30 Questions
What is the standard medium of exchange and the basis for measuring and accounting for all other items?
Cash
How do companies generally classify cash on their balance sheets?
As a current asset
What are some examples of negotiable instruments that are viewed as cash?
Money orders, certified checks, cashier’s checks, personal checks, bank drafts
What are some temporary investments that are often mistakenly classified as cash?
Money market funds, money market savings certificates, certificates of deposit (CDs)
Why is internal control over cash imperative for companies?
To safeguard and assure the accuracy of accounting records for cash
What are some examples of items that present classification problems when it comes to cash?
Petty cash funds, change funds
What are some ways of internal control over cash receipts?
Only designated personnel should handle cash receipts, daily cash counts should be made, and cash registers should be used.
Why is it important to use a voucher system for payments?
A voucher system ensures that payments are properly ordered, received, and billed by the supplier.
What are the main types of bank accounts mentioned in the text?
Saving account, demand account, and time account.
What distinguishes a saving account from a demand account?
Saving accounts have withdrawal limits, while demand accounts allow unrestricted withdrawals.
Why should payments be made by cheque/check rather than cash?
Payments by cheque/check provide a record and help ensure that transactions are authorized.
What role does a bank account play in internal cash controls?
A bank account is a primary tool for controlling cash receipts and payments.
How should companies classify restricted deposits held as compensating balances against short-term borrowing arrangements in their financial statements?
As part of 'Cash and cash equivalent items' in current assets
Where should companies classify restricted deposits held as compensating balances against long-term borrowing arrangements?
As non-current assets in either the investments or other assets sections
How should companies report bank overdrafts in their financial statements?
In the current liabilities section, adding them to the amount reported as accounts payable
Under what circumstances are bank overdrafts included as a component of cash?
If such overdrafts are repayable on demand and are an integral part of a company’s cash management
When should companies disclose compensating balance arrangements without cash use restrictions?
In the notes to the financial statements
What should companies do if they have bank overdrafts that are material?
Disclose these items separately, either on the face of the statement of financial position or in the related notes
How do companies typically treat interest revenue related to accounts receivable?
Companies ignore interest revenue related to accounts receivable because the amount of the discount is usually not material in relation to the net income for the period.
What is the classification criteria for receivables on the statement of financial position?
Receivables intended to be collected within a year or the operating cycle, whichever is longer, are classified as current. All other receivables are classified as non-current.
How do companies value and report short-term receivables?
Short-term receivables are valued and reported at cash realizable value, which is the net amount companies expect to receive in cash.
What is the purpose of recording credit losses as debits to Bad Debt Expense?
Recording credit losses as debits to Bad Debt Expense represents the normal and necessary risk of doing business on a credit basis.
What are the two methods used in accounting for uncollectible accounts?
The two methods used in accounting for uncollectible accounts are the direct write-off method and the allowance method.
How does the direct write-off method handle uncollectible accounts?
Under the direct write-off method, when a company determines an account to be uncollectible, it charges the loss to Bad Debt Expense.
What is the journal entry to reverse the write-off of an account that was previously deemed uncollectible?
Accounts Receivable debited, Allowance for Doubtful Accounts credited
How does a company record the collection of an account that was previously written off as uncollectible?
Cash debited, Accounts Receivable credited
What is a note receivable supported by?
A formal promissory note
Define a negotiable instrument in the context of notes receivable.
A note that can be legally and readily sold or transferred to others
How does a company record the recovery of a bad debt?
By reversing the write-off entry and then journalizing the collection
What entries are made when a company collects from a customer after writing off the account as uncollectible?
Reversal of write-off entry, Collection entry in the usual manner
Test your knowledge on how companies should classify legally restricted deposits in their financial statements. Learn about distinguishing between cash and cash equivalent items in current assets and non-current assets.
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