Accounting Chapter 7

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False

Showing marketable securities on the balance sheet at current market values violates the consistency principle.

False

A line of credit creates a liability for the borrower when it is granted by the bank.

False

The first step in a bank reconciliation is to update the depositor's accounting records for any deposits-in- transit.

True

To "write-off" an account receivable is to reduce the balance of the customer's account to zero.

True

The Allowance for Doubtful Accounts is a contra-asset account and appears on the balance sheet.

False

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.

False

Deposits-in-transit would not appear on a company's bank reconciliation but would appear on the company's bank statement.

False

Entries made in the general journal after preparing a bank reconciliation are called closing entries.

False

Financial assets may be current or long-term assets.

True

Cash equivalents include money market funds, U.S. Treasury bills and high-grade commercial paper.

False

The term "financial asset" is synonymous with the term "cash equivalent."

True

Cash equivalents are the most liquid of assets.

False

A credit memoranda from a bank indicates that they have decreased the depositor's cash balance.

False

U.S. Treasury bills that mature within six months are cash equivalents.

False

A company with more than one bank checking account should show more than one account for Cash in its balance sheet.

False

The amount of cash that should appear on the balance sheet is equal to the amount of cash on deposit, plus currency, coin, and customers' checks on hand, minus the balance of the Cash Over and Short account.

False

Financial assets describe not just cash, but all assets that are easily and directly convertible into known amounts of cash, except marketable securities.

False

Restricted cash may be available to meet the normal operating needs of a company.

True

A compensating balance is often required by a bank as a condition for granting a loan.

True

An unrealized gain on available-for-sale securities will increase shareholders' equity.

False

Internal control is strengthened by a policy of making payments by check or from cash receipts or from a petty cash fund.

False

Compensating balances are not included in the amount of cash listed on a balance sheet.

False

In order to be classified as available-for-sale securities, the investment cannot be held for a period longer than three months.

False

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.

True

Internal control will aid in achieving accurate accounting for cash.

True

Marketable securities includes investments in bonds and in the capital stocks of publicly traded corporations.

False

The Allowance for Doubtful Accounts should be listed on the balance sheet as a current liability.

False

Short-term investments in marketable securities may not be reported in the balance sheet at values higher than original cost.

False

If the allowance method is used and an account receivable that had been previously written-off is collected, income is currently recorded.

True

The income statement approach used to estimate uncollectible receivables uses a percentage of net sales without considering the current balance in the Allowance account

True

The Allowance for Doubtful Accounts is called a valuation account or contra-asset account and normally has a credit balance.

True

When an Allowance for Doubtful Accounts is used, accounts receivable are valued in the balance sheet at their estimated net realizable value.

True

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.

True

A debit memoranda from a bank indicates that they have decreased your cash balance.

True

When the direct write-off method is used to recognize uncollectible accounts expense, an Allowance for Doubtful Accounts is not required.

False

When doing a bank reconciliation, an NSF check will reduce the bank's balance.

True

The lower the accounts receivable turnover rate, the longer a company must wait to collect from its credit customers.

False

An unrealized loss on available-for-sale securities will reduce net income.

False

The direct write-off method is more conservative than the allowance method for valuation of receivables.

False

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.

True

A note receivable which is not collected promptly at the maturity date should be written off the books by a debit to Accounts Receivable and a credit to Notes Receivable.

True

If the time span covered by a note is stated in days, the number of days for which interest accrues is computed by omitting the day on which the note is dated but including the day on which the note falls due.

False

Non U. S. companies can never be compared to U. S. Companies because non U. S. companies use foreign currencies.

False

Many fraudulent financial reporting schemes seek to manipulate accounts payable in order to overstate revenue and income.

True

It has been found that improper revenue recognition was the most common scheme in fraud-related SEC enforcement actions.

True

Management may wish to overstate a company's income because bonus plans and stock options are related to reported earnings.

Both of the above

In order to overstate income, a company may fraudulently:

Preparing a pro-forma financial statement on a monthly basis.

A good system of internal control will include all of the following except:

A cash budget

In order to hold each department manager accountable for monthly cash transactions, a business will often prepare:

All of the above are correct

Accounts receivable

Balance sheet

The Allowance for Doubtful Accounts will appear on the

Both of the above

"Concentrations of credit risk" occur if:

The balance sheet

The mark-to-market adjustment for investments classified as "available for sale" affects:

Inventories

Financial assets include all of the following except

Adding $18 to the book balance

The bookkeeper prepared a check for $68 but accidentally recorded it as $86. When preparing the bank reconciliation, this should be corrected by:

Interest earned on the company's checking account.

