Question 1

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:

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Question 2

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

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Question 3

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 4

In regard to the accounts receivable turnover rate:

Accepted Answer

A higher accounts receivable turnover rate indicates that a company is collecting its outstanding debts more quickly, which is generally viewed as positive. It reflects efficient management of cash flow and reduces the risk of bad debt.

Question 5

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.

Question 6

The accounts receivable turnover rate:

Accepted Answer

The accounts receivable turnover rate measures how many times a business can collect its accounts receivable during a specific period, indicating how efficiently it is managing its cash flow. It is calculated by dividing the net credit sales by the average accounts receivable balance during the period.

Question 7

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 8

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.

Question 9

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:

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Question 10

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 11

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 12

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:

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Question 13

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 14

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 one who borrows the money and promises to repay it. In this case, J. Lennon is borrowing the money from Y. Ono, so he is considered the maker of the note. Choice B is incorrect because the payee is the one who is receiving the money, which is Y. Ono in this case. Choice C is also incorrect because the note is not considered an asset to J. Lennon as he owes the money rather than owns it. Choice D is incorrect because it is always the borrower who is considered the maker of the note.

Question 15

The mark-to-market valuation principle:

Accepted Answer

The mark-to-market valuation principle does not adhere to the cost principle or conservatism. The principle requires assets and liabilities to be recorded at their current market value, even if that value is higher or lower than their original cost. This results in more up-to-date financial statements but can also lead to more volatility in reported earnings.

Question 16

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 17

The mark-to-market adjustment:

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Question 18

Available-for-sale securities are usually held for:

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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 measures how many times a company collects its accounts receivable in a period. A higher turnover rate indicates that a company is collecting its receivables more quickly. Therefore, Basinger is collecting its accounts receivable faster than Baldwin. The turnover rate does not provide information about the average collection time or the number of credit sales made. Option B is incorrect as there is no information provided about the write-off percentage of both companies. Option D is irrelevant as the turnover rate does not provide information about the number of credit sales.

Question 20

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

Purchase of marketable securities for cash would only be reflected in the statement of cash flows under the investing activities section, not on the income statement. The other options would affect both the income statement and statement of cash flows.

Quiz 7: Financial Assets

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: