Question 1

The aging of the accounts receivable approach to estimating uncollectible accounts does not:

Accepted Answer

The aging of the accounts receivable approach does stress the relationship between uncollectible accounts expense and net sales. Therefore, option C is incorrect. A is correct because the existing balance in the Allowance for Impairment is an important consideration in estimating uncollectible accounts. B is correct because the approach utilizes a percentage of probable uncollectible accounts for each age group of accounts receivable. D is correct because this approach is unable to give a reliable estimate of uncollectible accounts due to the consideration given to the collectability of specific accounts receivable.

Question 2

Factoring of accounts receivables is:

Accepted Answer

Factoring of accounts receivables is a way of selling them, pledging them as collateral for a loan, and raising cash quickly. This means all three choices mentioned in the question are correct.

Question 3

If a company uses a percentage of net sales in computing the amount of uncollectible accounts expense:

Accepted Answer

Using a percentage of net sales in computing the amount of uncollectible accounts expense emphasizes the relationship between revenue and expenses, rather than the valuation of receivables at the balance sheet date. This method assumes that a certain percentage of sales will result in uncollectible accounts and expenses are recorded accordingly. It does not directly consider the specific circumstances of individual accounts receivable, such as their age or creditworthiness. Valuation allowance may still be required to adjust the remaining balance of accounts receivable to their estimated realizable value. Past-due accounts are typically included in the overall balance of accounts receivable, not listed separately in the balance sheet.

Question 4

Robert Lerner maintains the accounts receivable records, authorizes the write-off of uncollectible accounts, issues credit memoranda to customers, and handles cash receipts from customers. When customers are late in paying their accounts, Lerner often writes off the account as uncollectible and steals the cash received from the customer. This fraud should come to light if an employee other than Lerner:

Accepted Answer

The answer of Robert Lerner maintains the accounts receivable records,...

Question 5

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

Accepted Answer

When a previously written-off receivable is collected under the allowance method, it does not affect profit because the write-off was already accounted for in prior periods. The collection simply reverses the allowance and reinstates the receivable.

Question 6

Randall Limited uses the allowance method supported by an aging of its accounts receivable to recognize uncollectible accounts expense in its financial statements. What method of recognizing this expense does Randall use in its income tax return?

Accepted Answer

According to the tax code, Randall Limited is required to use the direct write-off method for tax purposes. This means that the business is only allowed to recognize bad debts when they are actually written off as uncollectible, not when an estimate is made based on an aging of the accounts receivable.

Question 7

Investments in available-for-sale securities:

Accepted Answer

Available-for-sale securities are adjusted to their fair market value at the end of each accounting period, with unrealized gains or losses reported in other comprehensive income.

Question 8

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 9

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 because the sale was made using a national credit card, and the credit card company will pay Shrek Cyclery, not the individual customer.

Question 10

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 quickly a company is able to collect its accounts receivable. A higher turnover rate means that a company is able to collect its accounts receivable faster. Therefore, Basinger Company, with a turnover rate of 10, collects its accounts receivable faster than Baldwin Corporation, with a turnover rate of 8.

Question 11

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, Davis 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 12

The accounts receivable turnover rate:

Accepted Answer

The accounts receivable turnover rate measures how frequently a company can collect its receivables during a given period. It shows how many times the receivables were converted into cash during the year, which is why option A is the correct answer. Option B is incorrect because it provides an alternative formula for calculating the turnover rate by dividing the average receivables by sales. Option C describes the average collection period, which is a different metric that measures the average number of days it takes for a company to collect its receivables. Option D is unrelated and describes an issue with account confirmations during an independent audit.

Question 13

Available-for-sale securities are usually held for:

Accepted Answer

The answer of Available-for-sale securities are usually held for:
...

Question 14

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

Accepted Answer

Making the end-of-period adjustment to record estimated uncollectible accounts affects profit by decreasing it due to the recognition of a loss. However, there is no immediate impact on cash flows because no cash is actually received or paid out at this point.

The other activities listed all involve cash flows. A) Collection of an account receivable increases cash inflows. C) Investing excess cash in securities involves cash outflows for the purchase of the securities. D) Write-off of an uncollectible account receivable against the allowance decreases cash inflows if the allowance for bad debts has already been set up, or increases cash inflows if it has not been set up.

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. It requires assets and liabilities to be valued at their current market value rather than the original cost, which can result in significant fluctuations in reported financial statements. This principle is often used for financial instruments such as stocks and derivatives.

Question 16

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. It is not tied to credit limits or sales made on credit, and it does not use a valuation account.

Question 17

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 18

When determining the uncollectible accounts expense in computing taxable income, income tax regulations

Accepted Answer

The answer of When determining the uncollectible accounts expense in...

Question 19

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 investments in securities for cash is a cash flow activity but it does not appear on the income statement. Instead, it would be reflected in the balance sheet as an asset. The other three choices (receipt of dividends, payment of interest, and sale of merchandise) would all impact both the income statement and the statement of cash flows.

Question 20

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.

Quiz 7: Financial Assets