Question 1

Which method is used for reporting current investments in the financial statements?
A) Current investments (gross - at cost)
3,500
Less provision for potential loss
-200
Current investments (net)
3,300
B) Gross value
Provisions
Net value
Current investments
3,500
200
3,300
C) Current investments (net of provision for potential loss: 200)
3,300
D) All of these.

Accepted Answer

All the options provided represent different ways of reporting current investments in the financial statements, taking into account the gross value, any provisions for potential loss, and the net value after such provisions.

Question 2

How is the figure for 'average days of sales' calculated?
A) (Average net accounts receivable/Net sales)× 365 days
B) (Average net accounts receivable × Net sales)/365 days
C) (Average net accounts receivable/Net sales)/180 days
D) (Average net accounts receivable/Net sales)× 180 days

Accepted Answer

The figure for 'average days of sales' is calculated using the formula: (Average net accounts receivable/Net sales)× 365 days. This formula is used to determine the average number of days it takes for a company to collect payment after a sale has been made, indicating the efficiency of the company's credit and collection policies.

Question 3

It is necessary to know the amount of discounted notes in order to compute the average days of sale in a financial statement analysis.

Accepted Answer

The amount of discounted notes affects the calculation of average days of sale, as it represents a reduction in the trade receivables balance and can affect the speed at which sales are converted into cash. Therefore, it is necessary to consider the impact of discounted notes when analyzing the efficiency of a company's accounts receivable management.

Question 4

What does the credit policy of a firm impact?
A) Sales revenue
B) The level of receivables
C) The length of the cash collection cycle
D) All of these

Accepted Answer

The credit policy of a firm impacts all of these factors. A liberal credit policy can increase sales revenue and the level of receivables, but also lengthen the cash collection cycle. A stricter credit policy can reduce the level of receivables and shorten the cash collection cycle, but may also lead to lower sales revenue.

Question 5

Which of the following statements is false?
A) Uncollectible accounts must be written off.
B) A claim is considered as uncollectible when the debtor is not solvent.
C) Uncollectible accounts are not reported in the financial statements.
D) The write off of the uncollectible accounts generates a bad debt expense in the income statement.

Accepted Answer

Uncollectible accounts are actually reported in the financial statements as an allowance for doubtful accounts or a bad debt expense.

Question 6

Notes can be discounted;the accounts receivable represented by notes are taken out of the assets at the time of discounting.However,this can still represent:
A) A potential gain
B) A latent liability
C) A fictive asset
D) None of these

Accepted Answer

Discounting a note means selling it to a third party at a discount, which means the note holder is receiving less than the full value of the note. This creates a liability for the note holder, as they are still obligated to pay the full value of the note to the third party, while they have already received less than that amount. Therefore, the discounted notes still represent a latent liability.

Question 7

What is the name of the written document in which a person or business promises to pay a given amount to a third party on a specified date?
A) A draft
B) A promissory note
C) A bill of exchange
D) None of these

Accepted Answer

A promissory note is a written document in which a person or business makes a promise to pay a given amount to a third party on a specified date. A draft is a type of payment order, and a bill of exchange is a written order used in international trade transactions.

Question 8

What is the term used for doubtful or disputed accounts,which are partly or totally uncollectible?
A) Bad debts
B) Valuation allowance
C) Provision expense
D) Debtor accounts

Accepted Answer

The term used for doubtful or disputed accounts, which are partly or totally uncollectible, is "Bad debts". This represents the amount that a company cannot collect from its customers or clients due to various reasons such as bankruptcy, insolvency, or other reasons.

Question 9

The valuation of the uncollectibility risk constitutes one of the tools managers use to manage their earnings.

Accepted Answer

The valuation of the uncollectibility risk helps managers in estimating the expected losses due to non-payment by customers and helps them in managing their earnings by adjusting bad debt expense to achieve desired earnings levels.

Question 10

Which of the following statements is not correct?
A) Under the direct write-off method,no provision is created when the risk of uncollectibility appears.
B) All countries allow the direct write-off method.
C) The direct write-off method shows receivables at their nominal value when in fact,there is a known risk of uncollectibility.
D) The only situation where the direct write-off method might not create a misrepresentation of the financial situation of the firm is when the sales revenue and the percentage of uncollectible receivables is essentially constant or stable.

Accepted Answer

It is not true that all countries allow the direct write-off method. Many countries, including the United States, have alternative methods for recognizing bad debts such as the allowance method.

