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Recognition and Valuation of Accounts Receivable Quiz
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Recognition and Valuation of Accounts Receivable Quiz

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Questions and Answers

Where should companies classify restricted deposits held as compensating balances against short-term borrowing arrangements?

  • As part of investments in current assets
  • In the non-current assets section
  • As a separate line item in current liabilities
  • In the cash and cash equivalent items in current assets (correct)
  • What should companies do if compensating balance arrangements exist without agreements that restrict the use of cash amounts shown on the statement of financial position?

  • Disclose them separately in either the statement or notes (correct)
  • Include them as part of accounts payable
  • Ignore these arrangements on financial statements
  • Classify them as non-current assets
  • How are bank overdrafts typically reported in a company's financial statements?

  • Disclosed only in the related notes section
  • Added to accounts payable in current liabilities (correct)
  • Included in cash and cash equivalents
  • Reported as part of investments
  • When are bank overdrafts considered a component of cash on a company's financial statements?

    <p>When they are repayable on demand and part of cash management</p> Signup and view all the answers

    How should companies treat bank overdrafts if they are material to the financial statements?

    <p>Disclose them separately on the statement or notes</p> Signup and view all the answers

    What is the recommended classification for restricted deposits held as compensating balances against long-term borrowing arrangements?

    <p>'Cash on deposit maintained as compensating balance'</p> Signup and view all the answers

    How do companies classify receivables for financial statement purposes?

    <p>As current or non-current receivables</p> Signup and view all the answers

    What do notes receivable represent?

    <p>Written promises to pay a certain sum of money on a specified future date</p> Signup and view all the answers

    How long does a company typically collect accounts receivable within?

    <p>Within 30 to 60 days</p> Signup and view all the answers

    How are trade receivables further classified in the statement of financial position?

    <p>As trade or non-trade receivables</p> Signup and view all the answers

    What are non-trade receivables in the context of the text?

    <p>Arising from a variety of transactions except sales or financing</p> Signup and view all the answers

    What characterizes notes receivable compared to accounts receivable?

    <p>Long-term extensions of credit resulting from sales transactions</p> Signup and view all the answers

    What is the purpose of bank reconciliation?

    <p>To identify outstanding checks and deposits in transit</p> Signup and view all the answers

    What method is used by companies to account for credit losses as debits to Bad Debt Expense?

    <p>The direct write-off method</p> Signup and view all the answers

    Why are the balances per bank and per books seldom in agreement?

    <p>Due to errors by both the business and the bank</p> Signup and view all the answers

    What are some common reasons for disagreements in cash balances according to the text?

    <p>Service charges and NSF checks</p> Signup and view all the answers

    How do companies classify receivables intended to be collected within a year or the operating cycle?

    <p>As current</p> Signup and view all the answers

    Why is a four-column bank reconciliation important for businesses?

    <p>To provide a comprehensive view of cash movement</p> Signup and view all the answers

    What is the valuation basis for reporting short-term receivables?

    <p>Cash realizable value</p> Signup and view all the answers

    What is the main purpose of initially depositing all cash receipts in a bank account?

    <p>To contribute to good internal control over cash</p> Signup and view all the answers

    Which method requires estimating both uncollectible receivables and any returns or allowances to be granted?

    <p>Cash realizable value method</p> Signup and view all the answers

    Why is reconciliation necessary according to the text?

    <p>To agree on cash balance according to the bank with per depositor</p> Signup and view all the answers

    What do companies record credit losses as, under the direct write-off method?

    <p>Debits to Bad Debt Expense</p> Signup and view all the answers

    Why do companies typically ignore interest revenue related to accounts receivable in practice?

    <p>Because the amount of the discount is not usually material in relation to the net income for the period.</p> Signup and view all the answers

    How are interest-bearing notes different from non-interest-bearing notes?

    <p>Interest-bearing notes have a stated rate of interest, while non-interest-bearing notes include interest as part of the face amount.</p> Signup and view all the answers

    Why are notes receivable considered fairly liquid?

    <p>Because they can be easily converted to cash, even if long-term.</p> Signup and view all the answers

    How do companies account for short-term notes receivable?

    <p>Companies record them at face value, ignoring any allowances and interest implicit in the maturity value.</p> Signup and view all the answers

    When do companies record and report long-term notes receivable on a discounted basis?

    <p>When the interest stated on an interest-bearing note equals the effective rate of interest.</p> Signup and view all the answers

    In what situations do companies accept notes receivable from customers?

    <p>From high-risk or new customers who need to extend payment periods.</p> Signup and view all the answers

    Why do companies often use notes in loans to employees and subsidiaries, and in sales of property, plant, and equipment?

    <p>To provide financing options to parties involved in these transactions.</p> Signup and view all the answers

    Study Notes

    Bank Accounts

    • Time deposit accounts have time restrictions for withdrawal
    • Using a bank minimizes the amount of currency kept on hand and contributes to good internal control over cash

    Bank Reconciliation

    • Business uses a bank account to control cash, with all cash receipts deposited and payments made by check
    • Double record of cash transactions is kept by the business and the bank
    • Reasons for disagreements between bank and book balances include:
    • Outstanding checks
    • Deposits in transit
    • Collections by bank
    • Service charges
    • Not-sufficient-funds (NSF) checks
    • Errors by both parties

    Four-Column Bank Reconciliation

    • Used to reconcile cash balance reported in the bank statement with the balance in the depositor's ledger

    Cash and Cash Equivalents

    • Companies should state separately legally restricted deposits held as compensating balances against short-term borrowing arrangements
    • Companies should classify restricted deposits held against long-term borrowing arrangements as non-current assets

    Bank Overdrafts

    • Occur when a company writes a check for more than the amount in its cash account
    • Should be reported in the current liabilities section, added to accounts payable
    • If material, should be disclosed separately on the statement of financial position or in notes

    Accounts Receivable

    • Are financial assets and financial instruments
    • Classified as current or non-current based on expected collection time
    • Further classified into trade and non-trade receivables
    • Trade receivables include accounts receivable and notes receivable
    • Accounts receivable are oral promises to pay for goods and services, expected to be collected within 30-60 days
    • Notes receivable are written promises to pay a certain sum on a specified future date

    Valuation of Receivables

    • Classification involves determining the length of time each receivable will be outstanding
    • Valuation involves estimating uncollectible receivables and returns or allowances to be granted
    • Companies record credit losses as debits to Bad Debt Expense

    Methods for Accounting for Uncollectible Accounts

    • Direct Write-Off Method: charge loss to Bad Debt Expense when an account is deemed uncollectible
    • Allowance Method: estimate uncollectible accounts and record as Bad Debt Expense

    Notes Receivable

    • Classified as interest-bearing or non-interest-bearing
    • Interest-bearing notes have a stated rate of interest
    • Zero-interest-bearing notes include interest as part of their face amount
    • Companies frequently accept notes receivable from customers, employees, and subsidiaries

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    Description

    Test your knowledge on the recognition and valuation of accounts receivable, including classification as current or non-current assets. Understand how companies report and classify receivables on financial statements.

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