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.
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.
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.
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.
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
Chapter 7 Cash and Receivables
6. The net method of accounting for cash discounts requires adjusting entries for discounts taken.
7. Recognizing sales returns when merchandise is returned could result in an overstatement of
income in the period of the related sale.
8. If cash has been collected from a customer, recognizing estimated sales returns results in
recognizing a refund liability.
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.
Chapter 7 Cash and Receivables
10. Under IFRS, accounts receivable can be accounted for at fair value whenever company
management wants to do so.
11. Under IFRS, accounts receivable can be accounted for as “available for sale” if that approach
is elected upon initial recognition of the receivable.
12. Using the balance sheet approach, bad debt expense is an indirect result of estimating the net
realizable value of accounts receivable.
13. Discounts on notes receivable are recognized as interest earned over the term of the related
note.
Chapter 7 Cash and Receivables
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.
15. Unless specific sales criteria are met, the factoring of accounts receivable with recourse is
accounted for as a loan.
16. Securitization of receivables is a type of secured borrowing.
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.
18. The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a
Chapter 7 Cash and Receivables
company in managing its investment in receivables.
19. In a bank reconciliation, adjustments to the bank balance could include adding deposits in
transit and deducting bank service charges.
20. In a bank reconciliation, adjustments to the book balance could include adding or subtracting
company errors.
21. The journal entry to record the replenishment of a petty cash fund includes a credit to the petty
cash fund.
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.
23. Under IFRS, accounts receivable impairments are not recognized.
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.
Chapter 7 Cash and Receivables
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?
Chapter 7 Cash and Receivables
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.
Use the following to answer questions 33 and 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
33. 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. 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.
Use the following to answer questions 35–37:
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.
35. 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. 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
Chapter 7 Cash and Receivables
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. 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
8,000
Accounts receivable
8,000
Use the following to answer questions 38–40:
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.
38. What entry would Oswego make on April 12?
a.
Accounts receivable
46,000
Sales
46,000
b.
Accounts receivable
46,000
Sales
45,540
Chapter 7 Cash and Receivables
Sales discounts
460
c.
Accounts receivable
45,540
Sales
45,540
d.
Accounts receivable
45,540
Sales discounts
460
Sales
46,000
39. 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
40. What entry would Oswego make on June 10, assuming the customer made the correct
payment on that date?
a.
Cash
46,000
Accounts receivable
45,540
Discounts receivable
460
b.
Cash
46,000
Accounts receivable
45,540
Interest revenue
460
c.
Cash
46,000
Accounts receivable
46,000
d.
Cash
46,460
Accounts receivable
46,000
Chapter 7 Cash and Receivables
Use the following to answer questions 41–43:
On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with
credit terms 2/10, n/30. Cherokee uses the net method of accounting for cash discounts.
41. What entry would Cherokee make 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
42. What entry would Cherokee make 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
Interest revenue
460
Chapter 7 Cash and Receivables
43. What entry would Cherokee make on December 10, 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
8,000
Accounts receivable
8,000
Use the following to answer questions 44–46:
Harvey’s Wholesale Company sold supplies of $46,000 to Northeast Company on April 12 of the
current year, with terms 1/15, n/60. Harvey uses the net method of accounting for cash discounts.
44. What entry would Harvey‘s 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
Chapter 7 Cash and Receivables
45. What entry would Harvey‘s 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
45,540
Accounts receivable
45,540
46. What entry would Harvey‘s make on June 10, assuming the customer made the correct
payment on that date?
a.
Cash
46,000
Accounts receivable
45,540
Discounts revenue
460
b.
Cash
46,000
Accounts receivable
45,540
Interest revenue
460
c.
Cash
46,000
Accounts receivable
46,000
d.
Cash
46,460
Accounts receivable
46,000
Interest revenue
460
47. Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer
agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record
Chapter 7 Cash and Receivables
this reduction by crediting accounts receivable and debiting:
a. Sales.
b. Sales discounts.
c. Sales returns.
d. Sales allowances.
48. Tom’s Textiles shipped the wrong material to a customer, who refused to accept the order.
Upon receipt of the material, Tom’s would credit accounts receivable and debit:
a. Sales.
b. Sales discount.
c. Sales returns.
d. Sales allowances.
49. Memorex Disks sells computer disk drives with right–of-return privileges. Returns are material
and reasonably predictable. Memorex should:
a. Not record sales until the right to return has expired.
b. Record an allowance for sales returns in the year of the sale.
c. Debit sales returns in the period of the return.
d. Debit sales in the period of the return.
50. Galaxy sells used videogames for cash and provides a one-week return right. Returns are
material and reasonably predictable. Galaxy should:
a. Not record sales until the right to return has expired.
b. Record a contra-receivable in the year of the sale.
Chapter 7 Cash and Receivables
c. Recognize a refund liability associated with estimated returns.
d. Credit sales in the period of the return.
Use the following to answer questions 51 and 52:
False Value Hardware began 2016 with a credit balance of $32,000 in the allowance for sales returns
account. Sales and cash collections from customers during the year were $650,000 and $610,000,
respectively. False Value estimates that 6% of all sales will be returned. During 2016, customers
returned merchandise for credit of $28,000 to their accounts.
51. What is the balance in the allowance for sales returns account at the end of 2016?
a. $11,000.
b. $39,000.
c. $43,000.
d. $21,000.
52. False Value’s 2016 income statement would report net sales of:
a. $622,000.
b. $607,000.
c. $646,000.
d. $611,000.
Chapter 7 Cash and Receivables
Use the following to answer questions 53 and 54:
Rusty Hardware makes only cash sales. It began 2016 with a credit balance of $32,000 in the refund
liability account. Sales during 2016 were $600,000. Rusty estimates that 6% of all sales will be
returned. During 2016, customers returned merchandise for credit of $28,000 to their accounts.
53. What is the balance in the allowance for sales returns account at the end of 2016?
a. $32,000.
b. $39,000.
c. $43,000.
d. $40,000.
54. Rusty’s 2016 income statement would report net sales of:
a. $600,000.
b. $564,000.
c. $568,000.
d. $604,000.
55. Accounts receivable are normally reported at the:
a. Present value of future cash receipts.
b. Current value plus accrued interest.
c. Expected amount to be received.
d. Current value less expected collection costs.
56. The allowance for uncollectible accounts is a:
a. Deferred charge to expense.
b. Contra asset account.
c. Deferred revenue account.
d. Quasi-liability account.
57. A company uses the allowance method to account for bad debts. What is the effect on each of
the following accounts of the collection of an account previously written off?
Allowance for Accounts
Uncollectible Accounts Receivable
a. Increase Decrease
b. No effect Decrease
c. Increase No effect
d. No effect No effect
58. Collection of accounts receivable that previously have been written off results in an increase
in cash and an increase in:
a. Accounts receivable.
b. Allowance for uncollectible accounts.
c. Bad debts expense.
d. Retained earnings.
Chapter 7 Cash and Receivables
59. Which of the following does not reduce the balance in accounts receivable?
a. Returns on credit sales.
b. Collections from customers.
c. Recognizing bad debts expense.
d. Write-offs.
60. Chez Fred Bakery estimates the allowance for uncollectible accounts at 3% of the ending
balance of accounts receivable. During 2016, Chez Fred’s credit sales and collections were
$125,000 and $131,000, respectively. What was the balance of accounts receivable on January
1, 2016, if $180 in accounts receivable were written off during 2016 and if the allowance
account had a balance of $750 on December 31, 2016?
a. $5,820.
b. $31,000.
c. $31,180.
d. None of these answer choices are correct.
61. The following information relates to Halloran Co.‘s accounts receivable for 2016:
Accounts receivable balance, 1/1/2016 $ 840,000
Credit sales for 2016 3,300,000
Accounts receivable written off during 2016 70,000
Collections from customers during 2016 3,100,000
Allowance for uncollectible accounts balance, 12/31/2016 210,000