After preparing a bank reconciliation, a journal entry would be required for which of the following:

Deducting any debit memoranda from the balance on the bank statement.

All the following are steps included in the preparation of a bank reconciliation except:

Inventories

Each of these categories of assets is normally shown in the balance sheet at current value, except:

Include short-term investments in marketable securities and receivables, as well as cash.

Financial assets:

Accounts receivable

Which of the following is not considered a cash equivalent?

Very liquid short-term investments such as U.S. Treasury Bills and commercial paper.

The term cash equivalent refers to:

Net income and net assets are not affected.

Under the allowance method, when a receivable that had been previously written off is collected:

Combining the functions of signing checks with the approval of expenditures.

Which of the following is not an example of internal control over cash?

Management arranges for a loan to cover projected cash shortages during the production phase of the business cycle each year.

Which of the following practices best illustrates efficient management of cash?

Prepare monthly cash budgets (forecasts) up to a year in advance.

Efficient management of cash includes which of the following concepts?

Cash

Which of the following are always listed on the balance sheet at face amount?

As soon as any money is borrowed.

With a line of credit, a liability arises:

Operating

Interest received is shown on which section of the statement of cash flows?

The practice of making small cash disbursements directly from the current day's cash receipts.

Which of the following does not contribute toward achieving internal control over cash payments?

Deposit all cash receipts daily in the petty cash fund.

Which of the following is not a basic means of achieving internal control over cash receipts?

The checks received in the mail from customers should not be sent to the accounting department to be
recorded as cash receipts.

In order to achieve internal control over cash receipts:

All three of the above are basic objectives of cash management.

Which of the following is not a basic objective of cash management?

All three of the above

Which of the following items on a bank reconciliation may not have been known to the depositor until the bank statement had arrived?

Convenience

The primary purpose of a petty cash fund is:

Mark-to-market

Marketable securities are classified into three types; which one is not one of the three types?

Reported in the stockholders' equity section of the balance sheet.

With available-for-sale securities, unrealized holding gains and losses are:

Decrease the balance per the bank statement.

When preparing a bank reconciliation, checks outstanding will:

The balance per bank statement and the cash balance per the accounting records of the depositor.

A bank reconciliation explains the differences between:

An outstanding check

In reconciling a bank statement, which of the following items could cause the cash per the bank statement to be greater than the balance of cash shown in the depositor's accounting records?

Increase the balance per the bank statement.

When preparing a bank reconciliation, deposits in transit will:

Accounts Receivable

An NSF check returned by the bank should be entered in the depositor's accounting records by a debit to:

Deducted from the balance per the depositor's records.

In preparing a bank reconciliation, a service charge shown on the bank statement should be:

Deducted from the balance per the depositor's records.

Enclosed with the bank statement received by Sydney Company at October 31 was an NSF check for $300. No entry has yet been made by the company to reflect the bank's action in charging back the NSF check. During preparation of the bank reconciliation, the NSF check should be:

To record items that explain the difference between the balance per the accounting records and the
adjusted cash balance.

When a bank reconciliation has been satisfactorily completed, the only related entries to be made in the depositor's records are:

Deducted from the balance per the bank statement.

During preparation of a bank reconciliation, outstanding checks should be:

Not change income or total assets

When there is an Allowance for Doubtful Accounts in use, the writing-off of an uncollectible accounts receivable will:

Deposits in transit

Which of the following items would cause cash per the bank statement to be smaller than the balance of cash shown in the accounting records?

Outstanding checks

Which of the following items would cause cash per the bank statement to be larger than the balance of cash shown in the accounting records?

Expenses paid from the fund are recorded when the fund is replenished.

When a petty cash fund is in use:

Decrease the balance per depositor's records.

When preparing a bank reconciliation, bank service charges will:

Achieve internal control over small cash disbursements not made by check.

The purpose of establishing a petty cash fund is to:

Decrease the balance per depositor's records.

When preparing a bank reconciliation, an NSF check will:

Enhances usefulness of the balance sheet in evaluating solvency of a business.

The valuation principle of "mark-to-market" applied to investments classified as available for sale securities:

Indicates that Baxter's marketable securities have a current market value higher than cost.

The financial statements of Baxter Corporation include an Unrealized Holding Gain on Investments. This item:

Not available for the normal operating needs of a company.

Restricted cash is:

Whenever the accounts receivable arise from "normal" sales of merchandise to customers, regardless
of the credit terms.

Accounts receivable are classified as current assets:

As current assets, immediately after cash and cash equivalents.

Accounts receivable appear in the balance sheet:

Represents the loss in value of accounts receivable that are estimated to be uncollectible.

Uncollectible accounts expense:

Credit Memorandum

When reading a bank statement which of the following will indicate an increase in the cash balance?

The difference between the face value of accounts receivable and the net realizable value of accounts
receivable.

The Allowance for Doubtful Accounts represents:

Require the direct write-off method.

When determining the uncollectible accounts expense in computing taxable income, income tax regulations

Stress the relationship between uncollectible accounts expense and net sales.

The aging of the accounts receivable approach to estimating uncollectible accounts does not:

The relationship between revenue and expenses is being stressed more than the valuation of receivables at the balance sheet date.

If a company uses a percentage of net sales in computing the amount of uncollectible accounts expense:

All three of the above

Factoring of accounts receivables is:

The direct write-off method

Randall, Inc. uses the allowance method supported by an aging of its accounts receivable to recognize uncollectible accounts expense in its financial statements. What method of recognizing this expense does Randall use in its income tax return?

Does not adhere to the cost principle or conservatism.

The mark-to-market valuation principle:

Records uncollectible accounts expense when individual accounts receivable are determined to be
worthless.

The direct write-off method of recognizing uncollectible accounts expense:

None of the above

Robert Lerner maintains the accounts receivable records, authorizes the write-off of uncollectible accounts, issues credit memoranda to customers, and handles cash receipts from customers. When customers are late in paying their accounts, Lerner often writes off the account as uncollectible and steals the cash received from the customer. This fraud should come to light if an employee other than Lerner:

Reconciles credit memoranda for sales returns to returned merchandise accepted by the receiving
department.

Joe Costello handles cash receipts from customers and also has responsibility for issuing credit memoranda, writing off uncollectible accounts, and maintaining the accounts receivable records. When customers pay their accounts, Davis occasionally issues a credit memorandum and steals the cash received from the customer. This fraud should come to light if an employee other than Costello:

An account receivable from Empress Charge.

Shrek Cyclery sells a bicycle to W. O'Connor, a customer who uses Empress Charge (a national credit card, but not issued by a bank). In recording this sale, Shrek Cyclery should record:

Sales to customers using bank credit cards are recorded as cash sales.

The Kansas Company makes credit sales to customers who use bank credit cards (such as Visa or MasterCard) as well as to customers who use non-bank credit cards (such as American Express or Diner's Club). In this situation:

Cash sales

Sales to customers using bank credit cards, such as Visa or MasterCard, are recorded as:

Indicates how many times the receivables were converted into cash during the year.

The accounts receivable turnover rate:

Basinger collects its accounts receivable faster than does Baldwin Company

The accounts receivable turnover rate for Baldwin Corporation is 8, and for Basinger Company is 10. These statistics indicate that:

Between six and eighteen months

Available-for-sale securities are usually held for:

Net income is not affected

Under the allowance method, when a receivable that had been previously written off is collected:

Making the end-of-period adjustment to record estimated uncollectible accounts.

Which of the following activities affects net income, but has no immediate impact upon cash flows?

Purchase of marketable securities for cash.

Each of the following transactions would be reflected in both the income statement and the statement of cash flows for the current period, except:

Are adjusted to current market value at the end of each accounting period.

Investments in available-for-sale marketable securities:

To adjust the valuation of a company's investment to current market value.

The purpose of the mark-to-market adjustment for securities classified as "available-for-sale" is:

Represents a departure from the cost principle.

The mark-to-market adjustment:

Is reported in the stockholders' equity section of the balance sheet, as either an increase or decrease in total stockholders' equity.

An Unrealized Holding Gain (or Loss) on Investments classified as "available-for-sale" securities:

J. Lennon is considered the maker of the note.

J. Lennon borrows a sum of money from Y. Ono. A promissory note is used to document the terms of the transaction. In this situation:

Cleopatra is considered the maker of the note and records the note as a liability in her [his] accounting
records.

Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation:

The higher the better

In regard to the accounts receivable turnover rate:

Notes payable and interest expense in the financial statements of the maker of the note throughout the life of the note.

When a promissory note is issued, you would expect to find:

An account receivable is recorded in the amount of the principal plus interest through the maturity
date.

When the maker of a note defaults:

Factoring

A transaction in which a business sells its accounts receivables to a financial institution.

Allowance for doubtful accounts

An estimate of the portion of year-end accounts receivable that ultimately will turn out to be uncollectible.

Bank reconciliation

Schedule explaining any differences between cash balances appearing in the accounting records and in the monthly bank statement.

Mark-to-market

Balance sheet valuation standard applicable to investments in marketable securities.

Financial asset

Cash and assets convertible directly into known amounts of cash, such as marketable securities and receivables.

Direct write-off

Method of accounting for uncollectible receivables that fails to match revenues and expenses.

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