Deck 7: Financial Assets: Cash and Receivables

Question 1

Methods of estimating bad debts based upon the collectability of accounts receivable emphasize the balance sheet rather than the income statement.

Answer 1

True

Question 2

If the same percentage is used, an estimate of bad debt expense based upon credit sales rather than total sales will likely be more in conformity with the matching principle.

Answer 2

True

Question 3

A company that receives cash in an amount less than the face amount of a non-interest-bearing note payable should record the note at its discounted present value.

Answer 3

True

Question 4

A note receivable is said to be impaired if there is some uncertainty with regards to the collection of all or part of the note.

Question 5

Cash, as defined for financial reporting purposes, includes currency, coin, and deposits at commercial banks, which are available for immediate use.

Question 6

Overdrafts in one chequing account can be offset by positive balances in other accounts, only if the accounts are at the same financial institution.

Question 7

When a specific bad debt which has already been written off is later collected sales revenue is increased by the amount of the recovery.

Question 8

Asset-backed commercial paper may or may not be considered a cash equivalent, depending on the term and risk profile of these investments.

Question 9

When an interest-bearing note payable is given to purchase an asset, the face amount of the note and the recorded cost of the assets received will always be the same.

Question 10

When a parent company transfers its receivables to one of its Special Purpose Entities (SPEs), these receivables will always be included in the parent's consolidated financial statements.

Question 11

Hedging instruments must always be classified as Fair Value through Profit or Loss (FVTPL).

Question 12

Financial assets include both derivative and non-derivative type financial instruments.

Question 13

If the effective interest is used, the market value of a Note Payable when the market interest rate is less than the rate specified for the Note Payable would be higher than its face value.

Question 14

If a customer's cheque that has been deposited is returned with the bank statement marked "insufficient funds (NSF)," it would appear on the bank reconciliation as a deduction from the ending bank balance of the company.

Question 15

If a Canadian corporation reports its financial results in Canadian dollars and most of its business is conducted in the U.S., an increase in value in the Canadian dollar (versus the U.S dollar) would result in an exchange gain.

Question 16

Separation of responsibilities is essential in the control procedures for both cash inflows and cash outflows.

Question 17

Guaranteed investment certificates (GICs) denote a specified deposit made at a financial institution at a specified rate of interest for a specified period of time.

Question 18

The "adjusted or correct cash balance" in a bank reconciliation is always equal to the bank balance plus all deposits in transit.

Question 19

Compensating balances must always be shown separately from other financial assets under IFRS on the Statement of Financial Position.

Question 20

A bank reconciliation is primarily a clerical activity, which verifies cash transactions and, as such, does not identify any entries that should be made in the depositor's books.

Question 21

When FVOCI financial instruments are sold, the gains or losses on disposition are recycled from AOCI to Retained Earnings.

Question 22

The gross and net methods of recording sales will always have the same income statement effect in any given period.

Question 23

The reported net carrying amount of a non-interest-bearing note payable recorded on a gross basis will increase as time goes by.

Question 24

When a specific bad debt is written off as uncollectible, and subsequently collected in full, there is no effect to the income statement.

Question 25

If the estimate of bad debt expense is made on the basis of net realizable value of the accounts receivable, the balance of the account, "Allowance for Doubtful Accounts," is adjusted so that the adjusted balance reflects the computed amount needed to value the receivables.

Question 26

Loans and receivable with a view to sale in the long-term would be accounted for using Fair Value through Profit or Loss (FVTPL).

Question 27

Trade accounts receivable due within 90 days would not normally be discounted, since the time value of money would be deemed to be immaterial in such a case.

Question 28

If the estimate of bad debt expense is made on the basis of net credit sales, an entry is made each period to the account, "Allowance for Doubtful Accounts," without regard to the prior balance in that account.

Question 29

When financial instruments that are designated as FVOCI are expected to be sold, a gain or loss for the difference between the amortized cost and fair values will be made to OCI.

Question 30

The estimation of bad debt expense by using a percentage of credit sales produces the same results, as an aging of accounts receivable.

