7-2 Test Bank for Intermediate Accounting: IFRS Edition, 2e

CHAPTER 7 TRUE-FALSE—Conceptual

CASH AND RECEIVABLES 1. Savings accounts are usually classified as cash on the statement of financial position.

2. Certificates of deposit are usually classified as cash on the statement of financial position.

CHAPTER LEARNING OBJECTIVES 3. Companies include postdated checks and petty cash funds as cash.
1. Identify items considered cash.
4. Cash equivalents are investments with original maturities of six months or less.
2. Indicate how to report cash and related items.
3. Define receivables and identify the different types of receivables. 5. Bank overdrafts are always included as part of cash in the statement of financial position.
4. Explain accounting issues related to recognition of accounts receivable.
5. Explain accounting issues related to valuation of accounts receivable. 6. Short-term, highly liquid investments may be included with cash on the statement of
financial position.
6. Explain accounting issues related to recognition of notes receivable.
7. Explain accounting issues related to valuation of notes receivable. 7. Receivables are classified in the statement of financial position as either trade or non-trade
8. Understand special topics related to receivables. receivables.
9. Describe how to report and analyze receivables.
*10. Explain common techniques employed to control cash. 8. Trade receivables include notes receivable and advances to officers and employees.
*11. Describe the accounting for a loan impairment. 9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.

10. In the gross method, sales discounts are reported as a deduction from sales.

11. Ideally, a company should measure receivables in terms of their present value, that is, the
discounted value of the cash to be received in the future.

12. The International Accounting Standard Board requires that companies assess their
receivables for impairment each reporting period and begin the impairment assessment by
considering whether objective evidence indicates that one or more loss events have
occurred.

13. The International Accounting Standard Board requires that when performing an impairment
assessment, all receivables that are individually significant should be considered for
impairment separately.

14. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes

15. The percentage-of-sales method results in a more accurate valuation of receivables on the
balance sheet.

16. Companies record and report long-term notes receivable on a discounted basis.

17. When the stated rate of interest exceeds the effective rate, the present value of the note
receivable will be less than its face value.

18. When buying receivables with recourse, the purchaser assumes the risk of collectibility and
absorbs any credit loss.
 Cash and Receivables 7-3 7-4 Test Bank for Intermediate Accounting: IFRS Edition, 2e

19. If substantially all the risks and rewards of ownership of the receivables are transferred, then
they are derecognised.
MULTIPLE CHOICE—Conceptual
31. Which of the following is not considered cash for financial reporting purposes?
20. The International Accounting Standards Board believes that historical cost for financial
a. Petty cash funds and change funds
instruments provides more relevant and understandable information than fair value.
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
21. Under IFRS, a company may select the fair value option or amortized cost for valuing a
d. Postdated checks and I.O.U.’s
group of receivables at each statement of financial position date.
32. Which of the following is considered cash?
22. Under IFRS, a company will derecognize its receivables when it elects to use the fair value
a. Certificates of deposit (CDs)
option for a receivable.
b. Money orders
c. Money market savings certificates
23. Under IFRS, a company will derecognize its receivables when the contractual rights to the
d. Postdated checks
cash flows of the receivable no longer exist.
33. Travel advances should be reported as
24. Under IFRS de-recognition of a receivable is determined by using lack of control as the
a. supplies.
primary criterion.
b. cash because they represent the equivalent of money.
c. investments.
25. The accounts receivable turnover is computed by dividing net sales by the ending net
d. None of these answer choices are correct.
receivables.
34.
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Which of the following items should not be included in the Cash caption on the statement
26. U.S. GAAP permits the reversal of impairment losses recorded on receivables, with the
of financial position
reversal limited to the asset‘s amortized cost before the impairment.
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
27. The International Accounting Standards Board has indicated that they believe that financial
c. Amounts on deposit in checking account at the bank
statements would be more transparent and understandable if companies recorded and
d. Postage stamps on hand
reported all financial instruments at amortized cost.
35. All of the following may be included under the heading of “cash” except
28. Under IFRS, the Cash Over and Short account is shown on the statement of financial
a. currency.
position as an addition to (over) or subtraction from (short) the cash account.
b. money market funds.
c. checking account balance.
29. The percentage-of-sales and -receivables approaches are examples of impairment testing
d. savings account balance.
based on the individual assessment approach for long-term receivables.
36. In which account are post-dated checks received classified?
30. If a receivable is deemed to be individually impaired, the impairment loss is calculated as
a. Receivables
the difference between the carrying amount (generally the principal plus accrued interest)
b. Prepaid expenses
and the expected future cash flows discounted at the loan’s historical effective-interest rate.
c. Cash
d. Payables
True False Answers—Conceptual 37. In which account are postage stamps classified?
Item Ans. Item Ans. Item Ans. Item Ans. a. Cash
1. T 9. T 17. F 25. F b. Supplies
2. F 10. T 18. F 26. F c. Receivables
3. F 11. T 19. T 27. F d. Inventory
4. F 12. T 20. F 28. F
5. F 13. T 21. F 29. F 38. What is a compensating balance?
6. T 14. F 22. F 30. T a. Savings account balances
7. F 15. F 23. T b. Margin accounts held with brokers
8. F 16. T 24. F c. Temporary investments serving as collateral for outstanding loans
d. Minimum deposits required to be maintained in connection with a borrowing
arrangement
 Cash and Receivables 7-5 7-6 Test Bank for Intermediate Accounting: IFRS Edition, 2e

