Intermediate Accounting 9th Edition Spiceland Test Bank

Chapter 7  Cash and Receivables

True/False Questions

1. Cash equivalents would include investments in marketable equity securities as long as management intends to sell the securities in the next three months.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-01

Topic Area: Cash and cash equivalents

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

2. From a financial accounting perspective, the main purposes of a system of internal control are to improve the accuracy and reliability of accounting information and to safeguard assets.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-01

Topic Area: Internal control

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Risk analysis

3. In a good system of internal control, the person who initiates a transaction should be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-01

Topic Area: Internal control

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Risk analysis

4. Depending on the circumstances, the classification of a compensating balance may be either current or noncurrent, and the arrangement should be disclosed in the notes.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-02

Topic Area: Restricted cash and compensating balances

Blooms: Remember

AACSB: Reflective thinking

AICPA: AICPA: FN Measurement

5. Under IFRS, an overdraft in a cash account at one bank can be offset against a positive balance in the account at another bank for purposes of reporting cash on the company’s balance sheet.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-10

Topic Area: IFRS – Cash and cash equivalents

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Global

AICPA: FN Measurement

6. The net method of accounting for cash discounts requires adjusting entries for discounts taken.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-03

Topic Area: Cash discounts

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

7. Sales returns and cash discounts are both examples of variable consideration that must be accounted for when receivables are recognized.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-03

Learning Objective: 07-04

Topic Area: Sales returns

Topic Area: Cash discounts

Blooms: Understand

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

8. Sales returns and trade discounts are both examples of variable consideration that must be accounted for when receivables are recognized.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-03

Learning Objective: 07-04

Topic Area: Sales returns

Topic Area: Trade discounts

Blooms: Understand

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

9. Recognizing sales returns only when merchandise is returned could result in an overstatement of income in the period of the related sale.

Answer: True

Level of Learning: 2 Medium

Learning Objective: 07-04

Topic Area: Sales returns

Blooms: Analyze

AACSB: Analytical thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

10. If cash has been collected from a customer, recognizing estimated sales returns results in recognizing a refund liability.

Answer: True

Level of Learning: 2 Medium

Learning Objective: 07-04

Topic Area: Sales returns

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

11. The allowance method for estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to their appropriate carrying value.

Answer: True

Level of Learning: 2 Medium

Learning Objective: 07-05

Topic Area: Uncollectible accounts receivable

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

12. Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-10

Topic Area: IFRS ‒ Accounts and notes receivable

Blooms: Remember

AACSB: Reflective thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

13. Under IFRS, accounts receivable can be accounted for as “available for sale” if that approach is elected upon initial recognition of the receivable.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-10

Topic Area: IFRS ‒ Accounts and notes receivable

Blooms: Remember

AACSB: Reflective thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

14. Using the balance sheet approach, bad debt expense is an indirect result of estimating the appropriate balance for the allowance for uncollectible accounts.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-06

Topic Area: Uncollectible accounts – Balance sheet approach

Blooms: Understand

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

15. The income statement approach to calculating bad debt expense should not be used if it results in a carrying value of accounts receivable that is materially different from what would be obtained under a balance sheet approach.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-06

Topic Area: Uncollectible accounts – Income statement approach

Blooms: Understand

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

16. The “income statement approach” and the “direct write-off method” are two ways to refer to the same method for recognizing bad debts expense.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-05

Learning Objective: 07-06

Topic Area: Uncollectible accounts – Income statement approach

Topic Area: Uncollectible accounts receivable

Blooms: Understand

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

17. Discounts on notes receivable are recognized as interest earned over the term of the related note.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-07

Topic Area: Notes receivable – noninterest-bearing

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

18. If a long-term noninterest-bearing note is received in exchange for merchandise sold, the amount of sales revenue recognized will be greater than the amount of the note.

Answer: False

Level of Learning: 2 Medium

Learning Objective: 07-07

Topic Area: Notes receivable – noninterest-bearing

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

19. Unless specific sales criteria are met, the factoring of accounts receivable with recourse is accounted for as a loan.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-08

Topic Area: Financing with receivables – with recourse

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

20. Securitization of receivables is a type of secured borrowing.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-08

Topic Area: Financing with receivables

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Resource management

AICPA: FN Measurement

21. Under IFRS, transfer of risks and rewards of ownership, rather than transfer of control, is the primary factor determining whether a factored receivable can be treated as sold rather than as part of a secured borrowing.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-10

