Question 1

The allowance method for estimating and reporting bad debt expense:

Accepted Answer

The allowance method adheres to the matching principle better than the specific write-off method because bad debt expense is recognized in the same period as the related revenue, instead of waiting until the account receivable is deemed uncollectible. This method is required under GAAP for all companies, and it also demonstrates a practical application of the conservatism principle.

Question 2

Simple interest is always computed based on the principal amount.

Accepted Answer

Simple interest is calculated based on the initial or principal amount of the loan or investment. It is a percentage of the principal amount that is charged or earned over a period of time.

Question 3

In reconciling the bank balance with the book cash balance,which of the following would not cause the bank balance shown on the bank statement to be lower than the unadjusted book balance?

Accepted Answer

The answer of In reconciling the bank balance with the...

Question 4

In the transfer of accounts receivable to a third party,the original customer is informed of the transfer and makes the payment to the third party.This is referred to as notification.

Accepted Answer

In the transfer of accounts receivable to a third party, notification is given to the original customer informing them to make payments directly to the third party. Therefore, the statement is true.

Question 5

A company uses the allowance method of accounting for bad debt.During 2001,an important customer became bankrupt and a related receivable of $6,400 was deemed uncollectible.The 2001 entry to record this event would be: $\begin{array}{|l|l|l|r|}
 \hline1& \text {  Bad debt expense..} & 6,400\
\hline &\text {Allowance for doubtful accounts...  } &&6,400\
\hline2& \text {  Loss on receivable.} & 6,400\
 \hline&\text {  Accounts receivable.} &&6,400\
\hline 3&\text {  Bad debt expense.} & 6,400\
\hline &\text {  Accounts receivable.} &&6,400\
\hline 4&\text {  Loss on receivable.} &6,400\
\hline& \text {Allowance for doubtful accounts...  } &&6,400\
\hline 5&\text {Allowance for doubtful accounts..  } & 6,400\
\hline &\text {  Accounts receivable} & &6,400\
\hline
\end{array}$

Accepted Answer

When using the allowance method, the entry to write off an uncollectible account is to debit the Allowance for Doubtful Accounts and credit Accounts Receivable. This reflects the removal of the uncollectible amount from both the allowance and the receivables.

Question 6

Which of the following would be classified as a trade receivable?

Accepted Answer

Trade receivables refer to amounts owed to a company by its customers for goods or services sold on credit. Therefore, amounts due from customers would be classified as trade receivables. Cash dividends receivable, claims in litigation, and loans to employees would not be classified as trade receivables.

Question 7

When individual customers' accounts have credit balances of material amounts,these amounts:

Accepted Answer

Credit balances in customers' accounts represent amounts the company owes to its customers, and thus, they should be reported as liabilities on the balance sheet. This is because from an accounting perspective, any amount that a company needs to pay back, regardless of the reason, is considered a liability.

Question 8

Cash management involves the planning and control of cash to efficiently accomplish all of the following except:

Accepted Answer

Cash management involves ensuring that a company has enough cash to meet its day-to-day needs, safeguarding cash from theft, and investing temporarily idle cash to earn interest revenue. While cash management may involve negotiating favorable credit terms with suppliers, it is not the main goal of cash management.

Question 9

How is a deposit in transit reflected on a bank reconciliation (using the "correct balance format")?

Accepted Answer

Deposits in transit are amounts that have been recorded by the company but not yet by the bank, so they are added to the balance per bank to reconcile the company's book balance with the bank's balance.

Question 10

With compounding,the interest earned each period on an amount invested at a fixed rate of interest increases over time.

Accepted Answer

True. Compounding allows the interest to be earned not only on the principal but also on the accumulated interest from previous periods, which results in an increasing amount of interest earned over time.

Question 11

In order to qualify as cash equivalents,near-cash items should have a term that is within:

Accepted Answer

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. They must be within 3 months (or 90 days) of their maturity when acquired to qualify as cash equivalents.

Question 12

Which of the following accounting principles primarily supports the use of an allowance for doubtful accounts?

Accepted Answer

The matching principle requires that expenses be matched with the revenues they helped to generate. Therefore, it is necessary to estimate and record the amount of uncollectible accounts expense in the same period in which the related sales revenue is recognized. The allowance for doubtful accounts represents the estimated amount of uncollectible accounts that will ultimately result from credit sales made during the current period.

Question 13

Which of the following statements concerning the estimation of bad debt expense by using a percentage of credit sales is incorrect?

Accepted Answer

Using a percentage of credit sales to estimate bad debt expense does not produce the same results as using an aging of accounts receivable. The two methods use different factors to estimate the amount of uncollectible accounts and can result in different estimates.

Question 14

Simple interest usually is computed on an annual basis but it can also be compounded semi-annually,quarterly,or even daily.

Accepted Answer

Simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains unpaid, and it does not compound.

Question 15

Which of the following procedures is not consistent with good control of cash receipts?

Accepted Answer

Assignment of cash custody and reconciliation to the same individual is not consistent with good control of cash receipts because it creates an opportunity for fraud and embezzlement. Separation of duties is important to prevent one individual from having too much control over the cash handling process.

Question 16

Which of the following procedures is the least essential attribute of a cash disbursement control system?

Accepted Answer

The use of multiple bank accounts is not considered an essential attribute of a cash disbursement control system. Effective control systems focus on ensuring that disbursements are properly authorized, documented, and recorded, rather than on the number of bank accounts used.

Question 17

Computing bad debt expense by estimating the net realizable value of accounts receivable (ageing approach):

Accepted Answer

The ageing approach estimates the amount of uncollectible accounts by analyzing the age of each account and applying a percentage to each category based on past experience. This produces an adjustment to the allowance account, which ultimately results in a balance equal to the total estimated uncollectible amount. This approach emphasizes the balance sheet and is based on the principle of conservatism.

Question 18

Using the same rate of annual interest over the same total time period,quarterly compounding will result in a larger accumulated amount than will monthly compounding.

Accepted Answer

Monthly compounding results in a larger accumulated amount than quarterly compounding because interest is compounded more frequently, allowing the investment to grow at a faster rate.

Question 19

The allowance method of recognizing bad debt expense (as opposed to the direct write-off method) can be applied in more than one way.What two conditions must be met before the allowance method can be used?

Accepted Answer

The two conditions that must be met before the allowance method can be used are that bad debts must be probable (meaning they are likely to occur) and estimable (meaning they can be reasonably estimated). This is because the allowance method involves estimating the amount of bad debt expense, rather than waiting until a specific account is determined to be uncollectible before recognizing the expense.

Question 20

The time value of money is measured by the excess of resources received,or paid over the amount of resources lent or borrowed at a different date.

Accepted Answer

The time value of money refers to the idea that the value of money changes over time due to factors such as inflation, interest rates, and opportunity cost. In other words, receiving or paying resources at a later date will have a different value than receiving or paying the same amount of resources today. This is why the time value of money is often described as the excess of resources received or paid over the amount of resources lent or borrowed at a different date.

Quiz 7: Financial Assets: Cash and Receivables