Deck 7: Financial Assets

Question 1

Entries made in the general journal after preparing a bank reconciliation are called closing entries.

Answer 1

False

Question 2

Financial assets describe not just cash, but all assets that are easily and directly convertible into known amounts of cash, except marketable securities.

Answer 2

False

Question 3

A line of credit creates a liability for the borrower when it is granted by the bank.

Answer 3

False

Question 4

The amount of cash that should appear on the balance sheet is equal to the amount of cash on deposit, plus currency, coin, and customers' checks on hand, minus the balance of the Cash Over and Short account.

Question 5

The balance shown on a bank statement is always less than the month-end balance of a company's cash account in the general ledger.

Question 6

U.S. Treasury bills that mature within six months are cash equivalents.

Question 7

Restricted cash may be available to meet the normal operating needs of a company.

Question 8

An unrealized gain on available-for-sale securities will increase shareholders' equity.

Question 9

Cash equivalents include money market funds, U.S. Treasury bills, and high-grade commercial paper.

Question 10

The term "financial asset" is synonymous with the term "cash equivalent."

Question 11

Financial assets may be current or long-term assets.

Question 12

Showing marketable securities on the balance sheet at current market values violates the consistency principle.

Question 13

Deposits-in-transit would not appear on a company's bank reconciliation but would appear on the company's bank statement.

Question 14

A credit memoranda from a bank indicates that they have decreased the depositor's cash balance.

Question 15

To "write-off" an account receivable is to reduce the balance of the customer's account to zero.

Question 16

Cash equivalents are the most liquid of assets.

Question 17

The Allowance for Doubtful Accounts is a contra-asset account and appears on the balance sheet.

Question 18

A company with more than one bank checking account should show more than one account for Cash in its balance sheet.

Question 19

A compensating balance is often required by a bank as a condition for granting a loan.

Question 20

The first step in a bank reconciliation is to update the depositor's accounting records for any deposits-in-transit.

Question 21

The Allowance for Doubtful Accounts is called a valuation account, or contra-asset account, and normally has a credit balance.

Question 22

When an Allowance for Doubtful Accounts is used, accounts receivable are valued in the balance sheet at their estimated net realizable value.

Question 23

If the allowance method is used and an account receivable that had been previously written-off is collected, income is currently recorded.

Question 24

When doing a bank reconciliation, an NSF check will reduce the bank's balance.

Question 25

The lower the accounts receivable turnover rate, the longer a company must wait to collect from its credit customers.

Question 26

In order for a company's accounting records to be up-to-date and accurate after a bank reconciliation has been completed, journal entries should be made for any service charges by the bank and for deposits-in-transit.

Question 27

The income statement approach used to estimate uncollectible receivables uses a percentage of net sales without considering the current balance in the Allowance account.

Question 28

Internal control will aid in achieving accurate accounting for cash.

Question 29

A debit memoranda from a bank indicates that they have decreased your cash balance.

Question 30

In order to be classified as available-for-sale securities, the investment cannot be held for a period longer than three months.

Question 31

A major purpose of using an Allowance for Doubtful Accounts is to recognize uncollectible accounts expense in the same accounting period as the related sales which caused the expense.

Question 32

An unrealized loss on available-for-sale securities will reduce net income.

Question 33

The direct write-off method is more conservative than the allowance method for valuation of receivables.

Question 34

Internal control is strengthened by a policy of making payments by check, or from cash receipts, or from a petty cash fund.

Question 35

Marketable securities includes investments in bonds and in the capital stocks of publicly traded corporations.

Question 36

Gains (or losses) on sales of marketable securities, as well as any unrealized holding gains (or losses) on investments in available for sale securities, are reported in the income statement.

Question 37

Compensating balances are not included in the amount of cash listed on a balance sheet.

Question 38

When the direct write-off method is used to recognize uncollectible accounts expense, an Allowance for Doubtful Accounts is not required.

Question 39

Short-term investments in marketable securities may not be reported in the balance sheet at values higher than original cost.

Question 40

The Allowance for Doubtful Accounts should be listed on the balance sheet as a current liability.

Question 41

In order to hold each department manager accountable for monthly cash transactions, a business will often prepare:

A) A bank reconciliation.
B) A bank statement.
C) A cash budget.
D) Petty cash vouchers.

Question 42

After preparing a bank reconciliation, a journal entry would be required for which of the following?

