Chapter 7: Cash And Receivables

Question 1

Cash is and consists of…..

Answer 1

The most liquid asset held by a business enterprise.it consists of coin, currency, bank deposits, and negotiable instruments such as money orders, checks and bank drafts.

Question 2

Receivables are….

Answer 2

Composed of both accounts and notes receivables (interest).

Question 3

What is restricted cash?

Answer 3

When an enterprise has on agreement with a bank concerning credit and borrowing arrangements.

Question 4

Receivables are:

Answer 4

Claims held against customers and others for money, goods, or services.
* can be classified as trade or nontrade.
* trade - a/r are oral promises of purchaser to pay for goods and services sold. Notes receivables are written promises to pay a certain sum of money on a specified future date.
* nontrade - arise from a variety of transactions and can be written promises either to pay on deliver.

Question 5

What are the two types of discounts that most be considered when determining the value of receivables?

Answer 5

Trade and cash discounts.
* trade discounts - reductions from the list or catalogs of merchandise (used to avoid frequent changes in catalogs or to quote different products for different quantities purchased.
*Cash discounts - offered as an inducement for prompt payment (2/10, n/30).

Question 6

Sales returns and allowances is a contra revenue accounting for..

Answer 6

Sales revenue

Question 7

Allowances for sales and returns and allowances is a contra asset account to…

Answer 7

Accounts receivable

Question 8

Two methods for uncollectible accounts:

Answer 8

1.) Direct write off - receivable account is reduced and an expense is recorded when a specific amount is determined to be uncollectible. Method is deficient because it does not match costs and revenues of the proof.
2.) Allowance method - requires year end estimate of expected uncollectible accounts based upon outstanding receivables. Entry is made to record sale and when account is deemed uncollectible. ( uses percentage of receivables approach)

Question 9

What is the difference between interest bearing notes and zero interest bearing notes?

Answer 9

Interest bearing - has a stated rate of interest
Zero bearing - includes interest as part of their face amount instead of stating it explicitly

Question 10

Notes receivable originate from…

Answer 10

• customers who need to extend payment period of an outstanding receivable
• high risk or new customers
• loans to employees and subsidiaries
• sales of PPE
• lending transactions

Question 11

Notes received for PPE: in a bargained transaction the stated interest rate is presumed to be fair unless…

Answer 11

1.) no interest rate is stated
2.) stated interest rate is unreasonable
3.) face amount of note is materially different from the current cash sales price

Question 12

Short term and long term valuation of notes receivable is reported at:

Answer 12

Short term - net realizable value
Long term - fast requires companies disclose not only their cost but their fair value in the notes of the financial statements

Question 13

Companies have the option to use what as the basis of their financial statements?

Answer 13

Fair value
* receivables are recorded at fair value
* unrealized holding gains or losses reported as part of net income
* companies report at far value each reporting date

Question 14

Disposition of accounts and notes receivable: owners may transfer accounts or notes receivables to another company for what cash reasons?

Answer 14

*competition
*money is scarce
*billing and collection are time consuming and costly

Question 15

How are transfers of accounts or notes accomplished?

Answer 15

*secured borrowing
*sale of receivables

Question 16

Difference between sale with recourse and sale without recourse:

Answer 16

Sale w/ recourse:
*seller guarantees payment to purchase
* financial component approach used to record transfer

Sale w/o recourse:
* purchase assumes risk of collection
*transfer is outright sale of receivable
*seller records loss on sale

Question 17

management faces two problems in Accounting for cash transactions

Answer 17

1.) establish proper controls to b prevent any unauthorized transactions by officers or employees
2.) provide information necessary to properly manage cash on hand and cash transactions

Question 18

Bank accounts used to obtain desired control objectives:

Answer 18

*collection float
*lockbox accounts
*general checking accounts
*imprest bank accounts

Question 19

Physical protection of cash balances:

Answer 19

Company should:
*minimize cash on hand
*only have pretty cash and current data receipts
*keep funds in vault, safe, or locked cash drawer
*transmit each days receipts to bank ASAP
*periodically prove reconcile balance shown in general ledger

Question 20

Reconciling items:

Answer 20

1.) deposit in transit
2.) outstanding checks
3.) bank charges and credits
4.) bank or depositor errors