Question 31

If the estimate of bad debt expense is made on the basis of net credit sales every period, this will result in a valuation of accounts receivable that approximates its net realizable at every balance sheet date.

Question 32

Long-term debt investments held for their contractual cash flows would be accounted for using Fair Value through Profit or Loss (FVTPL).

Question 33

Transaction costs arising from the purchase of amortized cost or FVOCI investments may be capitalized to the investment account or expensed.

Question 34

The impairment model for financial instruments under ASPE is the same as under IFRS.

Question 35

Under IFRS, an allowance account must be created reflecting expected lifetime credit losses on all financial instruments.

Question 36

Cash held by a foreign subsidiary that is not readily available to the parent must not be included with cash and cash equivalents on the consolidated Statement of Financial Position.

Question 37

ASPE requires that all discounts or premiums on Notes Receivable be amortized using the effective interest method.

Question 38

The credit sales method will provide a more realistic estimate of the realizable value of a company's accounts receivable than would the aging method.

Question 39

The Direct Write-off method of accounting is conceptually inferior to other methods since it does not match bad debt expense to revenues.

Question 40

Provisions or allowances for bad debt losses on trade notes receivable are usually included in computing the balance of "Allowance for Doubtful Accounts."

Question 41

In order to qualify as cash equivalents, near-cash items should have a term that is within:

A) 30 days of the balance sheet date.
B) 60 days of the balance sheet date.
C) 90 days of the balance sheet date.
D) 120 days of the balance sheet date.

Question 42

Collateral securities are assets of the borrower that the secured lender can seize if the note goes into default.

Question 43

Cash management involves the planning and control of cash to efficiently accomplish all of the following except:

A) meet the day-to-day cash needs of the company.
B) obtain the most beneficial credit terms.
C) safeguard cash from theft.
D) invest temporarily idle cash to earn interest revenue.

Question 44

Simple interest is always computed based on the principal amount.

Question 45

When individual customers' accounts have credit balances of material amounts, these amounts:

A) May be shown as "credit balances of customers' accounts" in the current assets section.
B) May be deducted from the debit balances in other customers' accounts on the balance sheet.
C) Must be reported (or disclosed) separately in the liability section of the balance sheet.
D) Should be omitted from the balance sheet.

Question 46

Short-term payables may include a current maturity of a long-term liability that arises when the next payment on such a debt will be made out of current assets.

Question 47

There are fewer note disclosures required under ASPE than under IFRS for financial instruments.

Question 48

In reconciling the bank balance with the book cash balance, which of the following would not cause the bank balance shown on the bank statement to be lower than the unadjusted book balance?

A) Cash on hand at the company
B) NSF cheques from a customer, as reported on the bank statement
C) Interest credited to the account by the bank
D) Deposits in transit

Question 49

In the assignment of accounts receivable, the right of a third party to demand payment from the transferor of the receivables if they prove uncollectible is referred to as recourse.

Question 50

How is a deposit in transit reflected on a bank reconciliation (using the "correct balance format")?

A) Subtracted from balance per bank
B) Subtracted from balance per books
C) Added to balance per books
D) Added to balance per bank

Question 51

Simple interest usually is computed on an annual basis but it can also be compounded semi-annually, quarterly, or even daily.

Question 52

In the transfer of accounts receivable to a third party, the original customer is informed of the transfer and makes the payment to the third party. This is referred to as notification.

Question 53

Which of the following procedures is not consistent with good control of cash receipts?

A) Assignment of cash custody and reconciliation to the same individual
B) Separate responsibilities for cash-handling and cash-recording functions
C) Assignment of responsibilities to ensure a continuous and uninterrupted flow of cash from initial receipt to deposit in an authorized bank account
D) Continuous and close supervision of all cash-handling and cash-recording functions

Question 54

Using the same rate of annual interest over the same total time period, quarterly compounding will result in a larger accumulated amount than will monthly compounding.

Question 55

The substance of a transfer of accounts receivable arrangement with recourse is more likely to be deemed a borrowing rather than an outright sale in most instances.

Question 56

Which of the following would be classified as a trade receivable?

