Final

Question 1

What are cash equivalents?

Answer 1

Short-term highly liquid investments that are both (a) readily available known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates

Question 2

If a company combines cash and short-term investment together where are the short-term investments reported?

Answer 2

They are reported in parenthetically or in the notes.

Question 3

When a cash equivalent bought at auction-rates has declined on value how does that affect the company?

Answer 3

The company incurs a large write-down which is when the value of the asset no longer matches fair market value

Question 4

Cash equivalents are considered highly liquid because they could be trade in auctions on a daily basis?

Answer 4

These used to be considered highly liquid but now there is no market to trade cash equivalents.

Question 5

When times are good, some carelessness in accounting may work

Answer 5

True, but on the contrary when times are bad it is painfully obvious that slopping accounting leads to misleading and harmful effects to financial statements.

Question 6

When restricted cash is immaterial some companies will combine with cash.

Answer 6

True, but when material they are segregated.

Question 7

Restricted cash includes

Answer 7

Petty cash, payroll and dividend funds, ect.

Question 8

Cash equivalents include

Answer 8

Treasury bills, commercial paper, money market funds, bank certificate of deposits (CDs), bankers acceptance, etc.

Question 9

Cash equivalents have

Answer 9

high credit quality, highly liquid, low-risk and low return profile.

Question 10

What are the three main asset classes?

Answer 10

Cash equivalents, stocks and bonds.

Question 11

Restricted cash can be current or non-current (long-term) asset

Answer 11

True, it depends when it is expected to be used.

Question 12

Money held in other countries are classified as cash and cash equivalents?

Answer 12

Generally, it is classified as restricted cash because there are potential restrictions such as regulations against exportation of currency.

Question 13

What are examples of long-term restricted cash?

Answer 13

Plant expansion, retirement for L-T debt, or even entry fee deposits in cases such as International Thoroughbred breeders.

Question 14

A portion of any demand deposit maintained by a corporation which constitutes support for existing for existing borrowing arrangements of the corporation with a lending institution.

Answer 14

Compensating balances

Question 15

When are compensating balances required?

Answer 15

Banks and other lending institutions often require customers to maintain minimum cash balances in checking or savings accounts.

Question 16

What are legally restricted deposits?

Answer 16

Compensating balances held against short-term borrowing arrangements among the “cash and cash equivalent items” in current assets.

Question 17

Legally restricted deposits are required by who?

Answer 17

The SEC does not require but RECOMMENDS companies report it separately to avoid misleading investors about the amount of cash available to meet recurring obligations.

Question 18

Companies should report restricted cash for compensating balances of short-term and long-term borrowing arrangements separately?

Answer 18

True, and compensating balances against long-term borrowing arrangements should be in the noncurrent assets in either investments.

Question 19

Bank overdrafts are reported as:

Answer 19

Current liabilities and added to accounts payable

Question 20

If material where should bank overdrafts be reported?

Answer 20

Separately, either on the face of the balance sheet or in related notes.

Question 21

Bank overdrafts generally do not offset cash accounts except,

Answer 21

when available cash is present in another account in the same bank, in this case off setting is required

Question 22

Receivable are

Answer 22

Claims held against customers and others for money, goods or services

Question 23

Trade receivables are cash equivalents?

Answer 23

False, receivables are not highly liquid.

Question 24

What are trade and non trade receivables?

Answer 24

A sub-classification of accounts receivable or notes receivable

Question 25

Accounts receivable are oral promises of the purchaser to pay for goods and services sold?

Answer 25

True, they represent “open accounts” resulting from short-term extensions of credit.

Question 26

Notes receivables are:

Answer 26

Written promises to pay a certain sum of money on a specific future date.

Question 27

The basis issues with account and notes receivables?

Answer 27

Recognition, valuation and disposition.

Question 28

What is usually recognized as the amount of exchange for receivable?

Answer 28

The exchange price is the amount due from debtor. Usually an invoice.

Question 29

What might make it hard to measure the exchange price of receivables recognition?

Answer 29

(1) the availability of discounts (trade and cash discounts) and (2) the length of time between the sale and the due date of payments (the interest element)

Question 30

Why do companies use trade discounts?

Answer 30

To avoid frequent changes in catalogs, to alter prices for different quantities or to hide the true invoice price from competitors

Question 31

Sales discount forfeited is a debit or credit account?

Answer 31

credit

Question 32

Under gross method, proper expense recognition dictates that company do what when discounts are expected?

Answer 32

Reasonably estimate the expected discounts to be taken and charge that amount against sales.

Question 33

Under the net method, sales discounts forested are classified are what?

Answer 33

Other revenue

Question 34

How should receivables be reported in value?

Answer 34

Present value, the discounted value of cash to be received in the future

Question 35

When do companies not include present value of receivables?

Answer 35

When the receivable is due in less then a year and in normal course of business.

Question 36

According to the valuation of receivables what is involved?

Answer 36

(1) classification and (2) the valuation on the balance sheet

Question 37

What does classification of accounts what in regards to the valuation?

Answer 37

The length of time each receivable will be outstanding (short-term/long-term)

Question 38

How do companies value and report receivables?

Answer 38

at net realizable value - the net amount they expect to receive in cash.

Question 39

Net realizable value is determined by?

Answer 39

Estimating both uncollectible receivables and any receivables and returns and allowances.

Question 40

Under the direct write off method, bad debt expense shows

Answer 40

actual losses

Question 41

The direct-write is theorctiaclly deficient.

Answer 41

It fails to record exposes in the same period as associated revenues. Violating the expense recognition method.

Question 42

When the amount is immaterial the direct method is appropriate.

Answer 42

True

Question 43

What does a company do when an accounts has been deemed uncollectable but receives payment.

Answer 43

They reverse the entry made to write off the uncollectible account. Debit accounts receivable and credit allowance for doubtful accounts.

Question 44

Using the percentage of sales estimation emphasizes what

Answer 44

the expenses and revenues (income statement)

Question 45

Usings the percentage of accounts receivables emphasizes what?

Answer 45

the net realizable value of accounts receivable (balance sheet)