1. Current assets are assets which
a. can be used immediately to retire liabilities.
b. are newly acquired.
c. have been converted into cash in the previous year.
d. are intended to be converted into cash within one year.
2. A company’s operating cycle may be described as
a. the period of time that is typically required for a company to convert cash into
inventory and inventory into cash.
b. the period of time from the beginning of operations until a company liquidates all of
its assets.
c. always a one-year time period.
d. a cycle that is distinguished at the discretion of the Board of Directors on a daily
basis.
3. Cash may consist of
a. coin and currency, loans to employees, and money orders.
b. petty cash, officer imprest accounts, and employee savings accounts.
c. money orders, postage stamps, and currency.
d. checking accounts, savings accounts, and bank drafts.
4. A compensating balance is
a. cash held by a foreign government.
b. a balance maintained by the company to pay the employees’ payroll.
c. a minimum cash balance that must be maintained on deposit.
d. items which are not cash, but equivalent to cash.
5. Which of the following are components of the quick ratio?
a. Cash and notes payable
b. Cash and accounts receivable
c. Accounts receivable and inventory
d. All current assets except accounts receivable
6. Which of the following are components of the current ratio?
a. Accounts receivable and short term investments
b. Inventory, retained earnings, and accounts payable
c. Accounts payable, dividends, and cash
d. Short term investments, equipment, and land
7. ‘Earnings management’ is described as deliberate managerial decisions and choices
that are solely designed to
a. increase selling prices of a company’s products.
b. reduce repair costs on the company’s equipment.
c. manipulate net income from one period to the next to boost the company’s stock
price.
d. increase working capital.
8. If a company with a current ratio of 2.0 pays $2,000 of its salaries payable, then its
current ratio will
a. change, but not enough information is provided to determine if it will increase or
decrease.
b. decrease.
c. remain the same.
d. increase.
9. On August 1, Compass Co. made a $10,000 credit sale under the terms 2/10, n/30. If
Compass receives full payment of the account on August 8, how much cash will it
receive?
a. $9,700
b. $9,800
c. $9,000
d. $10,000
10. If a company with working capital of $210,000 pays $4,000 of bonds payable, then its
working capital will
a. increase.
b. decrease.
c. remain the same.
d. Not enough information to determine
11. The allowance for doubtful accounts is
a. an ‘other revenue’ account.
b. a contra accounts receivable account.
c. an ‘other expense’ account.
d. a contra expense.
12. On November 3, Carol Company made a $2,000 credit sale under the terms 3/10, n/60.
If Carol receives full payment of the account on November 14, how much cash will it
receive?
a. $1,400
b. $1,900
c. $1,940
d. $2,000
13. On January 2, Favre Co. made a $2,000 credit sale under the terms 3/10, n/30. If Favre
uses the gross method of accounting for cash discounts, the proper entry on January 2
includes
a. a debit to Accounts Receivable for $2,000, and a credit to Sales for $2,000.
b. a debit to Accounts Receivable for $2,000, a credit to Cash Discounts for $1,940,
and a credit to Sales for $60.
c. a debit to Accounts Receivable for $1,940, and a credit to Sales for $1,940.
d. a debit to Accounts Receivable for $1,940, a debit to Cash Discounts for $60, and a
credit to Sales for $2,000.
14. The net realizable value of receivables is calculated as the face value of the receivables
less adjustments for
a. sales returns and sales discounts.
b. actual uncollected amounts adjusted for purchase discounts.
c. bad debts already written off.
d. sales returns, cash discounts, and estimated uncollectible accounts.
Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable 6-5
15. Montego Bay Resort Club offers a cash discount of 3% if its customers pay within 15
days after the customer eats dinner. Otherwise, the customer must pay within 30 days. If
a customer does not take advantage of the cash discount, then he/she is paying an
annual interest rate for not delaying payment for 15 days of
a. 3%.
b. 6%.
c. 36%.
d. 72%.
16. The face amount of accounts receivable for Rio Inc. is $20,000. It was estimated that 5%
of the accounts will not be collected, cash discounts of $500 will be exercised, and $200
of sales returns will be experienced. The net realizable value of accounts receivable is
a. $19,500
b. $19,300
c. $20,000
d. $18,300
17. Under the allowance method of accounting for bad debts, the recognition of bad debts
expense
a. increases current assets and decreases net income.
b. decreases current assets and increases net income.
c. increases current assets and net income.
d. decreases current assets and net income.
18. Under the direct write-off method of accounting for bad debts, the recognition of bad
debts expense
a. decreases current assets and net income.
b. decreases current assets and increases net income.
c. increases current assets and net income.
d. increases current assets and decreases retained earnings.
19. Under the allowance method of accounting for bad debts, the write-off of an account
receivable determined to be uncollectible
a. decreases the current ratio.
b. increases the current ratio.
c. has no effect on the current ratio.
d. decreases working capital.
Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable 6-7
20. Hummel Inc. and Nadia Co. have experienced identical economic performances for the
last several years of growing sales. Each uses identical accounting measurement rules
except that Hummel uses the allowance method and Nadia uses the direct write-off
method of accounting for bad debts. Both companies have experienced a gradual
increase in uncollectible accounts. Which one of the following statements is true in the
first year of operations for both companies?
a. Hummel ‘s net income is less than Nadia’s net income.
b. Hummel ‘s net income is greater than Nadia’s net income.
c. Hummel ‘s current ratio is greater than Nadia’s current ratio.
d. Hummel will appear more solvent than Nadia will.
21. Delvin Co. uses the percentage of credit sales approach in estimating its bad debt
expense. The total estimate that is calculated by multiplying the percentage times the
net sales revenue for the period will be equal to
a. the debit balance required in the allowance for doubtful accounts after the
recognition of bad debts expense.
b. the credit balance required in the allowance for doubtful accounts after the
recognition of bad debts expense.
c. the difference between the beginning and the ending accounts receivable balance.
d. the amount of bad debt expense.
22. Maradonna Co. uses an aging schedule of accounts receivable in estimating its bad debt
expense. The total estimate, which appears on the aging schedule, will be equal to
a. the amount of bad debts expense on the company’s income statement.
b. the debit balance required in the allowance account prior to the recognition of bad
debts expense.
c. the increase in bad debts expense as a result of the estimate.
d. the credit balance required in the allowance account after the recognition of bad
debts expense.
23. On December 1, 2015, Smith Company delivered a shipment of goods to a Danish
customer for a price of 160,000 euros. If on that date 1.3 U.S. dollars could be
exchanged for 1 euro. If Smith closes its books on December 31 and 1 U.S. dollar is
trading for 1 euro at that time, the adjusting entry that Smith would record would include:
a. a credit to Exchange Rate Gain for $48,000.
b. a debit to Accounts Receivable for $20,800.
6-8 Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable
c. a debit to Exchange Rate Loss for $48,000.
d. a debit to Sales for $48,000.
24. Under the allowance method of accounting for bad debts, the actual write-off of an
account receivable determined to be uncollectible
a. decreases current assets.
b. has no effect on current assets.
c. increases current assets.
d. occurs in the same accounting period as the sale.
25. Polo, Inc. uses the direct write-off method of accounting for bad debts. During July,
Torey’s account was written off as uncollectible. The write-off of Torey’s account
a. increases both the current and quick ratios.
b. decreases the current ratio and has no effect on the quick ratio.
c. decreases both the current and quick ratios.
d. increases the current ratio and has no effect on the quick ratio.
26. Alma Company uses the allowance method of accounting for bad debts. Alma:
a. is violating the matching principle.
b. will record bad debt expense only when an account is determined to be uncollectible.
c. will not sell to customers on account anymore.
d. will report accounts receivable in the balance sheet at their net realizable value.
27. If a company decreases its cash discount offer from 3/10, n/30 to 2/10, n/60, then it
would expect its accounts receivable collection period to
a. increase.
b. decrease.
c. remain the same.
d. There is not enough information to answer this question.
28. A company’s allowance for doubtful accounts is $4,000 and $3,000 on 1/1/11 and
1/1/10, respectively. During 2015, bad debts expenses were estimated to be 6% on net
credit sales of $100,000. During 2015, the amount of accounts written off as
uncollectible amounts to
a. $6,000.
b. $7,000.
c. $5,000.
d. $4,000.
6-10 Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable
29. The journal entry to record the recovery of a previously written-off $2,000 account
receivable (for customer Leno Company) under the allowance method would include:
a. a credit to Bad Debt Expense.
b. a credit to Cash.
c. a debit to Accounts Payable – Leno Company.
d. a credit to Allowance for Doubtful Accounts.
30. The allowance method of accounting for bad debts emphasizes the net realizable value
of accounts receivable on the balance sheet when
a. the direct write-off method is used.
b. the percentage of net credit sales approach is used to estimate uncollectibles.
c. the percentage of accounts receivable approach is used to estimate uncollectibles.
d. a company omits cash payments during the accounting period.
31. If a company’s collection period for accounts receivable is considered to be excessively
long, then
a. the company may want to invest excess cash from receivable collections in the stock
market.
b. the company might examine its billing procedures in order to expedite collection from
customers.
c. customer returns should be disallowed in order to increase the collection of cash.
d. cash flows from operations will probably be more than sufficient.
32. During the year, Caltech Inc.’s accounts receivable turnover rate increased from 10 to 12
times. The company makes credit sales only with credit terms of 3/10, n/40. The best
explanation for the increase is that
a. the company’s credit department did a better follow up with customers whose
account balances became past due.
b. the company has recently dropped its credit check policy.
c. the company makes all customers pay cash instead of allowing purchases to be
charged.
d. the company has more customers at the end of the year than it had at the beginning
of the year.
33. Summers, Inc. uses the allowance method to account for bad debts. The entry to record
the write-off of a customer’s account balance decreases
a. assets and owners’ equity.
b. assets and decreases liabilities.
c. owners’ equity and revenues.
d. none of these answers is correct.
34. If a company uses the allowance method to account for bad debts, the company’s
owners’ equity will decrease
a. at the end of the accounting period when an adjusting entry to estimate bad debts is
recorded.
b. on the date a customer’s account is determined to be uncollectible.
c. when the accounts receivable amount becomes past due.
d. on the date a customer’s account is written off.
35. Managers must understand how transactions affect working capital
a. because GAAP does not allow companies with weak working capital to obtain loans.
b. because lenders often use this to assess a company’s ability to meet current
obligations.
c. so that management can avoid transactions that increase working capital.
d. in anticipation of meeting creditors guidelines before issuing new stock.
36. Which of the following would be separately reported as restricted cash in the balance
sheet or footnotes to the financial statement?
a. $8,000 in the savings account at First Bank
b. $200 in a petty cash drawer
c. $10,000 cash in an escrow account at Guarantee Bank
d. $4,000 in a checking account at Second Rate Bank
Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable 6-13
37. On March 1, 2015, Silver Corp. sold goods to a Chinese company for 10,000 Chinese
yuan (10,000 RMB) to be paid on April 1, 2015. The exchange rates on March 1 and
April 1, 2015 are US$8.0 = 1 RMB and US$8.5 = 1 RMB, respectively. What is Silver’s
revenue in US dollars and its 2015 exchange gain or loss?
a. Sales revenue =US $80,000; Exchange gain US $5,000
b. Sales revenue = US $85,000; Exchange loss US $5,000
c. Sales revenue = US $80,000; Exchange loss US $5,000
d. Sales revenue = US $85,000; Exchange gain US $5,000
38. The current ratio fails to accurately reflect
a. the ability of a company to pay its current debts as they come due.
b. amounts that will come due within the next accounting period.
c. amounts due within the next operating cycle as of the end of the accounting period.
d. cash flows anticipated in future accounting periods.
39. Most companies
a. use working capital and current and quick ratios as low-cost surrogates for cash flow
measures.
b. place little importance on managing current assets.
c. have large amounts of current assets comprised of cash only.
d. are moving away from cash flow accounting.
40. The procedures designed to ensure that the cash account on the balance sheet reflects
the actual amount of cash in the company’s possession are referred to as
a. compensating balances.
b. record controls.
c. physical controls.
d. cash budgeting.
41. A company that maintains a cash balance of more than is necessary for its day–to-day
needs
a. is likely to have cash flow problems.
b. is not using working capital to its ideal advantage.
6-14 Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable
c. is likely to have a very low solvency.
d. has a problem with physical controls.
42. Accounts used to cover day-to-day office expenses are referred to as
a. petty cash.
b. bad debts.
c. cash restrictions.
d. compensating balances.
43. A cash discount differs from a trade discount in that the cash discount is
a. a reduction in the per unit price of an item if a certain quantity is purchased.
b. received in currency instead of by a check from the customer.
c. typically associated with consumers and a trade discount associated with
commercial vendors or suppliers.
d. the same as a mark down.
44. The gross method refers to
a. a method of accounting for uncollectible accounts.
b. the expectation that the customer will not take advantage of a cash discount.
c. a method of reporting cash on the balance sheet.
d. the restriction placed on the company’s bank account by the bank.
45. An exchange rate
a. is the cash amount received from a customer who takes advantage of a cash
discount.
b. is the value of one currency in terms of another currency.
c. seldom varies from one accounting period to the next.
d. is ignored by multinational companies.
46. Hedging is used to
a. reduce risks associated with holding receivables denominated in foreign currencies.
Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable 6-15
b. calculate the current ratio for multinational companies.
c. translate foreign currency into U.S. dollars.
d. ‘window dress’ uncollectible accounts.
47. Tyson Corp. uses the aging method to estimate bad debts. The bookkeeper provided the
following schedule as of March 30th, 2015:
Account Age
Balance
Noncollection Probability
Current
$50,000
3%
1 — 30 days past due
40,000
4%
31 — 60 days past due
10,000
8%
Over 60 days past due
5,000
15%
What is the amount of receivables deemed uncollectible?
a. $1,650
b. $4,650
c. $3,400
d. $105,000
48. At the beginning of 2015, Cyrus Corp.’s allowance for doubtful accounts is $12,500.
During 2015, $4,250 was written off as uncollectible. At December 31, the company
used an aging schedule of accounts receivable and determined that $10,530 of the
accounts receivable would probably be uncollectible. What would be the bad debts
expense that should be reported on Cyrus’s 2015 income statement?
a. $5,720
b. $26,780
c. $2,280
d.$18,280
Solution:
AICPA BB: Critical Thinking AICPA FN: Measurement
49. Before adjusting entries, Kilby Corp’s accounts receivable and allowance for doubtful
accounts are $745,000 and $7,000 (credit balance), respectively. Using an aging schedule of
accounts receivable, it is determined that $60,000 of the accounts receivable would probably be
uncollectible. Calculate the net realizable value of Truman’s receivables at year end.
a. $681,000
b. $695,000
6-16 Test Bank – Chapter 6 – The Current Asset Classification, Cash, and Accounts Receivable
c. $809,000
d. $685,000
Solution:
50. The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2015, is presented below.
Current Assets
$6,700
$7,900
(70)
7,830
2,270
500
Total
$17,300
Current Liabilities
$9,000
500
200
1,600
2,000
Total
$13,300
Based on this information, how would the current ratio be affected if Mason collects the
accounts receivable and then uses some of the cash to pay off the accounts payable?
a. The current ratio would increase from 1.30 to 1.93.
b. The current ratio would increase from 0.74 to 4.02.
c. The current ratio would decrease from 1.30 to 0.62.
d. The current ratio would increase from 1.09 to 1.61.
Solution:
51. The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2015, is presented below.
Current Assets
$6,700
$7,900
(70)
7,830
2,270
500
Total
$17,300
Current Liabilities
$9,000
500
200
1,600
2,000
Total
$13,300
Based on this information, how would the quick ratio be affected if Mason purchased
$1,300 of inventory on account?
a. The quick ratio would decrease from 1.30 to 1.21.
b. The quick ratio would not change.
c. The quick ratio would decrease from 1.09 to 1.00.
d. The quick ratio would decrease from 1.09 to 1.21.
Solution:
52. The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2015, is presented below.
Current Assets
$6,700
$7,900
(70)
7,830
2,270
500
Total
$17,300
Current Liabilities
$9,000
500
200
1,600
2,000
Total
$13,300
Based on this information, what would the quick ratio be if Mason sold all of its inventory
for $6,000 cash?
a. The quick ratio would decrease from 1.09 to 0.19.
b. The quick ratio would decrease from 1.30 to 0.85.
c. The quick ratio would increase from 1.30 to 1.54.
d. The quick ratio would increase from 1.09 to 1.54.
Solution:
53. Sanchez Inc. sells to customers only on credit. For the year ended December 31, 2015,
the following information is provided:
Sales revenue
$850,000
Accounts receivable, 1/01/15
230,000
Allowance for doubtful accounts, 12/31/15(before adjustment for bad debts)
600
Collections during 2015
470,000
Accounts written off as uncollectible during 2015
13,000
Sales returns
7,000
What is the balance of the Accounts Receivable account at December 31, 2015?
a. $1,525,000
b. $590,000
c. $205,000
d. $135,000
54. Sanchez Inc. sells to customers only on credit. For the year ended December 31, 2015,
the following information is provided:
Sales revenue
$850,000
Accounts receivable, 1/01/15
230,000
Allowance for doubtful accounts, 12/31/15(before adjustment for bad debts)
600
Collections during 2015
470,000
Accounts written off as uncollectible during 2015
13,000
Sales returns
7,000
If Sanchez estimates bad debts at 5% of net credit sales, how much is bad debt
expense?
a. $34,000
b. $15,200
c. $23,400
d. $42,150
55. The balances of the allowance for doubtful accounts on the balance sheets dated
December 31 of 2015 and 2014 were $2,000 and $7,000, respectively. During 2015, bad
debts expense was $12,000. What is the amount of accounts receivable that were
written off as uncollectible during 2015?
a. $22,000
b. $8,000
c. $17,000
d. $2,000
Solution:
56. The following information is provided for Atlanta, Inc..
Balance Sheet
2015
2014
Cash and cash equivalents
$89,000
$106,000
Accounts Receivables, less allowance for doubtful
accounts of $4,600 (2015) and $2,000 (2014)
198,000
154,000
How much is the balance in the Accounts Receivable account at December 31, 2015?
a. $193,600
b. $158,600
c. $202,600
d. $203,600
Solution:
57. The following information is provided for Atlanta Inc.
Balance Sheet
2015
2014
Cash and cash equivalents
$89,000
$106,000
Accounts Receivables, less allowance for doubtful
accounts of $4,600 (2015) and $2,000 (2014)
198,000
154,000
What is the amount of the Net Realizable Value of the receivables at December 31,
2015?
a. $198,000
b. $154,000
c. $193,600
d. $190,400
Solution:
AICPA BB: Critical Thinking AICPA FN: Measurement