Financial Statement Accounts

Question 1

Describe the income statement approach for bad debts.

Answer 1

Estimates bad debt expense as a percentage of credit sales.

Question 2

What purpose does analyzing ending accounts receivable serve?

Answer 2

The determination of the needed or desired balance in the allowance account.

Question 3

Describe the balance sheet approach for calculating an allowance balance.

Answer 3

Applies a percentage to ending accounts receivable.

Question 4

Who bears the costs of bad debts when factoring with recourse?

Answer 4

The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.

Question 5

What is the accounting treatment when factoring with recourse, as accounted for as a loan?

Answer 5

The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.

Question 6

Define “factoring”.

Answer 6

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.

Question 7

What is the accounting treatment when factoring with recourse, as accounted for as a sale?

Answer 7

The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.

Question 8

Who bears the cost of bad debts when factoring without recourse?

Answer 8

The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.

Question 9

When does loan impairment occur?

Answer 9

When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.

Question 10

What is the accounting treatment for loan impairments?

Answer 10

The receivable should be written down to: 1. Present value of future cash flows using original effective interest rate, or 2. Market value, if this value can be determined.

Question 11

List the methods through which interest revenue is recognized after a write-down has occurred.

Answer 11

Interest and cost recovery methods.

Question 12

When a receivable is impaired, what should it be written down to?

Answer 12

The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.

Question 13

How is the loss on impairment accomplished?

Answer 13

With a debit to bad debt expense and a credit to a contra-receivable account.

Question 14

Define “market rate”.

Answer 14

Interest rate used to determine the present value of a note receivable.

Question 15

What do we call the (1) maker and (2) holder of a note?

Answer 15

(1) Maker is the buyer or borrower. (2) The holder is the seller or lender.

Question 16

At what value should a note receivable be recorded?

Answer 16

The present value of all future cash flows.

Question 17

How is the present value in a noncash transaction determined?

Answer 17

The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.

Question 18

How is the present value in a cash transaction determined?

Answer 18

The amount of cash that exchanged hands.

Question 19

Describe the difference between an interest-bearing and a noninterest-bearing note receivable.

Answer 19

Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest; Noninterest-bearing: the face amount of the note includes principal and interest that will be collected at maturity date.

Question 20

Define “maker”.

Answer 20

A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.

Question 21

What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?

Answer 21

Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.

Question 22

Describe a transaction with recourse.

Answer 22

The transferor is responsible for nonpayment on the part of the original maker of the receivable.

Question 23

Describe a transaction without recourse.

Answer 23

Transferor is not responsible for nonpayment on the part of the maker of the receivable.

Question 24

In the transfer of receivables, if the three conditions for a sale are not met, what happens?

Answer 24

The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.

Question 25

With respect to the transfer of receivable, what are the three conditions of a sale?

Answer 25

(1) The transferred assets have been isolated from the transferor, even in bankruptcy; (2) the transferee is free to pledge or exchange the assets; (3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.

Question 26

What is the preferred method of accounting for uncollectible accounts receivable?

Answer 26

Allowance method.

Question 27

Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?

Answer 27

The Allowance method.

Question 28

Describe the Allowance Method of Accounting for Bad Debts.

Answer 28

Determine the amount uncollectible and provide an Allowance to measure Accounts Receivable at net realizable value.

Question 29

Describe the Direct Write-Off Method for Bad Debts.

Answer 29

Direct write off records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Direct write-off method is rarely used.

Question 30

What does cash on hand reflect?

Answer 30

Petty cash on hand and undeposited cash receipts.

Question 31

What does an NSF check represent?

Answer 31

“Non-sufficient funds” checks received from customers.

Question 32

List the adjustments made to book balance to arrive at the bank balance.

Answer 32

Interest Earned; Note Collected; Service Charges; NSF Checks; Errors in company’s records.

Question 33

What is a deposit in transit?

Answer 33

Deposits made by a company that have not cleared the bank as of the bank statement date.

Question 34

List the three types of bank reconciliations.

Answer 34

Bank to Book; Book to Bank; Bank and Book to True.

Question 35

What are outstanding checks?

Answer 35

Checks written and mailed by the company which have not cleared the bank by the bank statement date.

Question 36

List the adjustments made to a bank balance to arrive at book income.

Answer 36

Deposits in Transit; Cash on Hand (deposited cash receipts, not petty cash); Outstanding Checks. Bank Errors.

Question 37

What effect do overdrafts have in International Financial Reporting Standards (IFRS)?

Answer 37

They can be subtracted from cash, rather than classified as a liability.

Question 38

Define “cash equivalents”.

Answer 38

Treasury obligations (bills, notes, and bonds), commercial paper (very short-term corporate notes), and money market funds.

Question 39

Define “monetary assets”.

Answer 39

An asset with fixed nominal value.

Question 40

Define “compensating balance”.

Answer 40

A minimum balance that must be maintained by the firm in relation to a borrowing. Classified as current or non-current based on related loan classification.

Question 41

List the items that are not included in cash

Answer 41

COD; Legally restricted compensating balances; Restricted cash funds; Post-dated checks received; Checks written but not sent; Advances to employees; Postage stamps.

Question 42

What does separation of duties accomplish?

Answer 42

Makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.

Question 43

Describe bank overdraft rules.

Answer 43

Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, it is reported as a current liability.

Question 44

List the items included in cash.

Answer 44

Coin and currency, petty cash, cash in bank, and negotiable instruments such as ordinary checks, cashier’s checks, certified checks, and money orders.

Question 45

What elements affect fixed overhead rates?

Answer 45

Subject to estimation errors and affected by the choice of denominator measure and the budgeting horizon reflected in the denominator.

Question 46

What does inventory for a typical business entity include?

Answer 46

Includes property held for resale, property in the process of production, and property consumed in the process of production.

Question 47

Is fixed overhead one of the four manufacturing input costs?

Answer 47

Yes, this is one of the input costs.

Question 48

How is the ownership of goods shipped Free On Board (FOB) destination determined?

Answer 48

The seller owns the goods until they reach destination.

Question 49

What merchandise is included in ending inventory?

Answer 49

All owned inventory, regardless of location.

Question 50

What inventory costs are required to be capitalized?

Answer 50

All costs necessary to bring the item of inventory to salable condition.

Question 51

Who is the owner of consigned goods?

Answer 51

The consignor (firm that shipped the inventory to consignee).

Question 52

What cost flow assumption utilizes the latest purchases at time of sale?

Answer 52

Last In First Out (LIFO).

Question 53

What cost flow assumption is the same for both the periodic and perpetual systems?

Answer 53

First In First Out (FIFO).

Question 54

For which method should an ending inventory count be made?

Answer 54

Both periodic and perpetual.

Question 55

List the main differences between perpetual and periodic entries.

Answer 55

The use of the inventory account rather than purchases and recording cost of goods sold at sale.

Question 56

What inventory system is implied when the moving average cost flow assumption is utilized?

Answer 56

Implies the perpetual inventory system.