Chapter 7

Question 1

Short-term, highly liquid investments that can be readily converted to cash with little risk of loss

Answer 1

Cash Equivalents

Question 2

A company’s plan to encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data

Answer 2

Internal Control

Question 3

An internal control technique where various functions are distributed amongst employees to provide cross-checking that encourages accuracy and discourages fraud

Answer 3

Separation of Duties

Question 4

A specified balance a borrower of a loan is asked to maintain in a low-interest or noninterest-bearing account at the bank

Answer 4

Compensating Balance

Question 5

Percentage reduction from the list price

Answer 5

Trade Discounts

Question 6

Represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specific period of time

Answer 6

Cash Discounts

Question 7

For the buyer, views a discount not taken as a part of the cost of the inventory. For the seller, views a discount not taken by the customer as part of the sales revenue

Answer 7

Gross Method

Question 8

For the buyer, considers the cost of inventory the include the net, after-discount amount, and any discounts not taken are reported as interest expense. For the seller, considers sales revenue to be the net amount, after discount, and any discounts not taken by the customer as interest revenue

Answer 8

Net Method

Question 9

The return of merchandise for a refund or for credit to be applied to other purchases

Answer 9

Sales Return

Question 10

An operating expense incurred to boost sales; inherent cost of granting credit

Answer 10

Bad Debt Expense

Question 11

The amount of cash the company expects to actually collect from customers

Answer 11

Net Realizable Value

Question 12

Recording bad debt expense and reducing accounts receivable indirectly by crediting a contra account to accounts receivable for an estimate of the amount that eventually will prove uncollectible

Answer 12

Allowance Method

Question 13

Estimating bad debt expense as a percentage of each period’s net credit sales; usually determined by reviewing the company’s recent history of the relationship between credit sales and actual bad debts

Answer 13

Income Statement Approach

Question 14

Determination of bad debt expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet

Answer 14

Balance Sheet Approach

Question 15

Applying different percentages to accounts receivable balances depending on the length of time outstanding

Answer 15

Accounts Receivable Aging Schedule

Question 16

An allowance for uncollectible accounts is not used; instead bad debts that do arise are written off as bad debt expense

Answer 16

Direct Write-off Method

Question 17

Notes that bear interest, but the interest is deducted from the face value to determine the cash proceeds made available to the borrower at the outset

Answer 17

Noninterest-bearing Notes

Question 18

Operational Assets should be written down if blank has become significant

Answer 18

Impairment of Value

Question 19

Trade receivables in general rather than specific receivables as collateral; the responsibility for collecting the receivables remains solely with the company

Answer 19

Pledge

Question 20

Using receivables as collateral for loans where specific receivables go directly toward repayment of a debt if that debt goes unpaid

Answer 20

Assigning

Question 21

Financial institution that buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service

Answer 21

Factor

Question 22

The company creates a special purpose entity that buys a pool of trade receivables, credit card receivables, or loans from the company and then sells related securities

Answer 22

Securitization

Question 23

The buyer assumes the risk of bad debts

Answer 23

Without Recourse

Question 24

The seller retains the risk of uncollectibility

Answer 24

With Recourse

Question 25

The transfer of a note receivable to a financial institution

Answer 25

Discounting

Question 26

Comparison of the bank balance with the balance in the company’s own records

Answer 26

Bank Reconciliation

Question 27

The original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor

Answer 27

Troubled Debt Restructuring