Chapter 07 – Cash and Receivables
TRUE/FALSE
1. Under discounting, a company sells its receivables in batches at a discount.
2. Purchasing receivables with recourse is riskier than purchasing them without recourse.
3. A contingent liability is generally not disclosed in the notes to the financial statements.
4. A company’s acceptance of credits cards, like MasterCard, is an example of factoring with recourse.
5. Having a compensating balance decreases a company’s liquidity.
6. Companies that experience seasonal cycles of business activity need not manage their cash as carefully
as companies whose business is not cyclical.
7. The receivable turnover is expressed in terms of times.
8. The higher the receivable turnover, the lower the days’ sales uncollected.
9. Securitization expedites the receipt of cash from sales made on credit for a fee.
10. Accounts receivable and inventory are considered short-term financial assets.
11. It is considered unethical to use the estimate for bad debts to purposely manipulate the amount of net
income.
12. Notes payable and cash are examples of short-term financial assets.
13. The fee for factoring with recourse is normally higher than it would be without recourse.
14. A discounted note represents a contingent liability because a potential liability exists.
15. Receivable turnover cannot be calculated without first knowing the days’ sales uncollected.
16. A compensating balance refers to a minimum amount that must remain in a bank account as part of a
credit-granting arrangement.
17. The SEC requires companies to disclose the amount of compensating balances in a note to the
financial statements.
18. Loans to company employees should be classified on the balance sheet as receivables from employees.
19. Trade credit arises from credit sales.
20. Compensating balances are kept as part of the Cash account balance on the balance sheet.
21. A compensating balance restricts cash; in effect, it increases the interest on the loan and reduces a
company’s liquidity.
22. Credit balances in customer accounts appear on the balance sheet as a current asset.
23. Bad debts are considered an expense of selling on credit.
24. When Company A discounts, with recourse, a note to Company B, Company A has a contingent
liability until the note is paid.
25. A company that factors its receivables will have a less favorable receivable turnover than a company
that does not factor.
26. Following a stringent credit-granting policy will probably result in fewer defaults by customers.
27. Customers with credit balances in their accounts are entitled to a refund if they do not intend to make
any future purchase.
28. Most operating transactions do not use or generate cash.
29. A successful credit policy balances an acceptable level of credit losses with the potential for profit
from total credit sales.
30. A petty cash fund is an example of an imprest system.
31. In a petty cash fund, the current cash amount plus the receipts submitted should equal the original
fixed amount.
32. When an individual uses a debit card to make a purchase, the amount of the purchase is deducted
directly from that individual’s bank account.
33. Cash equivalents are categorized as cash on the balance sheet.
34. Cash equivalents are defined as investments that carry a term of less than one year.
35. Automated teller machines (ATMs) are used primarily by consumers rather than by businesses.
36. On a bank reconciliation, outstanding checks are deducted from the balance per books.
37. On a bank reconciliation, interest income would be added to the balance per book.
38. A bank reconciliation begins with the balances as of the beginning of the month.
39. On a bank reconciliation, an NSF check would be deducted from the balance per book.
40.
On a bank reconciliation, a deposit in transit would be added to the balance per bank.
41. On a bank reconciliation, a bank service charge would be added to the balance per books.
42. When a bank reconciliation balances, no errors could have been made by the bank or the company.
43. A debit memorandum means that an amount was added to the bank balance; a credit memorandum
means that an amount was deducted.
44. A check that is outstanding for two consecutive months will appear only on the first month’s bank
reconciliation.
45. Excess cash should be kept in a petty cash fund.
46. It is usually a good business practice to maintain as large a balance in the Cash account as possible.
47. The use of electronic funds transfers makes check writing necessary.
48. Under the direct charge-off method, uncollectible accounts must be estimated if the matching rule is to
be followed.
49. Because bad debt losses are incurred to generate sales, they should be charged against the sales that
they helped generate.
50. The direct charge-off method makes an attempt to match bad-debt losses with revenues.
51. The allowance method of handling bad debts violates the matching principle.
52. The account Allowance for Uncollectible Accounts is adjusted at the end of the accounting period.
53. The allowance for uncollectible accounts is similar to accumulated depreciation in that it represents the
total of all accounts written off over the years.
54. Uncollectible accounts cannot be estimated because it is not possible to know which accounts will not
be collected.
55. The Allowance for Uncollectible Accounts is a contra-asset account.
56. The accounts receivable aging method of estimating uncollectible accounts is in violation of the
matching principle.
57. Under the accounts receivable aging method, the balance in Allowance for Uncollectible Accounts
must be considered prior to adjusting for estimated uncollectible accounts.
