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Chapter 07 Financial Assets Answer Key
True / False Questions
1.
Financial assets may be current or long-term assets.
2.
The term "financial asset" is synonymous with the term "cash equivalent."
3.
Cash equivalents are the most liquid of all assets.
4.
U.S. Treasury bills that mature within a period of four to six months are cash equivalents.
5.
A line of credit is an advance agreement by a bank to lend a company any amount of
money up to a specified limit.
6.
Financial assets describe not just cash, but all assets that are easily and directly
convertible into known amounts of cash, except marketable securities.
7.
Cash equivalents include money market funds, U.S. Treasury bills, and high-grade
commercial paper.
8.
A line of credit creates a liability for the borrower when it is granted by the bank.
9.
Restricted cash may be available to meet the normal operating needs of a company.
10.
A compensating balance is often required by a bank as a condition for granting a loan.
11.
Compensating balances are not included in the amount of cash listed on a balance sheet.
12.
Internal control will aid in achieving accurate accounting for cash transactions.
13.
If the account Cash Over and Short has a debit balance, it is reported in the balance sheet
as a current asset.
14.
Internal control is strengthened by a policy of making payments by check, from cash
receipts, or from a petty cash fund.
15.
An example of good internal control over cash is to have the person responsible for
physically handling all cash perform the bank statement reconciliations.
16.
The first step in a bank reconciliation is to update the depositor's accounting records for
any deposits in transit.
17.
Deposits in transit would not appear on a company's bank reconciliation but would appear
on the company's bank statement.
18.
Entries made in the general journal after preparing a bank reconciliation are called closing
entries.
19.
Service charges are an example of a transaction that appears in the bank statement but
which may not yet have been recorded by the company.
20.
Charges for depositing NSF checks are an example of a transaction that has been
recorded by the depositor but may not have been recorded by the bank.
21.
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.
22.
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.
23.
When doing a bank reconciliation, an NSF check will reduce the bank's balance.
24.
In the bank reconciliation, every adjustment to the balance per depositor's records
requires a journal entry.
25.
A basic characteristic of all marketable securities is that they can be purchased or sold
quickly and easily at quoted market prices.
26.
Marketable securities include investments in bonds and in the capital stocks of publicly
traded corporations.
27.
An unrealized holding gain on available for sale securities will increase shareholders'
equity.
28.
An unrealized holding loss on available-for-sale securities will reduce net income.
29.
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.
30.
Dividend revenue and interest revenue are reported in the income statement as a
component of a company's net income.
31.
Short-term investments in marketable securities may not be reported in the balance sheet
at values higher than original cost.
32.
Effective internal control over receivables is designed to ensure that customers' payments
are promptly deposited.
33.
One of the major steps in achieving internal control over accounts receivable is that the
Billing department reviews the sales order, the customer's credit file, and decides whether
and how much credit should be extended.
34.
In order to maximize sales and profits, effective internal control over receivables ensures
that credit is extended to all customers who request credit.
35.
To "write-off" an account receivable is to reduce the balance of the customer's account to
zero.
36.
The direct write-off method is more conservative than the allowance method for valuation
of receivables.
37.
An account receivable that arose from normal sales activity has a 16-month credit term.
This receivable will be classified as a noncurrent asset.
38.
If the allowance method is used, the recovery of an account receivable previously written-
off results in a gain being recorded on the income statement.
39.
The income statement approach used to estimate uncollectible receivables uses a
percentage of net sales without considering the current balance in the Allowance
account.
40.
The Allowance for Doubtful Accounts is called a valuation account, or contra-asset
account, and normally has a credit balance.
41.
When an Allowance for Doubtful Accounts is used, accounts receivable are valued in the
balance sheet at their estimated net realizable value.
42.
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.
43.
When the direct write-off method is used to recognize uncollectible accounts expense, an
Allowance for Doubtful Accounts is not required.
44.
The Allowance for Doubtful Accounts is a contra-asset account and appears on the
balance sheet.
45.
The Allowance for Doubtful Accounts should be listed on the balance sheet as a current
liability.
46.
Factoring allows a business to obtain immediate cash instead of waiting to collect the
account receivable.
47.
In general, the longer an account receivable is outstanding, the greater the likelihood it will
be collected.
48.
When a company makes a sale by accepting a bank-issued credit card from the customer,
the sale is recorded as a cash sale.
49.
If the maker of a note defaults, an entry is made which debits Accounts Receivable and
credits Notes Receivable.
50.
If the note receivable bears interest, the amount debited to Notes Receivable is for the
maturity amount of the note.
51.
The maker of a note is the party to whom payment is to be made.
52.
When interest is collected, it is debited to the Interest Revenue account and credited to
the Notes Receivable account.
