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Intermediate Accounting David Spiceland James Sepe Mark Nelson 8

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Intermediate Accounting David Spiceland James Sepe Mark Nelson 8

Chapter 07

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.

True False

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.

True False

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.

True False

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.

True False

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.

True False

6.

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

True False

7.

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

True False

8.

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

True False

9.

The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value.

True False

10.

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

True False

11.

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

True False

12.

Using the balance sheet approach, bad debt expense is an indirect result of estimating the net realizable value of accounts receivable.

True False

13.

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

True False

14.

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.

True False

15.

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

True False

16.

Securitization of receivables is a type of secured borrowing.

True False

17.

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.

True False

18.

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

True False

19.

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

True False

20.

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

True False

21.

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

True False

22.

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.

True False

23.

Under IFRS, accounts receivable impairments are not recognized.

True False

Multiple Choice Questions
24.

Important elements of an internal control system for cash disbursements include each of the following except:

A.

Only authorized personnel should sign checks.

B.

All expenditures should be authorized before a check is prepared.

C.

All disbursements, other than very small disbursements, should be made by check.

D.

The same person that prepares the check should also record it in the proper journal.

25.

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:

A.

Effectiveness and efficiency of operations.

B.

Reliability of financial advice.

C.

Compliance with local ordinances.

D.

All of these answer choices are correct.

26.

Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/2016:

Currency and coins

$ 650

Balance in checking account

2,600

Customer checks waiting to be deposited

1,200

Treasury bills, purchased on 11/1/2016, mature on 4/30/2017

3,000

Marketable equity securities

10,200

Commercial paper, purchased on 11/1/2016, mature on 1/30/2017

5,000

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

A.

$9,450.

B.

$12,450.

C.

$7,450.

D.

$19,650.

27.

Cash equivalents do not include:

A.

Money market funds.

B.

High grade marketable equity securities.

C.

U.S. treasury bills.

D.

Commercial paper.

28.

Cash may not include:

A.

Foreign currency.

B.

Money orders.

C.

Restricted cash.

D.

Undeposited customer checks.

29.

Compensating balances represent:

A.

Funds in a bank account that can’t be spent.

B.

Balances in a payroll checking account.

C.

Accounts that are subject to bank service charges.

D.

Accounts on which banks pay interest, e.g., NOW accounts.

30.

Cash that is restricted and not available for current operations is reported in the balance sheet as:

A.

Equity.

B.

Investments.

C.

Liabilities.

D.

A separate section between liabilities and equity.

31.

Logistics Company had the following items listed in its trial balance at 12/31/2016:

Balance in checking account, Bank of the East

$442,000

Treasury bills, purchased on 11/1/2016 mature on 1/30/2017

20,000

Loan payable, long-term, Bank of the East

300,000

Included in the checking account balance is $50,000 of restricted cash that Bank of the East requires as a compensating balance for the $300,000 note. What amount will Logistics include in its year-end balance sheet as cash and cash equivalents?

A.

$412,000.

B.

$462,000.

C.

$392,000.

D.

$442,000.

32.

Which of the following is true about reporting cash under IFRS?

A.

Cash accounts include loans made to customers, but not to related parties.

B.

Overdrafts typically cannot be offset against positive balance in other cash accounts on the balance sheet.

C.

Cash overdrafts are not allowed.

D.

Overdrafts typically are not shown as current liabilities on the balance sheet.

33.

Wilson Company had the following cash balance items listed in its trial balance at 12/31/2016:

Peterson Savings and Loan:

$50,000

Right Bank:

( 5,000)

Clinton County Trust Bank:

10,000

If Wilson reports under IFRS, its 12/31/2016 balance sheet would show what cash balance?

A.

($5,000).

B.

$55,000.

C.

$60,000.

D.

None of these answer choices are correct.

34.

Wilson Company had the following cash balance items listed in its trial balance at 12/31/2016:

Peterson Savings and Loan:

$50,000

Right Bank:

( 5,000)

Clinton County Trust Bank:

10,000

If Wilson reports under U.S. GAAP, its 12/31/2016 balance sheet would show what cash balance?

A.

($5,000).

B.

$55,000.

C.

$60,000.

D.

None these answer choices are correct.

35.

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts.

What is the correct entry for Flores on November 10?

A.

Accounts receivable

7,840

Sales

7,840

B.

Accounts receivable

8,000

Sales

8,000

C.

Accounts receivable

7,840

Cash discounts

160

Sales

8,000

D.

Accounts receivable

8,000

Cash discounts

160

Sales

7,840

36.

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts.

What is the correct entry for Flores on November 17, assuming the correct payment was received on that date?

A.

Cash

7,840

Accounts receivable

7,840

B.

Cash

7,840

Sales discounts

160

Accounts receivable

8,000

C.

Cash

7,840

Sales

160

Accounts receivable

8,000

D.

Cash

8,000

Sales discounts

160

Accounts receivable

8,000

Sales

160

37.

On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts.

What is the correct entry for Flores on December 5, assuming the correct payment was received on that date?

A.

Cash

8,000

Accounts receivable

7,840

Discounts revenue

160

B.

Cash

8,000

Accounts receivable

7,840

Interest revenue

160

C.

Cash

8,160

Accounts receivable

8,000

Interest revenue

160

D.

Cash

8,00

Accounts receivable

8,00

38.

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts.

What entry would Oswego make on April 12?

A.

Accounts receivable

46,000

Sales

46,000

B.

Accounts receivable

46,000

Sales

45,540

Sales discounts

460

C.

Accounts receivable

45,540

Sales

45,540

D.

Accounts receivable

45,540

Sales discounts

460

Sales

46,000

39.

Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts.

What entry would Oswego make on April 23, assuming the customer made the correct payment on that date?

A.

Cash

45,540

Sales

460

Accounts receivable

46,000

B.

Cash

46,000

Sales discounts

460

Accounts receivable

46,000

Interest revenue

460

C.

Cash

45,540

Sales discounts

460

Accounts receivable

46,000

D.

Cash

46,000

Accounts receivable

45,540

Sales

460

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