58. When the direct method is used, the write-off of an account receivable results in an expense at the time
of write-off.
59. When an account receivable that was previously written off is collected, it is necessary to reverse the
entry for the write-off before recording the collection.
60. The allowance method of recognizing uncollectible accounts is not in accordance with good
accounting practice.
61. Both the allowance method and the direct charge-off method are acceptable for tax purposes.
62. When using the allowance method, year-end adjustments for uncollectible accounts expense must be
made.
63. Under the allowance method, Uncollectible Accounts Expense is recorded when an individual
customer defaults.
64. The existence of uncollectible accounts is not evidence of poor credit policies.
65. A promissory note may be issued for an amount to be determined at a future date.
66. The debtor named in a promissory note is called the maker.
67. A 60-day note dated December 10 is due on February 10.
68. The maker of a note records Notes Receivable.
69. If a promissory note is dishonored, the payee should record interest income.
70. Interest on a nine-month, 9 percent, $4,000 note is calculated by multiplying $4,000 9/100 9/12.
71. The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest
Income.
MULTIPLE CHOICE
1. Cash consists of all of the following except
a.
deposits in checking accounts.
b.
checks from customers.
c.
compensating balances.
d.
receivables from customers.
2. A company’s acceptance of credit cards like Visa is an example of
a.
securitization.
b.
factoring with recourse.
c.
discounting.
d.
factoring without recourse.
3. Which of the following accounts is classified as a short-term financial asset?
a.
Inventory
b.
Notes Receivable
c.
Machinery
d.
Prepaid Insurance
4. Which of the following is not classified as a short-term financial asset?
a.
Accounts Receivable
b.
Notes Receivable
c.
Inventory
d.
Cash
5. The sale or transfer of accounts receivable to raise funds is called
a.
discounting.
b.
collateralizing.
c.
pledging.
d.
factoring.
6. Which of the following topics involves a contingent liability?
a.
Installment accounts receivable
b.
A factored accounts receivable with recourse
c.
Securitization
d.
A factored accounts receivable without recourse
7. The receivable turnover is expressed in terms of
a.
times.
b.
days.
c.
a percentage.
d.
dollars.
8. Days’ sales uncollected equals 365 days divided by
a.
cash.
b.
net accounts receivable.
c.
net sales.
d.
the receivable turnover.
9. The most liquid of all assets is
a.
cash.
b.
notes receivable.
c.
machinery.
d.
accounts receivable.
10. Which of the following would not be considered cash?
a.
Postage stamps
b.
Currency on hand
c.
Money orders from customers
d.
Bank deposits
11. Customers’ accounts with credit balances should be disclosed as a(n)
a.
expense on the income statement.
b.
current liability on the balance sheet.
c.
offset to Accounts Receivable on the asset side of the balance sheet.
d.
note to the financial statements.
12. Which of the following statements is false about factoring without recourse?
a.
The seller of the receivables is liable upon default of the debtor.
b.
The factor’s risk is higher than if the factoring were with recourse.
c.
An example is the use of major credit cards.
d.
The fee will be higher than if the factoring were with recourse.
13. Which of the following situations results in a contingent liability?
a.
Making a credit card sale
b.
Dishonoring a note
c.
Estimating uncollectible accounts expense
d.
Discounting a note
14. Which of the following statements is not true when FLK Company discounts a note receivable to the
bank?
a.
FLK may ultimately have to pay the bank when the note is due.
b.
If the maker of the note pays the bank on time, no liability will result to FLK.
c.
FLK will receive the maturity value from the bank.
d.
A contingent liability arises for FLK.
15. The goal of a successful credit policy is to maximize the potential profit on total credit sales while
a.
limiting credit losses to an acceptable level.
b.
minimizing the number of credit customers.
c.
keeping credit sales as low as possible.
d.
selling only to customers who will pay.
16. Which of the following would not be included in Cash or Cash Equivalents?
a.
Sixty-day U.S. Treasury bills held
b.
Deposits in bank checking accounts
c.
Checks and money orders received from customers
d.
Twelve-month certificates of deposit held
17. An example of a cash equivalent is
a.
a 120-day time deposit.
b.
notes receivable.
c.
accounts receivable.
d.
a 60-day certificate of deposit.
18. Which of the following would not be a valid reason to keep some currency on hand at a place of
business?
a.
To pay expenses that are impractical to pay by check
b.
To make up for any imbalance in the books
c.
To advance money to employees
d.
To provide money for cash registers
19. Which of the following items on a bank reconciliation would require a journal entry on the company’s
books?
a.
A deposit in transit
b.
Outstanding checks
c.
A bank service charge
d.