39. Under which section of the statement of financial position is “cash restricted for plant 46. Which of the following statement is incorrect regarding receivables on the statement of
expansion” reported? financial position?
a. Current assets a. Receivables are a financial asset.
b. Non-current assets b. Receivables are financial instruments.
c. Current liabilities c. Non-trade receivables are generally reported as separate items in the statement of
d. Equity financial position.
d. Accounts receivable are written promises of the purchaser to pay for goods or services.
40.
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A cash equivalent is a short-term, highly liquid investment that is readily convertible into
known amounts of cash and 47.
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When a customer purchases merchandise inventory from a business organization, she
a. is acceptable as a means to pay current liabilities. may be given a discount which is designed to induce prompt payment. Such a discount is
b. has a current market value that is greater than its original cost. called a(n)
c. bears an interest rate that is at least equal to the prime rate of interest at the date of a. trade discount.
liquidation. b. nominal discount.
d. is so near its maturity that it presents insignificant risk of changes in interest rates. c. enhancement discount.
d. cash discount.
41. Bank overdrafts generally should be
a. reported as a deduction from the current asset section. 48.
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Trade discounts are
b. reported as a deduction from cash. a. not recorded in the accounts; rather they are a means of computing a price.
c. netted against cash and a net cash amount reported. b. used to avoid frequent changes in catalogues.
d. reported as a current liability. c. used to quote different prices for different quantities purchased.
d. All of these answer choices are correct.
42. Deposits held as compensating balances
49. If a company employs the gross method of recording accounts receivable from customers,
a. usually do not earn interest.
then sales discounts taken should be reported as
b. if legally restricted and held against short-term credit may be included as cash.
a. a deduction from sales in the income statement.
c. if legally restricted and held against long-term credit may be included among current
b. an item of "other income and expense" in the income statement.
assets.
c. a deduction from accounts receivable in determining the net realizable value of
d. None of these answer choices are correct.
accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
43. The category "trade receivables" includes
a. advances to officers and employees.
50. Why do companies provide trade discounts?
b. income tax refunds receivable.
a. To avoid frequent changes in catalogs only
c. claims against insurance companies for casualties sustained.
b. To induce prompt payment
d. None of these answer choices are correct.
c. To easily alter prices for different customers only
d. To avoid frequent changes in catalogs and to easily alter prices
44. Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers
51. Of the approaches to record cash discounts related to accounts receivable, which is more
b. Receivables from subsidiaries
theoretically correct?
c. Dividends receivable
a. Net approach
d. None of these answer choices are correct.
b. Gross approach
45.
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What is the preferable presentation of accounts receivable from officers, employees, or c. Allowance approach
affiliated companies on a statement of financial position? d. All three approaches are theoretically correct.
a. As offsets to equity
b. By means of footnotes only 52. All of the following are problems associated with the valuation of accounts receivable
c. As assets but separately from other receivables except for
d. As trade notes and accounts receivable if they otherwise qualify as current assets a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.
 Cash and Receivables 7-7 7-8 Test Bank for Intermediate Accounting: IFRS Edition, 2e

