Test Bank | Financial Assets and Liabilities 1st

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Chapter 8

Financial Assets and Liabilities

Test Bank

True/False Questions

1. Financial assets would include the shares an entity owns of another entity.

Page: 428

1. Examples of financial liabilities include trade accounts payable, unearned revenues, and notes payable.

Page: 429

1. Restricted cash refers to situations when a minimum balance must be kept on hand at all times as part of a loan agreement with a lender?

Page: 429

1. Petty cash refers to an amount set aside for specific purpose such as a large payment on debt or a legal settlement that is soon due.

Page: 430

1. A bank overdraft refers to a situation in which the cash ledger account has a net credit rather than a net debit balance.

Page: 430

1. Petty cash is debited when the petty cash fund is being established for the first time and when the amount in the petty cash fund is increased.

Page: 430

1. Petty cash is credited when the amount of the petty cash fund is decreased and when the cash balance is replenished.

Page: 431

1. If the total amount of receipts in petty cash exceed the amount of cash that needs to be replenished, the cash over and short account would credited for the difference.

Page: 431

1. If the total amount of receipts in petty cash are less than the amount of cash that needs to be replenished, the cash over and short account would be credited for the difference.

Page: 431

1. When reconciling the cash ledger account and the bank statement, any transaction recorded by the bank but unknown to the business must have a journal entry recorded to correct the cash ledger balance.

Page: 432

1. When reconciling the cash ledger account and bank statement, a bank fee listed on the bank statement would not need to be recorded in the cash ledger account.

Page: 433

1. Once journal entries are made for a bank reconciliation, the cash ledger account will be equal to the balance shown on the bank statement.

Page: 434

1. Financial assets with a maturity of three months or less are typically classified as a cash equivalent.

Page: 438

1. A current financial liability is typically due between 6 and 12 months into the future.

Page: 438

1. A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability that either 1) is classified as held for trading or 2) is designated as at fair value through profit and loss upon initial recognition by the entity.

Page: 439

1. Held to maturity investments are financial assets with fixed or determinable payments and which management plans to sell in the short-term for profit.

Page: 440

1. Loans and receivables are financial assets with fixed or determinable payments that are quoted in an active market.

Page: 441

1. Available-for-sale financial assets are designated as available for sale or are not classified as 1) loans and receivables, 2) held-to-maturity investments, or 3) financial assets at fair value through profit or loss.

Page: 441

1. The appropriate accounting for held-to-maturity investments and loans and receivables is amortized cost using effective interest method.

Page: 442

1. Any gains and losses on available-for-sale financial assets are recognized immediately in profit and loss.

Page: 442

1. The effective interest rate method is not applied to trade accounts.

Page: 449

1. Net receivables are calculated by subtracting the allowance for uncollectible accounts from trade accounts receivable.

Page: 454

1. Under the percentage of sales method, the estimate of the uncollectible amount for the current period is credited to the allowance account in full adjusted for any debit or credit balance that remains in the allowance account from the previous period.

Page: 455

1. Under the aged receivables method, the estimate of the uncollectible amount for the current period is credited to the allowance account in full adjusted for any debit or credit balance that remains in the allowance account from the previous period.

Page: 457

1. Under the allowance method, the journal entry to record a customer default has no impact on profit or loss.

Page: 460

1. Under the direct write off method of accounting for uncollectible accounts, a journal entry is recorded when the estimate is made to debit uncollectible accounts expense.

Page: 462

1. Under the direct write off method of accounting for uncollectible accounts, a customer default would have an impact on the profit or loss reported for the period.

Page: 462

1. Under the aged receivables method of estimating uncollectible amounts, if the allowance account has a net credit remaining from the prior period, the prior credit in the allowance account would be subtracted from the estimate from the aged receivables method to calculate the amount of the adjustment to the allowance account.

Page: 462

1. The journal entry to record a purchase of merchandise when a customer uses a third-party credit card debits trade accounts receivable.

Page: 465

1. If a note payable does not have stated interest, then the effective interest rate method is not applicable.

Page: 467

1. The effective interest rate method is applicable regardless of whether a note payable is interest or noninterest-bearing.