A bank error on the bank statement
20. All of the following bank reconciliation items would result in a journal entry on the company’s books
except
a.
error in recording deposit.
b.
fee for collection of note by bank.
c.
NSF check of customer.
d.
outstanding checks.
21. Which of the following bank reconciliation items would result in a journal entry on the company’s
books?
a.
Bank error
b.
Interest income
c.
Deposit in transit
d.
Outstanding checks
22. Which of the following would be added to the balance per books on a bank reconciliation?
a.
Deposits in transit
b.
Outstanding checks
c.
Collection fee
d.
Interest income
23. An NSF check should appear in which section of the bank reconciliation?
a.
Deduction from the balance per books
b.
Deduction from the balance per bank
c.
Addition to the balance per books
d.
Addition to the balance per bank
24. Which of the following would be added to the balance per bank?
a.
Outstanding checks
b.
Interest income
c.
Collection of a note receivable by the bank
d.
Deposit in transit
25. Which of the following would be deducted from the balance per bank?
a.
An issued check that the company forgot to record on its books
b.
Bank service charge
c.
Outstanding checks
d.
NSF check
26. A check written for $354 is incorrectly recorded by a company as $534. On the bank reconciliation the
$180 error should be
a.
deducted from the balance per books.
b.
added to the balance per bank.
c.
deducted from the balance per bank.
d.
added to the balance per books.
27. On a bank reconciliation, interest earned on a checking account should be
a.
deducted from the balance per books.
b.
added to the balance per books.
c.
added to the balance per bank.
d.
deducted from the balance per bank.
28. Which of the following bank reconciliation items would not result in a journal entry?
a.
Service charge
b.
NSF check of customer
c.
Interest income
d.
Deposits in transit
29. During the month, a company learns that a check it issued has been accidentally destroyed. On the
bank reconciliation, the company would
a.
deduct the amount from the balance per bank.
b.
deduct the amount from the balance per books.
c.
add the amount to the balance per bank.
d.
add the amount back to the balance per books.
30. A company issues a check for $792 but records it as $729. On the bank reconciliation, the $63 error
should be
a.
deducted from the balance per books.
b.
added to the balance per bank.
c.
deducted from the balance per bank.
d.
added to the balance per books.
31. Which of the following would be deducted from the balance per books on a bank reconciliation?
a.
Notes collected by the bank
b.
Deposits in transit
c.
Service charges
d.
Outstanding checks
32. For which of the following errors should the appropriate amount be added to the balance per bank on a
bank reconciliation?
a.
A returned $600 check recorded by bank as $500
b.
Check for $164 recorded as $146
c.
Deposit of $800 recorded by bank as $600
d.
Check for $69 recorded as $96
33. The allowance for uncollectible accounts is necessary because
a.
a liability results when a credit sale is made.
b.
when recording uncollectible accounts expense, it is not possible to predict specifically
which accounts will not be collected.
c.
management should know how many credit losses have been sustained over the years.
d.
uncollected accounts that are written off must be accumulated in a separate account.
34. The account Allowance for Uncollectible Accounts is classified as a(n)
a.
contra account to Bad Debt Expense.
b.
expense.
c.
asset.
d.
contra account to Accounts Receivable.
35. Under the allowance method, Uncollectible Accounts Expense is recorded
a.
for an estimated amount.
b.
several times during the accounting period.
c.
when an individual account is written off.
d.
for a known amount.
36. Which of the following methods of recording uncollectible accounts expense would be described best
as an income statement method?
a.
Both percentage of net sales method and accounts receivable aging method
b.
Direct charge-off method
c.
Percentage of net sales method
d.
Accounts receivable aging method
37. Which of the following methods of recording uncollectible accounts expense would be described best
as a balance sheet method?
a.
Accounts receivable aging method
b.
Percentage of net sales method
c.
Direct charge-off method
d.
Both percentage of net sales method and direct charge-off method
38. The balance in Allowance for Uncollectible Accounts must be considered prior to end–of-period
adjustment when using which of the following methods?
a.
Both percentage of net sales method and accounts receivable aging method
b.
Both direct charge-off method and percentage of net sales method
c.
Percentage of net sales method
d.
Accounts receivable aging method
39. The matching rule
a.
results in the recording of a known amount for bad-debt losses.
b.
necessitates the recording of an estimated amount for bad debts.
c.
requires that all bad-debt losses be recorded when an individual customer defaults.
d.
is violated when the allowance method is employed.
40. If the amount of uncollectible accounts expense is overstated at year end,
a.
Allowance for Uncollectible Accounts will be understated.
b.
net income will be overstated.
c.
net Accounts Receivable will be understated.
d.
total liabilities and stockholders’ equity will be overstated.
41. The matching rule relates to credit losses by stating that Uncollectible Accounts Expense should be
recorded
a.
in the period of the loss.
b.
for an exact amount.
c.
in the same period as allowed for tax purposes.
d.
in the period of the sale.
42. Under the allowance method, when a specific account is written off,
a.
total assets will be unchanged.
b.
expenses will increase.
c.
net income will decrease.
d.
total assets will decrease.
43. A company that uses the allowance method writes off a specific account as uncollectible, but then the
customer pays. The entries made upon receiving payment will
a.
decrease Cash.
b.
decrease Accounts Receivable.
c.
increase Allowance for Uncollectible Accounts.
d.
decrease Uncollectible Accounts Expense.
44. Under the allowance method, when a year-end adjustment is made for estimated uncollectible
accounts,
a.
total assets decrease.
b.
total assets increase.
c.
expenses are unchanged.
d.
net income is unchanged.
45. One might infer from a debit balance in Allowance for Uncollectible Accounts that
a.
a posting error has been made.
b.
Uncollectible Accounts Expense has been overestimated.
c.
the accounts receivable aging method apparently is being used.
d.
more has been written off than had been estimated.
46. Under the direct charge-off method of dealing with uncollectible accounts,
a.
revenues and expenses are properly matched.
b.
Accounts Receivable is shown on the balance sheet at net realizable value.
c.
Uncollectible Accounts Expense is recorded in the period of the sale.
d.
no Allowance for Uncollectible Accounts exists.
47. If the amount of uncollectible accounts expense is understated at year end,
a.
net Accounts Receivable will be overstated.
b.
total liabilities will be overstated.
c.
net income will be understated.
d.
Allowance for Uncollectible Accounts will be overstated.
48. Use this information to answer the following question.
The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for
Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $1,000,000. In the
past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results
in an estimate of $27,000 of uncollectible accounts.
Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance (after
adjustment) would be
a.
$29,000.
b.
$28,000.
c.
$27,000.
d.
$25,000.
49. Use this information to answer the following question.
The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for
Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $1,044,000. In the
past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results
in an estimate of $27,000 of uncollectible accounts.
Using the percentage of net sales method, Uncollectible Accounts Expense would be debited for
a.
$18,880.
b.
$22,880.
c.
$2,000.
d.
$20,880.
50. Use this information to answer the following question.
The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for
Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $930,000. In the
past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results
in an estimate of $27,000 of uncollectible accounts.
Using the percentage of net sales method, the Allowance for Uncollectible Accounts balance (after
adjustment) would be
a.
$16,600.
b.
$18,600.
c.
$20,600.
d.
$2,000.
51. Use this information to answer the following question.
The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for
Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $1,000,000. In the
past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results
in an estimate of $35,800 of uncollectible accounts.
Using the accounts receivable aging method, the Uncollectible Accounts Expense would be
a.
$33,800.
b.
$36,800.
c.
$35,800.
d.
$37,800.
52. Using the percentage of net sales method, uncollectible accounts expense for the year is estimated to
be $54,000. If the balance of the Allowance for Uncollectible Accounts is an $18,000 credit before
adjustment, what is the balance after adjustment?
a.
$72,000
b.
$38,000
c.
$54,000
d.
$18,000
53. Using the accounts receivable aging method, estimated uncollectible accounts are $50,000. If the
balance of the Allowance for Uncollectible Accounts is an $18,000 debit before adjustment, what is
the balance after adjustment?
a.
$68,000
b.
$50,000
c.
$18,000
d.
$32,000
54. The balance of Accounts Receivable, net of the allowance account, is $70,000 before the write-off of a
$5,600 account. What is the Accounts Receivable balance, net of the allowance account, after the
write-off?
a.
$70,000
b.
$64,400
c.
$5,600
d.
$75,600
55. A company performs the aging of accounts receivable calculation and arrives at an estimate for
uncollectible accounts of $800. If Allowance for Uncollectible Accounts has a debit balance of $300
prior to the year-end adjustment, for how much should the adjustment be journalized?
a.
$1,100
b.
$800
c.
$300
d.
$5,500
56. A company has net sales of $100,000 during the year. At year end (before an adjustment is made),
Allowance for Uncollectible Accounts has a credit balance of $5,000. If the company estimates that 3
percent of net sales are uncollectible and the company uses percentage of net sales method, what is the
balance in the allowance account after the year-end adjustment has been made?
a.
$3,000 debit balance
b.
$3,000 credit balance
c.
$8,000 credit balance
d.
$2,000 debit balance