53. Why is the allowance method preferred over the direct write-off method of accounting for 60. Which of the following methods of determining bad debt expense does not properly match
bad debts? expense and revenue?
a. Allowance method is used for tax purposes a. Charging bad debts with a percentage of sales under the allowance method
b. Estimates are used b. Charging bad debts with an amount derived from a percentage of accounts receivable
c. Determining worthless accounts under direct write-off method is difficult to do under the allowance method
d. Improved matching of bad debt expense with revenue c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method
54. Which of the following concepts relates to using the allowance method in accounting for d. Charging bad debts as accounts are written off as uncollectible
accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective 61. Which of the following methods of determining annual bad debt expense best achieves the
information. matching concept?
b. Bad debt expense is based on the actual amounts determined to be uncollectible. a. Percentage of sales
c. Bad debt expense is an estimate that is based only on an analysis of the receivables b. Percentage of ending accounts receivable
aging. c. Percentage of average accounts receivable
d. Bad debt expense is management’s determination of which accounts will be sent to d. Direct write-off
the attorney for collection.
62. Which of the following is a generally accepted method of determining the amount of the
55. How can accounting for bad debts be used for earnings management? adjustment to bad debt expense?
a. Determining which accounts to write-off a. A percentage of sales adjusted for the balance in the allowance
b. Changing the percentage of sales recorded as bad debt expense b. A percentage of sales not adjusted for the balance in the allowance
c. Using an aging of the accounts receivable balance to determine bad debt expense c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. Reversing previous write-offs d. An amount derived from aging accounts receivable and not adjusted for the balance in
the allowance
56. What is the normal journal entry for recording bad debt expense under the allowance
method? 63. The advantage of relating a company’s bad debt expense to its outstanding accounts
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable receivable is that this approach
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense a. gives a reasonably correct statement of receivables in the statement of financial
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts position.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
57. What is the normal journal entry when writing-off an account as uncollectible under the d. makes estimates of uncollectible accounts unnecessary.
allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable 64. Under IFRS, which of the following is not permitted for accounting for material amounts of
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense uncollectable accounts receivable?
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts a. Percentage of receivables, allowance method
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts b. Percentage of sales, allowance method
c. Direct write-off method
58. Which of the following is included in the normal journal entry to record the collection of d. All of these answer choices are acceptable under IFRS
accounts receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable 65. Which of the following statement is incorrect regarding how the IASB requires that the
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense impairment assessment be performed?
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts a. Receivables that are individually significant should be considered for impairment
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts separately, if impaired, the company recognizes it.
b. Receivables that are not individually significant are assessed individually. If impaired,
59. Assuming that the ideal measure of short-term receivables in the statement of financial the company recognizes it.
position is the discounted value of the cash to be received in the future, failure to follow c. Any receivable individually assessed that is not considered impaired should be
this practice usually does not make the statement of financial position misleading because included with a group of assets with similar credit-risk characteristics and collectively
a. most short-term receivables are not interest-bearing. assessed for impairment.
b. the allowance for uncollectible accounts includes a discount element. d. Any receivables not individually assessed should be collectively assessed for
c. the amount of the discount is not material. impairment.
d. most receivables can be sold to a bank or factor.
 Cash and Receivables 7-9 7 - 10 Test Bank for Intermediate Accounting: IFRS Edition, 2e