Page: 466

1. The principal on a serial bond is paid on the final maturity date.

Page: 472

1. An unsecured bond is sold on the cognizance of the issuer with no claim against specific assets.

Page: 472

1. If the market rate of interest is greater than the stated interest when a bond is issued, then the bond sells for more than its stated value.

Page: 473

1. If the market rate of interest is less than the stated interest when a bond is issued, then the bond sells for more than its stated value.

Page: 473

1. A noninterest-bearing bond is not amortized since no interest is charged on the bond.

Page: 479

1. Liquidity is the availability of cash in the near future after taking account of financial commitments over the period.

Page: 484

1. A company reports the following amounts in its 2011 statement of financial position: Cash €35 000, Current assets €110 000, Current liabilities €80 000, total assets €360 000, and total liabilities €285 000. Working capital is €75 000.

Page: 485

1. A company reports the following amounts in its 2011 statement of financial position: Cash €35 000, current assets €110 000, current liabilities €80 000, total assets €360 000, and total liabilities €285 000. The current ratio is 1.38.

Page: 485

1. A business entity reports the following amounts in its 2012 statement of financial position: Cash and cash equivalents €40 000, trade accounts receivable €21 000, noncurrent securities €60 000, current assets €200 000, current liabilities €140 000, total assets €340 000, and total liabilities €300 000. The acid-test ratio is 0.86.

Page: 486

1. The receivables turnover ratio is calculated by dividing average receivables into gross profit.

Page: 487

1. Solvency is the availability of cash over the longer term to meet financial commitments as they fall due.

Page: 488

Multiple Choice Questions

1. Which of the following terms describes a minimum cash balance that must be kept on hand at all times as part of a loan agreement with a lender?
   1. Bank overdraft
   2. Petty cash
   3. Restricted cash
   4. Compensating balance

Page: 429

1. A journal entry would not be required for which of the following items when reconciling the cash ledger account with the bank statement?
   1. The bank charged a fee related to the processing of electronic wire transfers
   2. A salary cheque to an employee was written and recorded but has not cleared the bank
   3. An electronic payment was made directly to the bank by a customer and this amount appears ont eh bank statement
   4. A customer’s cheque was returned to the bank due to insufficient funds

Page: 432

1. On 30 April 2011, the petty cash fund at Sage Greengrocers, Ltd had £49 in cash and coin. In addition, £17 in vouchers and £3 in IOUs were on hand. The petty cash fund was established at £70. What entry should be made to the over and short account?
   1. No entry should be made
   2. £20 credit
   3. £1 debit
   4. £20 debit

Page: 430

1. On 30 June 2012, Ramirez Industries, SA had a $135 000 reported on its bank statement. The reconciliation found four differences between the bank balance and the cash ledger account:

• A cheque for $7700 refund had been prepared and sent to a customer but had not yet cleared the bank
• The bank charged $450 in fees which appeared on the bank statement.
• Ramirez received a cheque for $14 100 from a customer which had been recorded but was not deposited with the bank in time to appear on the 30 June 2012 bank statement.
• A customer’s cheque for $1200 was returned because of insufficient funds.

How much was the cash ledger account before adjustments were made from the bank reconciliation?

• 1. $139 750
  2. $141 400
  3. $143 050
  4. $130 250

Page: 431

1. On 30 June 2012, Ramirez Industries, SA had a $135 000 reported on its bank statement. The reconciliation found four differences between the bank balance and the cash ledger account:

• A cheque for $7700 refund had been prepared and sent to a customer but had not yet cleared the bank
• The bank charged $450 in fees which appeared on the bank statement.
• Ramirez received a cheque for $14 100 from a customer which had been recorded but was not deposited with the bank in time to appear on the 30 June 2012 bank statement.
• A customer’s cheque for $1200 was returned because of insufficient funds.

How much was the reconciled (or true) balance from the bank reconciliation?