A) A deposit in transit.
B) A check for $48 given to a supplier but not yet recorded by the company's bank.
C) Interest earned on the company's checking account.
D) A deposit made by a company with a similar name and credited to your account.

Question 43

Financial assets include all of the following except:

A) Cash.
B) Marketable securities.
C) Inventories.
D) Accounts receivable.

Question 44

If the time span covered by a note is stated in days, the number of days for which interest accrues is computed by omitting the day on which the note is dated but including the day on which the note falls due.

Question 45

The bookkeeper prepared a check for $68 but accidentally recorded it as $86. When preparing the bank reconciliation, this should be corrected by:

A) Adding $18 to the bank balance.
B) Subtracting $18 from the bank balance.
C) Adding $18 to the book balance.
D) Subtracting $18 from the book balance.

Question 46

A good system of internal control will include all of the following except:

A) Preparing a pro-forma financial statement on a monthly basis.
B) Separating the handling of cash from the maintenance of accounting records.
C) Making all major payments by check.
D) Reconciling bank statements with accounting records.

Question 47

All the following are steps included in the preparation of a bank reconciliation except:

A) Comparing deposits listed on the bank statement with the deposits shown in the accounting records.
B) Arranging checks by serial numbers and comparing with those listed in the accounting records.
C) Deducting any debit memoranda from the balance on the bank statement.
D) Preparing journal entries for any adjustments to the depositor's records.

Question 48

A note receivable which is not collected promptly at the maturity date should be written off the books by a debit to Accounts Receivable and a credit to Notes Receivable.

Question 49

Many fraudulent financial reporting schemes seek to manipulate accounts payable in order to overstate revenue and income.

Question 50

In order to overstate income, a company may fraudulently:

A) Capitalize operating expenses.
B) Recognize revenue before it is earned.
C) Both capitalize operating expenses and recognize revenue before it is earned.
D) Neither capitalize operating expenses nor recognize revenue before it is earned.

Question 51

It has been found that improper revenue recognition was the most common scheme in fraud-related SEC enforcement actions.

Question 52

Which of the following is not considered a cash equivalent?

A) US Treasury bills.
B) Money market funds.
C) Accounts receivable.
D) High-grade commercial paper.

Question 53

The mark-to-market adjustment for investments classified as "available for sale" affects:

A) The balance sheet.
B) The income statement.
C) The cash flow statement.
D) All of the above.

Question 54

The Allowance for Doubtful Accounts will appear on the:

A) Income statement.
B) Balance sheet.
C) Cash flow statement.
D) Owners' equity statement.

Question 55

Each of these categories of assets is normally shown in the balance sheet at current value, except:

A) Inventories.
B) Accounts receivable.
C) Short-term investments in marketable securities.
D) Cash.

Question 56

"Concentrations of credit risk" occur if:

A) A significant portion of receivables are due from a few major customers.
B) A significant portion of receivables are from customers in the same industry.
C) Both of the above.
D) Neither of the above.

Question 57

Which of the following does not contribute toward achieving internal control over cash payments?

A) The practice of making small cash disbursements directly from the current day's cash receipts.
B) The use of a voucher system.
C) The use of a petty cash fund.
D) The practice of approving every expenditure before the cash disbursement is made.

Question 58

Non U. S. companies can never be compared to U. S. Companies because non U. S. companies use foreign currencies.

Question 59

Management may wish to overstate a company's income because bonus plans and stock options are related to reported earnings.

Question 60

Financial assets:

A) Consist of cash and cash equivalents.
B) Are reported at cost in the balance sheet.
C) Include short-term investments in marketable securities and receivables, as well as cash.
D) Are not very productive assets and should be kept to a minimum in a well-managed company.

Question 61

When preparing a bank reconciliation, checks outstanding will:

A) Increase the balance per depositor's records.
B) Decrease the balance per depositor's records.
C) Increase the balance per the bank statement.
D) Decrease the balance per the bank statement.

Question 62

Which of the following practices best illustrates efficient management of cash?

A) The accountant records all cash receipts and payments when reconciling the bank account at the end of each month.
B) Management arranges for a loan to cover projected cash shortages during the production phase of the business cycle each year.
C) Cash budgets (forecasts) are prepared only one month in advance in order to avoid the need for constant revision.
D) All cash resources are held in the checking account to maximize liquidity.