66. At the beginning of 2014, Gannon Company received a three-year zero-interest-bearing 72. Morley Manufacturing has notes receivable that have a fair value of $810,000 and a
$1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon carrying amount of $620,000. Morley decides on December 31, 2015, to use the fair value
reported this note as a $1,000 trade note receivable on its 2014 year-end statement of option for these recently-acquired receivables. Which of the following statements is correct
financial position and $1,000 as sales revenue for 2014. What effect did this accounting regarding the election of the fair value option by Morley?
for the note have on Gannon’s net earnings for 2014, 2015, 2016, and its retained a. Morley can elect to use the fair value option or amortized cost for these notes at each
earnings at the end of 2016, respectively? statement of financial position date.
a. Overstate, overstate, understate, zero b. Morley reports the receivables at fair value, with any unrealized holding gains and
b. Overstate, understate, understate, understate losses reported as a separate component of comprehensive income.
c. Overstate, overstate, overstate, overstate c. The unrealized holding gain is the difference between the fair value and the carrying
d. None of these answer choices are correct. amount.
d. All of the choices are correct regarding the fair value option.
67. What is imputed interest?
a. Interest based on the stated interest rate 73. Under IFRS Morley Manufacturing will derecognize its receivables in all of the following
b. Interest based on the implicit interest rate cases except
c. Interest based on the average interest rate a. When Morley elects to use the fair value option for a receivable.
d. Interest based on the coupon rate b. When the contractual rights to the cash flows of the receivable no longer exist; for
example when one of Morley’s customers declares bankruptcy.
68. Why would a company sell receivables to another company? c. When Morley collects a receivable when due.
a. To improve the quality of its credit granting process d. All of these answer choices require Morley Manufacturing to derecognize its
b. To limit its legal liability receivables.
c. To accelerate access to amounts collected 74. On December 31, 2015, Hunter Corporation has elected to use the fair value option for
d. To comply with customer agreements one of its notes receivable. The note was accepted in late September, 2015 from a
customer who was unable to pay its accounts receivable. The transaction with the
69. Which of the following is true when accounts receivable are factored without recourse? customer had been delivery of accounting services valued at €25,000. The customer
a. The transaction may be accounted for either as a secured borrowing or as a sale, made a partial payment, resulting in a carrying value for the note of €22,000. At year-end,
depending upon the substance of the transaction. Hunter Corporation estimates the fair value of the note to be €17,500. Which of the
b. The receivables are used as collateral for a promissory note issued to the factor by the following is incorrect regarding this note?
owner of the receivables. a. Hunter will report the note on its statement of financial position at €17,500.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting b. Hunter will report an unrealized loss of €7,500 in its income statement for the year
the receivables. ended December 31, 2015.
d. The financing cost (interest expense) should be recognized ratably over the collection c. Hunter will be required to use the fair value option for this note for the duration of its
period of the receivables. existence.
d. In 2016, Hunter will calculate the unrealized holding gain or loss as the net change in
70.
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Which of the following statements is incorrect regarding the classification of accounts and the fair value of the receivable from 2015 to 2016, exclusive of interest revenue
notes receivable? recognized but not recorded.
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables. 75. IFRS requires all of the following when classifying receivables except
c. Any discount or premium resulting from the determination of present value in notes a. Indicate the receivables classified as current and non-current in the statement of
receivable transactions is an asset or liability respectively. financial position.
d. Valuation accounts should be appropriately offset against the proper receivable b. Disclose any receivables pledged as collateral.
accounts. c. Disclose all significant concentrations of credit risk arising from receivables.
d. All of these answer choices are required by IFRS when classifying receivables.
71. Which of the following statements is incorrect when a company chooses the fair value
option for its receivables?
a. Receivables are recorded at fair value in the statement of financial position.
b. Unrealized holding gains and losses from fair value adjustments are reported as a
component of comprehensive income.
c. The International Accounting Standards Board believes that fair value measurement
for financial instruments provides more relevant and understandable information than
historical cost.
d. An unrealized holding gain or loss is the net change in the fair value of the receivable
from one period to another, exclusive of interest revenue recognized but not recorded.
 Cash and Receivables 7 - 11 7 - 12 Test Bank for Intermediate Accounting: IFRS Edition, 2e

