Question 1

Shrek Cyclery sells a bicycle to W. O'Connor, a customer who uses Empress Charge (a national credit card, but not issued by a bank). In recording this sale, Shrek Cyclery should record:

Accepted Answer

Shrek Cyclery should record an account receivable from Empress Charge, as they are the ones who will be paying for the purchase, not the customer W.O'Connor.

Question 2

The mark-to-market valuation principle:

Accepted Answer

The mark-to-market valuation principle does not adhere to the cost principle or conservatism. Instead, it requires assets and liabilities to be valued at their current market values. This can result in fluctuations in the reported value of assets and liabilities, which can impact a company's financial statements.

Question 3

In regard to the accounts receivable turnover rate:

Accepted Answer

A higher accounts receivable turnover rate indicates that a company is able to collect its outstanding debts more quickly, which is generally seen as a positive sign of efficient management.

Question 4

The accounts receivable turnover rate:

Accepted Answer

The accounts receivable turnover rate measures how quickly a company collects cash from credit sales, indicating how many times receivables were converted into cash during the year.

Question 5

The mark-to-market adjustment:

Accepted Answer

The answer of The mark-to-market adjustment:
...

Question 6

The purpose of the mark-to-market adjustment for securities classified as "available-for-sale" is:

Accepted Answer

The answer of The purpose of the mark-to-market adjustment for...

Question 7

Joe Costello handles cash receipts from customers and also has responsibility for issuing credit memoranda, writing off uncollectible accounts, and maintaining the accounts receivable records. When customers pay their accounts, Costello occasionally issues a credit memorandum and steals the cash received from the customer. This fraud should come to light if an employee other than Costello:

Accepted Answer

The answer of Joe Costello handles cash receipts from customers...

Question 8

Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation:

Accepted Answer

Cleopatra, as the borrower, is the maker of the note and records it as a liability in her accounting records. Anthony, as the lender, would record it as an asset.

Question 9

Available-for-sale securities are usually held for:

Accepted Answer

Available-for-sale securities are typically held for a period that is not short-term like less than three months or one month, but also not necessarily long-term like greater than one year. They are often held for a medium-term period, such as between six and eighteen months.

Question 10

Sales to customers using bank credit cards, such as Visa or MasterCard, are recorded as:

Accepted Answer

Sales made using bank credit cards like Visa or MasterCard are treated as cash sales because the merchant receives payment from the issuing bank almost immediately, minus any fees associated with the transaction.

Question 11

Investments in available-for-sale marketable securities:

Accepted Answer

Investments classified as available-for-sale securities are adjusted to their current market value at the end of each accounting period. This adjustment can result in unrealized gains or losses being reported in other comprehensive income until the securities are sold.

Question 12

Each of the following transactions would be reflected in both the income statement and the statement of cash flows for the current period, except:

Accepted Answer

The purchase of marketable securities for cash is a cash outflow reflected in the statement of cash flows but does not affect the income statement, as it is not an expense or revenue transaction.

Question 13

The Kansas Company makes credit sales to customers who use bank credit cards (such as Visa or MasterCard) as well as to customers who use non-bank credit cards (such as American Express or Diner's Club). In this situation:

Accepted Answer

The answer of The Kansas Company makes credit sales to...

Question 14

The direct write-off method of recognizing uncollectible accounts expense:

Accepted Answer

The direct write-off method records uncollectible accounts expense when individual accounts receivable are determined to be worthless. This method is not reliant on credit sales or credit limits, and does not use a valuation account to specifically record uncollectible customer accounts.

Question 15

An Unrealized Holding Gain (or Loss) on Investments classified as "available-for-sale" securities:

Accepted Answer

Unrealized holding gains or losses on investments classified as "available-for-sale" securities are reported in the stockholders' equity section of the balance sheet as either an increase or decrease in total stockholders' equity, not in the income statement or as an adjustment to the carrying value of the securities on the balance sheet. This treatment reflects changes in fair value that are not realized through sale.

Question 16

Which of the following activities affects net income, but has no immediate impact upon cash flows?

Accepted Answer

Making the end-of-period adjustment to record estimated uncollectible accounts affects net income through increasing expense (bad debt expense) but does not involve any immediate cash flow since it is an estimation of future cash flows that may not be collected.

Question 17

Under the allowance method, when a receivable that had been previously written off is collected:

Accepted Answer

When a receivable that had been previously written off is collected under the allowance method, the collection is recorded by reversing the write-off and recognizing the cash receipt. This process does not affect net income because the expense was recognized when the receivable was initially written off, and the recovery simply reverses this. Net income remains unchanged.

Question 18

J. Lennon borrows a sum of money from Y. Ono. A promissory note is used to document the terms of the transaction. In this situation:

Accepted Answer

The maker of the note is the person who is borrowing the money and agreeing to repay it. In this scenario, J. Lennon is borrowing the money, so he is considered the maker of the note. Option B is incorrect because the payee is the person who is lending the money, which is Y. Ono in this case. Option C is incorrect because J. Lennon would record the loan as a liability, not an asset. Option D is incorrect because it is not dependent on which party draws up the document, but rather who is borrowing and who is lending the money.

Question 19

The accounts receivable turnover rate for Baldwin Corporation is 8, and for Basinger Company is 10. These statistics indicate that:

Accepted Answer

The accounts receivable turnover rate is calculated by dividing net credit sales by average accounts receivable. A higher turnover rate indicates that a company is collecting its accounts receivable faster. Therefore, Basinger collects its accounts receivable faster than does Baldwin Company as its turnover rate is 10 compared to Baldwin's 8.

Question 20

When a promissory note is issued, you would expect to find:

Accepted Answer

When a promissory note is issued by an entity (the maker), it represents a liability for that entity. Therefore, "Notes Payable" would be recorded on its balance sheet, and as the entity incurs interest on this liability, "Interest Expense" would be recognized in its income statement throughout the life of the note.

Quiz 7: Financial Assets

Shrek Cyclery sells a bicycle to W. O'Connor, a customer who uses Empress Charge (a national credit card, but not issued by a bank) . In recording this sale, Shrek Cyclery should record: