Chapter 7

Question 1

Cash

Answer 1

Readily available to pay off debt or to use in operations

Question 2

cash equivalents

Answer 2

Short term, highly liquid investments, NO LONGER THAN 3 MONTHS

Question 3

Internal control (4)

Answer 3

Encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, enhance reliability and accuracy of accounting data.

Question 4

Arbanes-Oxleu Act

Answer 4

Company to document its internal controls and asses their adequacy

Question 5

restricted cash

Answer 5

Cash that is restricted in some way and not available for current use.

Question 6

compensating balance

Answer 6

amount that compensates the bank for granting the loan or extending the line of credit

Question 7

A/R

Answer 7

created when sellers recognize revenue associated with a credit sale

Question 8

Trade discounts

Answer 8

Percentage reduction from the list price

Question 9

Sales Discounts

Answer 9

Reductions in the amount to be paid by a credit customer if paid within a specified period of time.

Question 10

Sales returns

Answer 10

Merchandise is returned for a refund or for credit to be applied to other purchases

Question 11

Allowance

Answer 11

special price reduction, incentive for the customer to keep the merchandise rather than returning it.

Question 12

How should we account for the fact that not every A/R is likely to be collected

Answer 12

Direct Write Off (Not GAAP)
Allowance method (GAAP)

Question 13

Direct Write-Off Method

Answer 13

Wait until a particular account is deemed uncollectable and write it off at that time

Question 14

Allowance Method

Answer 14

Companies use a contra-asset account, the allowance for uncollectible accounts, to reduce the carrying value of A/R to the amount of cash they expect to collect.

Question 15

Bad Dept Expense

Answer 15

Not recognized when specific accounts are written off

Question 16

CECL (current expected credit loss)

Answer 16

Consider all receivables and be based on all relevant information including historical experience, current conditions, and reasonable and supportable forecasts

Question 17

Interest on notes (equation)

Answer 17

Face AmountAnnual RateFraction of the annual period

Question 18

Discount on note receivable

Answer 18

Represents future interest revenue, is a contra account

Question 19

Secured borrowing

Answer 19

Pledge accounts receivable as collateral for a loan, no special accounting treatment

Question 20

Sale of receivables

Answer 20

Can be sold at a gain or a loss like other assets, accounting treatment is similar to that of the sale of other assets

Question 21

factoring arrangement is made without recourse

Answer 21

buyer can’t ask the seller for more money if the receivables prove to be uncollectable

Question 22

Company sells accounts recievables with recourse

Answer 22

seller retains all of the risk of bad debts

Question 23

When is transferor allowed to treat a transfer as a sale?

Answer 23

When company has surrendered control over assets transferred

Question 24

conditions for transfer of control

Answer 24

-Asset is isolated
-Right to pledge or exchange the asset
-Effective control over the transferred assets

Question 25

how do companies obtain immediate cash

Answer 25

from financial institution either by pledging a note as collateral for a loan or by selling note