A) Cash dividends receivable
B) Amounts due from customers
C) Claims in litigation
D) Loans to employees

Question 57

The time value of money is measured by the excess of resources received, or paid over the amount of resources lent or borrowed at a different date.

Question 58

Trade accounts payable should include only obligations directly related to the primary and continuing operations of an entity.

Question 59

With compounding, the interest earned each period on an amount invested at a fixed rate of interest increases over time.

Question 60

Which of the following procedures is the least essential attribute of a cash disbursement control system?

A) Supervision of all cash disbursement and record keeping functions
B) Establishment of a petty cash system
C) Use of multiple bank accounts
D) All disbursements (except petty cash) are required to be made by cheque
E) Cheques are signed only when supported by adequate documentation and verification

Question 61

In a factoring of accounts receivable without recourse, which party bears (indicated by * in the answer alternatives) the cost of bad debts and sales adjustments? $$\begin{array} { | l | l | l | l | } \hline &\text { } & \text {bad depts} &\text {sales adjuistments} \\\hline 1&\text { transferor } & *& * \\\hline 2 &\text { factor } &* & \\\hline &\text { transferor } & & * \\\hline 3& \text { factor } & * & \\\hline& \text { transferor} & *& \\\hline 4 &\text { factor } & *\\\hline\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 62

When accounts receivable are factored without recourse, what account does the transferor credit?

A) Accounts receivable
B) Sales
C) Liability
D) Accounts receivable assigned

Question 63

The allowance method for estimating and reporting bad debt expense:

A) Demonstrates a practical application of the full-disclosure principle.
B) Generally recognizes gains and losses on bad debts in the period when the related account receivable is removed from the accounting records.
C) Is optional under GAAP for all retail companies.
D) Generally adheres to the matching principle better than the specific write-off method.

Question 64

Which party bears (indicated by * in the answer alternatives) the cost of bad debts and sales adjustments for assigned accounts receivable? $$\begin{array} { | l | l | l | l | } \hline &\text { } & \text {bad depts} &\text {sales adjuistments} \\\hline 1&\text { Assignor } & *& * \\\hline 2 &\text { Assignee } & & *\\\hline &\text { Assignor } & & * \\\hline 3& \text { Assignee } & * & \\\hline& \text { Assignor } & *& \\\hline 4 &\text { Assignee } & *\\\hline\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 65

Which of the following accounting principles primarily supports the use of an allowance for doubtful accounts?

A) Continuity principle
B) Full-disclosure principle
C) Matching principle
D) Cost principle
E) Going-concern principle

Question 66

Which of the following statements concerning the estimation of bad debt expense by using a percentage of credit sales is incorrect?

A) Produces the same results, as an aging of accounts receivable.
B) Causes an adjustment to the allowance account without regard to the balance in that account immediately prior to the adjustment.
C) Is based primarily on the matching principle.
D) Emphasizes the income statement.
E) Only incidentally measures accounts receivable at net realizable value.

Question 67

When a bad debt is written off and subsequently collected in full:

A) The bad debt expense for the period of collection is reduced.
B) The allowance for doubtful accounts is reduced.
C) The net realizable value of accounts receivable increases.
D) A gain is recognized.
E) There is no effect to the income statement.

Question 68

A company uses the allowance method of accounting for bad debt. During 2001, an important customer became bankrupt and a related receivable of $6,400 was deemed uncollectible. The 2001 entry to record this event would be: $$\begin{array} { | l | l | l | l | } \hline 1 &\text { Bad debt expense } & 6,400 & \\\hline &\text { A llowance tor doubtful accounts } & & 6,400 \\\hline 2 &\text { Loss on receivable } & 6,400 & \\\hline &\text { Accounts receivable } & & 6,400 \\\hline 3& \text { Bad debt expense } & 6,400 & \\\hline& \text { Accounts receiv able } & & 6,400 \\\hline 4 &\text { Loss on receivable } & 6,400 & \\\hline &\text { Allowance tor doubtful accounts } & & 6,400 \\\hline 5& \text { Allowance tor doubtful accounts } & 6,400 & \\\hline &\text { Accounts receivable } & & 6,400 \\\hline\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4
E) Choice 5

Question 69

Choosing to account for a transfer of accounts receivable as a sale rather than a borrowing would result in:

A) a higher current ratio and lower debt-to-equity ratio.
B) A higher debt-to-equity ratio.
C) a lower current ratio.
D) a higher current ratio higher debt-to-equity ratio.