Question 63

The purpose of establishing a petty cash fund is to:

A) Achieve internal control over small cash disbursements not made by check.
B) Keep track of expenditures paid out of cash receipts from customers prior to deposit.
C) Ensure that the amount of cash in the bank does not become excessive.
D) Keep enough cash on hand in the office to cover all normal operating expenses of the business for a period of time.

Question 64

Which of the following is not an example of internal control over cash?

A) Preparation of a cash budget.
B) Daily deposits of cash receipts at the bank.
C) Combining the functions of signing checks with the approval of expenditures.
D) Preparation of bank reconciliation.

Question 65

A bank reconciliation explains the differences between:

A) Cash receipts and cash disbursements for the period.
B) The balance of cash in the bank and the budgeted expenditures for the upcoming accounting period.
C) The balance per bank statement and the cash balance per the accounting records of the depositor.
D) The balance per bank statement and cash expected to be on hand according to the cash forecast.

Question 66

With available-for-sale securities, unrealized holding gains and losses are:

A) Not reported until recognized.
B) Reported on the income statement.
C) Reported as an unearned revenue on the balance sheet.
D) Reported in the stockholders' equity section of the balance sheet.

Question 67

In order to achieve internal control over cash receipts:

A) The employee who handles checks received in the mail should not prepare the control listing.
B) The cashier should not deposit cash in the bank.
C) The salesclerk should not count the cash in the register at the end of the day.
D) The checks received in the mail from customers should not be sent to the accounting department to be recorded as cash receipts.

Question 68

Which of the following is not a basic means of achieving internal control over cash receipts?

A) Separate the functions of cash handling and maintenance of accounting records.
B) Prepare a daily listing of cash received through the mail.
C) Deposit all cash receipts daily in the petty cash fund.
D) Use cash registers or pre-numbered sales tickets to record cash sales.

Question 69

Marketable securities are classified into three types; which one is not one of the three types?

A) Available-for-sale.
B) Mark-to-market.
C) Trading.
D) Held-to-maturity.

Question 70

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

A) Net income is increased.
B) Net assets are increased.
C) Net income and net assets are not affected.
D) Net assets and net income are both increased.

Question 71

The valuation principle of "mark-to-market" applied to investments classified as available for sale securities:

A) Affects the current period income statement, but not the balance sheet.
B) Enhances usefulness of the balance sheet in evaluating solvency of a business.
C) Applies to marketable securities and inventories.
D) Requires a corporation to adjust its capital stock account to reflect current market value of its outstanding capital stock.

Question 72

Which of the following items on a bank reconciliation may not have been known to the depositor until the bank statement had arrived?

A) Bank service charges.
B) An NSF check.
C) A credit for interest earned.
D) All three of the above.

Question 73

When preparing a bank reconciliation, deposits in transit will:

A) Increase the balance per depositor's records.
B) Decrease the balance per depositor's records.
C) Increase the balance per the bank statement.
D) Decrease the balance per the bank statement.

Question 74

With a line of credit, a liability arises:

A) As soon as the line is created.
B) As soon as any money is borrowed.
C) Upon repayment of the debt.
D) At maturity date.

Question 75

When preparing a bank reconciliation, an NSF check will:

A) Increase the balance per depositor's records.
B) Decrease the balance per depositor's records.
C) Increase the balance per the bank statement.
D) Decrease the balance per the bank statement.

Question 76

In reconciling a bank statement, which of the following items could cause the cash per the bank statement to be greater than the balance of cash shown in the depositor's accounting records?

A) An outstanding check.
B) A check returned to the depositor marked NSF.
C) Check 457 written for $643 was recorded by the depositor as $463.
D) A bank service charge.

Question 77

The term cash equivalent refers to:

A) An item such as a money order, travelers' check, or check from a customer.
B) An account receivable from a reliable customer who has always paid bills within the discount period.
C) A guaranteed line of credit at the company's bank.
D) Very liquid short-term investments such as U.S. Treasury Bills and commercial paper.

Question 78

Efficient management of cash includes which of the following concepts?

A) Pay each bill as soon as the invoice is received.
B) Deposit all cash receipts and make all cash disbursements at the end of each week.
C) Prepare monthly cash budgets (forecasts) up to a year in advance.
D) Pay suppliers in cash out of cash sales receipts before depositing them in the bank.

Question 79

The primary purpose of a petty cash fund is:

A) Accuracy.
B) Convenience.
C) Internal control.
D) Conservatism.

Question 80

Interest received is shown on which section of the statement of cash flows?

A) Operating.
B) Investing.
C) Financing.
D) Leveraging.