76. Which of the following is correct regarding differences between IFRS and U.S. GAAP with b. Entries are made to the Petty Cash account only to increase or decrease the size of
regard to receivables? the fund or to adjust the balance if not replenished at year-end.
a. Under IFRS de-recognition of a receivable is determined by using lack of control as the c. The Petty Cash account is debited when the fund is replenished.
primary criterion. d. All of these answer choices are not true.
b. U.S. GAAP permits the reversal of impairment losses, with the reversal limited to the
asset‘s amortized cost before the impairment. *84. A Cash Over and Short account
c. Under IFRS the fair value option is subject to certain qualifying criteria not in U.S. a. is not generally accepted.
GAAP. b. is debited when the petty cash fund proves out over.
d. All of these answer choices are differences between IFRS and U.S. GAAP for c. is debited when the petty cash fund proves out short.
receivables. d. is a contra account to Cash.
77.
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The accounts receivable turnover measures the
a. number of times the average balance of accounts receivable is collected during the *85. The journal entries for a bank reconciliation
period. a. are taken from the "balance per bank" section only.
b. percentage of accounts receivable turned over to a collection agency during the period. b. may include a debit to Office Expense for bank service charges.
c. percentage of accounts receivable arising during certain seasons. c. may include a credit to Accounts Receivable for an NSF check.
d. number of times the average balance of inventory is sold during the period. d. may include a debit to Accounts Payable for an NSF check.

78. The accounts receivable turnover is computed by dividing *86. When preparing a bank reconciliation, bank credits are
a. gross sales by ending net receivables. a. added to the bank statement balance.
b. gross sales by average net receivables. b. deducted from the bank statement balance.
c. net sales by ending net receivables. c. added to the balance per books.
d. net sales by average net receivables. d. deducted from the balance per books.

79. Which of the following items affect the accounts receivable amount reported on the Multiple Choice Answers—Conceptual
statement of financial position?
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a. Notes receivable
b. Interest receivable 31. d S
40. d 49. a 58. d 67. b 76. c *85. b
c. Allowance for doubtful accounts 32. b 41. d 50. d 59. c 68. c P
77. a *86. c
d. Advances to related parties and officers 33. d 42. d 51. a 60. d 69. c 78. d
P
34. d 43. d 52. c 61. a 70. c 79. c
80. How is days to collect accounts receivable determined? 35. b 44. d 53. d 62. b 71. b 80. a
a. 365 days divided by accounts receivable turnover
36. a S
45. c 54. a 63. a 72. c 81. d
b. Net sales divided by 365
c. Net sales divided by average net trade receivables 37. b S
46. d 55. b 64. c 73. a *82. b
d. Accounts receivable turnover divided by 365 days 38. d P
47. d 56. c 65. b 74. b *83. c
39. b 48. d 57. a 66. d 75. d *84. c
81. What is a possible reason for accounts receivable turnover to increase from one year to
the next year? Solutions to those Multiple Choice questions for which the answer is “none of these.”
a. Decreased credit sales during a recession 33. As receivables.
b. Write-off uncollectible receivables 42. Many answers are possible.
c. Granting credit to customers with lower credit quality 43. Open accounts resulting from short-term extensions of credit to customers.
d. Improved collection process 44. Open accounts resulting from short-term extensions of credit to customers.
66. Overstate, understate, understate, zero.
*82. Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a. Bank service charge
b. Deposit in transit
c. Bank interest
d. Chargeback for NSF check

*83. Which of the following is not true?