Question 11

Which of the following items is not a type of accounts receivable reported in the financial statements?
A) Doubtful accounts receivable
B) Disputed accounts receivable
C) Uncollectible accounts receivable
D) Overdue accounts receivable

Accepted Answer

The answer of Which of the following items is not...

Question 12

What is (are)the advantage(s)to the seller of notes receivable?
A) A note is a contract and thus offers a higher level of guarantee of payment to the seller than a simple combination 'order,delivery,acknowledgment of receipt plus invoice'.
B) A note is a regular financial instrument and thus can be endorsed over to a third party.
C) A note is a negotiable credit instrument.The seller can sell a note to a financial institution before its maturity date.
D) All of the above

Accepted Answer

All of the options are advantages to the seller of notes receivable. A note provides a formal contract with a higher level of guarantee for payment. It is a financial instrument that can be endorsed or sold to a third party for funding. The note is a negotiable credit instrument, which enables the seller to sell the note to a financial institution or other buyer.

Question 13

Which of the following items is not a financial asset?
A) Receivables
B) Cash and cash equivalents
C) Current investments
D) Property,plant and equipment

Accepted Answer

Property, plant, and equipment are not considered financial assets as they are tangible assets used in the production or operation of a business rather than being held for investment purposes. Receivables, cash and cash equivalents, and current investments are all examples of financial assets.

Question 14

The more a receivable exceeds the contractual credit terms,the less likely it is to be uncollectible.

Accepted Answer

The longer a receivable exceeds the contractual credit terms, the more likely it is to be uncollectible. This is because the longer the payment is delayed, the more likely it is that the customer is experiencing financial difficulties or disputes with the invoice.

Question 15

What is the name of the accounting document in which the total amount of accounts receivable is split by customer?
A) General ledger
B) Subsidiary ledger
C) Sale ledger
D) Trial balance

Accepted Answer

The document in which the total amount of accounts receivable is split by customer is called a subsidiary ledger. This is a detailed record of individual accounts that makes up the total balance in the general ledger. The other options listed are not specific to tracking accounts receivable by customer.

Question 16

IAS 39 defines three categories of financial instruments in assets?

Accepted Answer

IAS 39 defines two categories of financial instruments: financial assets and financial liabilities, with further subcategories under each, but not three distinct categories for assets alone.

Question 17

Generally,the uncollectibility risk is evaluated and an allowance for uncollectibles is recorded as a provision.What is this method called?
A) Provision method
B) Allowance method
C) Prudent method
D) None of the above

Accepted Answer

This method is called the allowance method, which involves estimating the uncollectible amount and recording it as a provision (allowance) for doubtful accounts. It is a prudent method of recognizing potential bad debts and reducing the risk of overstating accounts receivable.

Question 18

Held-to-maturity investments are valued at fair value through profit or loss in the balance sheet.

Accepted Answer

Held-to-maturity investments are recorded at amortized cost in the balance sheet and any changes in fair value are not recognized.

Question 19

Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.

Accepted Answer

Cash equivalents, such as money market funds, treasury bills, and short-term commercial paper, are highly liquid and easily convertible to cash, and are held for the purpose of meeting short-term cash commitments. They are not typically held for investment or other longer-term purposes.

Quiz 10: Financial Instruments in the Statement of Financial Position and Fair Value Accounting

Which method is used for reporting current investments in the financial statements?

How is the figure for 'average days of sales' calculated?

It is necessary to know the amount of discounted notes in order to compute the average days of sale in a financial statement analysis.

What does the credit policy of a firm impact?

Which of the following statements is false?

Notes can be discounted;the accounts receivable represented by notes are taken out of the assets at the time of discounting.However,this can still represent:

What is the name of the written document in which a person or business promises to pay a given amount to a third party on a specified date?

What is the term used for doubtful or disputed accounts,which are partly or totally uncollectible?

The valuation of the uncollectibility risk constitutes one of the tools managers use to manage their earnings.

Which of the following statements is not correct?

Which of the following items is not a type of accounts receivable reported in the financial statements?

What is (are) the advantage(s) to the seller of notes receivable?

Which of the following items is not a financial asset?

The more a receivable exceeds the contractual credit terms,the less likely it is to be uncollectible.

What is the name of the accounting document in which the total amount of accounts receivable is split by customer?

IAS 39 defines three categories of financial instruments in assets?

Generally,the uncollectibility risk is evaluated and an allowance for uncollectibles is recorded as a provision.What is this method called?

Held-to-maturity investments are valued at fair value through profit or loss in the balance sheet.

Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.