Topic Area: IFRS ‒ Transfers of receivables

Blooms: Remember

AACSB: Reflective thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

22. The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a company in managing its investment in receivables.

Answer: True

Level of Learning: 1 Easy

Learning Objective: 07-09

Topic Area: Receivables management and ratios

Blooms: Remember

AACSB: Reflective thinking

AICPA: FN Risk analysis

AICPA: FN Measurement

23. In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges.

Answer: False

Level of Learning: 1 Easy

Learning Objective: Appendix 7A

Topic Area: Bank reconciliation―App A

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

24. In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors.

Answer: True

Level of Learning: 1 Easy

Learning Objective: Appendix 7A

Topic Area: Bank reconciliation―App A

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

25. The journal entry to record the replenishment of a petty cash fund includes a credit to the petty cash fund.

Answer: False

Level of Learning: 1 Easy

Learning Objective: Appendix 7A

Topic Area: Petty cash―App A

Blooms: Analyze

AACSB: Analytical thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

26. When a creditor’s receivable becomes impaired, the receivable is revalued based on the discounted present value of currently expected cash flows at the loan’s original effective rate.

Answer: True

Level of Learning: 1 Easy

Learning Objective: Appendix 7B

Topic Area: Impairment of a receivable―App B

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

27. Under the CECL approach, impairments are only recognized when it is probable that the receivable has been impaired.

Answer: False

Level of Learning: 1 Easy

Learning Objective: Appendix 7B

Topic Area: Impairment of a receivable―App B

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

28. Under the CECL approach used in U.S. GAAP, impairments are only recognized for losses that occur more than a year in the future when a receivable has deteriorated in credit quality.

Answer: False

Level of Learning: 1 Easy

Learning Objective: Appendix 7B

Topic Area: Impairment of a receivable―App B

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

29. Under the ECL approach used in IFRS, impairments are only recognized for losses that occur more than a year in the future when a receivable has deteriorated in credit quality.

Answer: True

Level of Learning: 1 Easy

Learning Objective: Appendix 7B

Topic Area: IFRS – Impairment of receivables

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

30 . Under IFRS, accounts receivable impairments are not recognized.

Answer: False

Level of Learning: 1 Easy

Learning Objective: 07-10

Learning Objective: Appendix 7B

Topic Area: IFRS ‒ Impairment of receivables

Blooms: Remember

AACSB: Reflective thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Multiple Choice Questions

31. Important elements of an internal control system for cash disbursements include each of the following except:
32. Only authorized personnel should sign checks.
33. All expenditures should be authorized before a check is prepared.
34. All disbursements, other than very small disbursements, should be made by check.
35. The same person that prepares the check should also record it in the proper journal.

Answer: d

Level of Learning: 1 Easy

Learning Objective: 07-01

Topic Area: Internal control

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Risk analysis

32. COSO defines internal control as a process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in:
33. Effectiveness and efficiency of operations.
34. Reliability of financial advice.
35. Compliance with local ordinances.
36. All of these answer choices are correct.

Answer: a

Level of Learning: 1 Easy

Learning Objective: 07-01

Topic Area: Internal control

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Risk analysis

33. Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/2018:

Currency and coins $ 650

Balance in checking account 2,600

Customer checks waiting to be deposited 1,200

Treasury bills, purchased on 11/1/2018,

mature on 4/30/2019 3,000

Marketable equity securities 10,200

Commercial paper, purchased on 11/1/2018,

mature on 1/30/2019 5,000

What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents?

450. $ 9,450.
451. $12,450.
452. $ 7,450.
453. $19,650.

Answer: a

Level of Learning: 3 Hard

Learning Objective: 07-01

Topic Area: Cash and cash equivalents

Blooms: Apply

AACSB: Knowledge application

AICPA: FN Measurement

Feedback: $650 + 2,600 + 1,200 + 5,000 = $9,450

34. Cash equivalents do not include:
35. Money market funds.
36. High grade marketable equity securities.
37. U.S. treasury bills.
38. Commercial paper.

Answer: b

Level of Learning: 1 Easy

Learning Objective: 07-01

Topic Area: Cash and cash equivalents

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

35. Cash may not include:
36. Foreign currency.
37. Money orders.
38. Restricted cash.
39. Undeposited customer checks.

Answer: c

Level of Learning: 1 Easy

Learning Objective: 07-01

Learning Objective: 07-02

Topic Area: Cash and cash equivalents

Topic Area: Restricted cash and compensating balances

Blooms: Remember

AACSB: Reflective thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement