Financial Accounting, 3e (Kemp/Waybright)
Chapter 7 Cash and Receivables
7.1 Questions
1) Credit sales are the most desirable form of sales.
2) The most common credit cards issued by financial institutions are Discover and American
Express.
3) The most common types of financial institution credit cards are MasterCard and Visa.
4) MasterCard and Visa sales are treated like cash sales.
5) Most financial institutions charge the retailer a service fee that enables the retailer to accept
the credit cards as payment on merchandise.
6) From the retailer’s perspective, debit cards are nearly identical to credit cards and have the
same benefits and drawbacks.
7) Cash is one of the least vulnerable assets that a business has.
8) The cash register provides control over the cash receipts for a retail business.
9) Cash receipts should never be deposited more than once a business day.
10) Separation of duties is essential for internal control over cash receipts and cash payments.
11) Streamlined payment procedures now involve the use of electronic data interchange and
electronic funds transfer between and among suppliers and merchandisers.
12) Bank reconciliations are an important part of internal control that should be performed daily.
13) In a bank reconciliation, the bank balance and the book balance must be adjusted to be
reconciled.
14) Differences between when a company records a transaction and when the bank records the
same transaction are called “timing” differences.
15) If possible, the bank reconciler should have no other duties relating to cash transactions in
the business.
16) Online banking should NOT be used to reconcile the bank account.
17) The processing of credit card and debit card transactions is generally done:
A) at the retail site.
B) at the financial institution of the retailer.
C) by third parties hired to do the processing.
D) over the Internet.
18) Proceeds from credit card and debit card transactions are generally deposited into a
business’s bank account within:
A) one to three days.
B) three to five days.
C) a week.
D) a month.
19) A retailer has 4% credit/debit card service fees deducted from the proceeds from each sale.
The retailer has $1,200 in credit/debit card sales for the day. The journal entry to record these
sales would be to:
A) debit Cash for $1,200 and credit Sales for $1,200.
B) debit Sales for $1,200 and credit Cash for $1,200.
C) debit Cash for $1,152, debit Service Fee Expense for $48; and credit Sales for $1,200.
D) debit Cash for $1,152 and credit Sales for $1,152.
20) A retailer has 3% credit/debit card service fees deducted from the proceeds from each sale.
The retailer has $1,700 in credit/debit card sales for the day. The journal entry to record these
sales would be to:
A) debit sales for $1,700 and credit Cash for $1,700.
B) debit Cash for $1,700 and credit Sales for $1,700.
C) debit Cash for $1,649, debit Service Fee Expense for $51; and credit Sales for $1,200.
D) debit Cash for $1,700, credit Sales for $1,649, and credit Service Fee Expense for $51.
21) A retailer has 5% credit/debit card service fees deducted from the business’s bank account on
a monthly basis. The retailer has $43,500 in sales for the month. The journal entry to record these
sales would be to:
A) debit Sales for $43,500 and credit Cash for $43,500.
B) debit Cash for $43,500 and credit Sales for $43,500.
C) debit Cash for $41,325, debit Service Fee Expense for $2,175 and credit Sales for $43,500.
D) debit Cash for $43,500, credit Sales for $41,325 and credit Service Fee Expense for $2,175.
22) Toy Company has 4% credit/debit card service fees deducted monthly by the bank from Toy
Company’s bank account. Toy Company has $75,000 in sales for the month. At what amount
will Toy Company record this month’s sales?
A) $78,000
B) $75,000
C) $72,000
D) $3,000
23) When companies extend credit to customers:
A) sales generally decrease.
B) the likelihood of not collecting money from customers decreases.
C) the likelihood of not collecting money from customers increases.
D) the business stays the same.
24) Which of the following situations would cause Acme Company to have an NSF check
amount on its bank reconciliation?
A) Acme writes a check to a supplier that bounces.
B) A customer writes a check to pay Acme and that check bounces.
C) Both situations A and B will cause Acme to have an NSF check on its’ bank reconciliation.
D) Neither situation A nor B will cause Acme to have an NSF check on its’ bank reconciliation.
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25) As part of the procedure to properly control cash payments received in the mail, after the
mailroom employee opens the cash receipts, the checks then go to the:
A) bank.
B) Controller.
C) Treasurer.
D) accounting department.
26) As part of the procedure to properly control cash payments received in the mail, after the
mailroom employee opens the cash receipts, the remittance advices go to the:
A) Controller.
B) accounting department.
C) Treasurer.
D) bank.
27) In the last step of the procedure to properly control cash payments received in the mail, the
________ verifies the amount of the deposit and the total amount posted to the cash account.
A) bank
B) accounting department
C) Treasurer
D) Controller
28) The process of acquiring merchandise from a supplier begins with the:
A) check for payment.
B) receiving report.
C) purchase order.
D) invoice.
29) Once the merchandise is received from the supplier, the company:
A) issues an invoice.
B) issues a check.
C) issues a purchase order.
D) completes a receiving report.
30) Before signing a check to pay for a purchase, the ________ should examine the documents
supporting the purchase.
A) Controller
B) purchasing agent
C) Treasurer
D) manager
31) To prevent a second payment for an invoice, the check signer should ________ the
documents relating to the transaction.
A) deface
B) sign
C) file
D) throw away
32) A bank statement shows the:
A) ending book balance as of a specific date.
B) ending bank balance as of a specific date.
C) reconciled balance as of a specific date.
D) book errors as of a specific date.
33) Deposits in transit are:
A) subtracted from the book balance.
B) added to the book balance.
C) subtracted from the bank balance.
D) added to the bank balance.
34) The bank recorded a $56 deposit as $65. On a bank reconciliation this error would be
corrected by:
A) subtracting $9 from the bank balance.
B) adding $9 to the bank balance.
C) adding $9 to the book balance.
D) subtracting $9 from the book balance.
35) On a bank reconciliation, outstanding checks are:
A) added to the book balance.
B) added to the bank balance.
C) subtracted from the book balance.
D) subtracted from the bank balance.
36) A $525 collection on a note from a customer was reflected on Ronaldo Co’s bank statement.
When doing the bank reconciliation, Ronaldo Co. should:
A) add $525 to the bank balance.
B) subtract $525 from the bank balance.
C) add $525 to their book balance.
D) subtract $525 from their book balance.
37) Cypress Inc. deposited $2,000 into its bank account at the end of the month, but the bank
statement does not show the deposit. This $2,000 is an example of a(n):
A) outstanding check.
B) bank error.
C) bank collection.
D) deposit in transit.
38) Rex’s Auto has a checking account that earns interest. The current bank statement shows
interest earned of $11.27. This amount should be:
A) added to Rex’s book balance.
B) subtracted from Rex’s book balance.
C) ignored, as the bank has added it to Rex’s book balance.
D) subtracted from the bank balance.
39) Pirates Party Supply deposited a check for $675, but it was recorded on their books as a
check for $576. This error of $99 would be:
A) added to the bank balance.
B) added to Pirate’s book balance.
C) subtracted from the bank balance.
D) subtracted from Pirate’s book balance.
40) Northwest Plumbing’s bank statement shows a bank balance of $43,267. The statement
shows a bank service charge of $50. Northwest Plumbing’s book balance shows outstanding
checks of $5,288 and deposits in transit of $9,325. The adjusted balance on the bank side of the
reconciliation would be:
A) $43,267.
B) $43,217.
C) $39,230.
D) $47,304.
41) Cesario Auto’s bank statement shows a bank balance of $43,267. The statement shows a
bank service charge of $50 and a note collection of $760 on Cesario Auto’s behalf. Cesario
Auto’s book balance should be adjusted by a total of:
A) +$810.
B) +$760.
C) +$710.
D) -$710.
42) Which of the following is NOT true concerning NSF checks:
A) NSF checks represent customer checks that the business previously deposited but have turned
out to be worthless.
B) The amount of the NSF check will need to be subtracted from the book balance.
C) The amount of the NSF check will need to be added to the book balance.
D) NSF stands for nonsufficient funds.
43) During a bank reconciliation, S & C Inc. discovered a NSF check from their customer, Marla
Hicks for $35. The journal entry required to update the cash balance would be:
A) Debit cash, credit Accounts Receivable
B) Debit Accounts Receivable, credit Cash
C) Debit Accounts Receivable — M. Hicks, credit Cash
D) No journal entry is required.
7.2 Questions
1) Cash is listed first on the Balance Sheet because it is the least liquid asset.
2) Each cash account is listed separately on the Balance Sheet.
3) Cash equivalents may include money orders and traveler’s checks.
4) Ninety-day U.S. Treasury notes are considered cash equivalents.
5) Cash consists of anything that a bank will take as a deposit.
6) Which of the following would NOT be considered cash?
A) Currency
B) Money market funds
C) Money orders
D) Checking accounts
7) Which of the following would NOT be considered a 90-day cash equivalent?
A) Time deposits
B) Coin
C) Treasury notes
D) Certificates of deposits
8) Cash equivalents are:
A) very liquid and carry high risk.
B) not liquid and carry little risk.
C) very liquid and carry little risk.
D) not liquid and carry high risk.
9) U.S. Treasury notes must mature within ________ days of the Balance Sheet date in order to
be considered cash equivalents.
A) 60
B) 90
C) 120
D) 180
10) Which of the following would be considered a cash equivalent?
A) Currency
B) Time deposits
C) Checks
D) Money orders
11) Cash on the Balance Sheet includes:
A) checks on hand.
B) traveler’s checks.
C) Petty Cash.
D) all of the above.
12) A fund that contains a small amount of cash and is used to pay for minor expenditures is
known as:
A) the emergency fund.
B) the checking account.
C) the petty cash fund.
D) the cash account.
7.3 Questions
1) Accounts Receivable are more formal and usually longer in terms than notes receivable.
2) Notes receivable generally include a charge for interest.
3) A company may have receivables such as loans to employees and interest receivable.
4) Accounts Receivable are classified as Current Assets.
5) Which of the following would indicate poor internal control over Accounts Receivable?
A) The person handling cash receipts passes the receipts to someone who enters them into
Accounts Receivable.
B) The same person handling cash receipts also records the Accounts Receivable transactions.
C) The mailroom employees open the mail and give the cash receipts to another employee.
D) The person who handles Accounts Receivable would not write off accounts as uncollectible.
6) Companies who sell on account expect:
A) the benefit to outweigh the cost.
B) to incur bad debt expense.
C) to reach a wider range of customers.
D) all of the above.
7) An example of good internal control over Accounts Receivable is:
A) the employee who handles the daily cash receipts also records Accounts Receivable
transactions.
B) the employee who opens the mail is also in charge of recording Accounts Receivable.
C) there are separate employees for cash-handling and cash-accounting duties.
D) All of the above are examples of good internal controls.
8) Which is NOT a benefit to extending credit to customers?
A) Bad debt expenses
B) Increased revenues
C) Increased profits
D) Wider range of customers
7.4 Questions
1) The simplest way to account for an uncollectible account is to use the allowance method.
2) When writing off an account using the direct write-off method, the journal entry would
include a debit to Bad Debt Expense.
3) GAAP generally allows the direct write-off method for accounting for bad debts.
4) The direct write-off method always adheres to the matching principle.
5) The materiality principle allows companies with low amounts of uncollectible accounts to use
the direct write-off method.
6) The allowance method of accounting for bad debts is required by GAAP because of the
materiality principle.
7) The contra-account, Allowance for Doubtful Accounts, is credited when journal entries are
made for estimates of bad debts.
8) The percent of sales method is the only method allowed by GAAP to estimate the amount of
uncollectible accounts.
9) The net realizable value of Accounts Receivable is computed by subtracting the allowance for
doubtful accounts from the amount in the Accounts Receivable control account.
10) When using the aging method, the amount calculated to be the uncollectible accounts is
always the amount used for the adjusting entry at the end of the period.
11) There are two methods for accounting for uncollectible receivables.