Question 70

Computing bad debt expense by estimating the net realizable value of accounts receivable (ageing approach):

A) Emphasizes the income statement rather than the balance sheet.
B) Causes an adjustment to the allowance account, which produces a balance in the account equal to the total estimated uncollectible amount.
C) Produces a bad debt expense amount that is close to uncollectible current credit sales.
D) Is based primarily on the cost principle.

Question 71

Accounting for factoring accounts receivable without recourse is generally accounted for by the transferor (original seller of good or service) as a:

A) Sale
B) Loan
C) Transfer
D) Equity adjustment

Question 72

When a firm (assignor) assigns part of its accounts receivable as collateral for a loan:

A) The assignor relinquishes control over the receivables
B) The transaction is essentially the same as factoring without recourse
C) The assigned accounts are reclassified as a separate account within total accounts receivable
D) The loan is offset against the assigned accounts receivable in the assignor's balance sheet

Question 73

An advantage of relating a company's bad debt experience to its accounts receivable is that this approach:

A) Is the only generally accepted method for "valuing" accounts receivable.
B) Gives a reasonably accurate measurement of the net realizable value of the accounts receivable in the balance sheet.
C) Does not require estimates of uncollectible accounts.
D) Does not require knowledge of the balance in the allowance for doubtful accounts before adjustment for bad debt expense.

Question 74

Company M assigned a receivable from AB to the XY Finance Company on a "non-notification" basis. On this basis:

A) XY need not tell M when AB makes payment to M.
B) AB will make payment to M.
C) AB need not make further contact with M about the payment situation.
D) M need not tell XY when AB makes payment to M.

Question 75

The allowance method of recognizing bad debt expense (as opposed to the direct write-off method) can be applied in more than one way. What two conditions must be met before the allowance method can be used?

A) Bad debts must be expected and material.
B) Bad debts must be relevant and reliable.
C) Bad debts must be consistent over time and the method used to estimate them must be consistently applied.
D) Bad debts must be probable and estimable.

Question 76

When accounts receivable are factored with recourse and are accounted for as a sale, what account does the transferor credit?

A) Accounts receivable
B) Sales
C) Liability
D) Accounts receivable assigned

Question 77

ABC Inc. sold machinery on account to a U.S. based client on June 30^th, Year 1 in the amount of $100,000 U.S. On that date, $1US=$1.20 CAD. The account was settled on July 30^th, Year 1, when the rate was $1US=$1.22 CAD.
Assuming that ABC Inc. is a publicly traded enterprise that reports its results in Canadian dollars, the effect of this transaction on its financial statements would be a:

A) Gain of $2,000 CAD flowing to earnings.
B) Loss of $2,000 CAD flowing to earnings.
C) Gain of $2,000 CAD flowing to OCI.
D) Loss of $2,000 CAD flowing to OCI.

Question 78

When accounts receivable are factored with recourse and are accounted for as a loan, what account does the transferor credit?

A) Accounts receivable
B) Sales
C) Liability
D) Accounts receivable assigned

Question 79

Bad debt losses on accounts receivable:

A) Include cash and trade discounts forfeited.
B) Are reported as unusual items if collected a number of years after their write-off.
C) Are considered a normal business expense under the matching principle.
D) Can be reported in all situations by using either the allowance method or the specific write off method.

Question 80

In a factoring of accounts receivable with recourse, which party bears (indicated by * in the answer alternatives) the cost of bad debts and sales adjustments? $$\begin{array} { | l | l | l | l | } \hline &\text { } & \text {bad depts} &\text {sales adjuistments} \\\hline 1&\text { transferor } & *& * \\\hline 2 &\text { factor } & &* \\\hline &\text { transferor } & & * \\\hline 3& \text { factor } & * & \\\hline& \text { transferor} & *& \\\hline 4 &\text { factor } & *\\\hline\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4