• 1. $139 750
  2. $141 400
  3. $143 050
  4. $130 250

Page: 431

1. Which of the following financial assets and liabilities would not be accounted for using amortized cost using effective interest method?
   1. Financial liabilities other than held-for-trading
   2. Loans and receivables
   3. Available-for-sale financial assets
   4. Held-to-maturity investments

Page: 442

1. On 30 November 2012, Bahashty Productions, LLC had an allowance for uncollectible accounts balance of €12 880. Revenue for November was €1 303 000. Bahashty estimates that 2% of all sales will be uncollectible. In addition, on 30 November Bahashty’s receivables collection department wrote off €6500 in defaulted amounts. How much should Bahashty report for uncollectible accounts expense for November 2012?
   1. €26 060
   2. €32 440
   3. €19 560
   4. €6500

Page: 453

1. On 30 November 2012, Bahashty Productions, LLC had an allowance for uncollectible accounts balance of €12 880. Revenue for November was €1 303 000. Bahashty estimates that 2% of all sales will be uncollectible. In addition, on 30 November Bahashty’s receivables collection department wrote off €6500 in defaulted amounts. What is the balance in the allowance for uncollectible accounts that Bahashty will report on its statement of financial position at 30 November 2012?
   1. €26 060
   2. €32 440
   3. €19 560
   4. €6500

Page: 453

1. Heeran Paper Company, Inc. has an allowance for uncollectible accounts with a net debit of $1650 on 31 August 2011. During August sales were $455 000. Heeran uses the aged receivable method of estimating the amount of uncollectible accounts. At the end of August, the aged balances were:

During August, Heeran’s accountants wrote off $1400 in uncollectible accounts. What is the balance in the allowance for uncollectible accounts that Heeran will report on its statement of financial position at 31 August 2011?

1. $4062
2. $762
3. $2412
4. $1650

Page: 456

1. Heeran Paper Company, Inc. has an allowance for uncollectible accounts with a net debit of $1650 on 31 August 2011. During August sales were $455 000. Heeran uses the aged receivable method of estimating the amount of uncollectible accounts. At the end of August, the aged balances were:

During August, Heeran’s accountants wrote off $1400 in uncollectible accounts. How much should Heeran report for uncollectible accounts expense for August 2011?

1. $4062
2. $762
3. $2412
4. $1650

Page: 456

1. Which type of bond allows the issuer has the right to purchase the bond from the investor at a certain price?
   1. Unsecured bond
   2. Callable bond
   3. Term bond
   4. Serial bond

Page: 472

1. On which type of bond is the principal paid on the maturity date?
   1. Unsecured bond
   2. Zero-interest bond
   3. Term bond
   4. Serial bond

Page: 472

1. On which type of bond is the principal paid in installments over the term of the bond?
   1. Unsecured bond
   2. Zero-interest bond
   3. Term bond
   4. Serial bond

Page: 472

1. On 1 January 2011, a €200 000 000 bond is issued with a 3.5% stated rate of interest when the market rate of interest is 3.9%. As a result the bond sold for €179 487 180. The bond has a 20 year term. The bond is a term bond with interest paid annually. How much interest expense should be recognized for 2011?
   1. €7 000 000
   2. €8 085 0000
   3. €7 973 718
   4. €6 282 051

Page: 477

1. On 31 August 2010, a company reported the following amounts in its statement of financial position:

What is the company’s acid-test ratio?

1. 31.3%
2. 50.0%
3. 20.7%
4. 19.2%

Page: 486

1. On 31 August 2010, a company reported the following amounts in its statement of financial position:

What is the company’s cash ratio?

1. 31.3%
2. 50.0%
3. 20.7%
4. 19.2%

Page: 486

1. On 31 August 2010, a company reported the following amounts in its statement of financial position:

What is the company’s current ratio?

1. 41.3%
2. 62.6%
3. 50.0%
4. 300.0%

Page: 486

1. On 31 August 2010, a company reported the following amounts in its statement of financial position:

What is the company’s debt ratio?

1. 198.0%
2. 40.0%
3. 200.0%
4. 66.7%

Page: 486

Essay Questions

1. List and briefly describe the major forms cash and cash equivalents can take.
2. What is the difference in the timing of recognizing the uncollectible accounts between the direct write-off method and the allowance method for uncollectible accounts?
3. What is the difference between the percentage of sales method and the aged receivables method in terms of the amount of the current estimate that is adjusted to the allowance for uncollectible accounts?
4. List and briefly describe the six types of bonds discussed in the text.