Accounts Receivable Quiz: Recognition and Valuation of Deposits Held as Compensating Balances

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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?

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

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

Disclose them separately on the statement or notes Signup and view all the answers

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

'Cash on deposit maintained as compensating balance' Signup and view all the answers

How do companies classify receivables for financial statement purposes?

As current or non-current receivables Signup and view all the answers

What do notes receivable represent?

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

How long does a company typically collect accounts receivable within?

Within 30 to 60 days Signup and view all the answers

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

As trade or non-trade receivables Signup and view all the answers

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

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

What characterizes notes receivable compared to accounts receivable?

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

What is the purpose of bank reconciliation?

To identify outstanding checks and deposits in transit Signup and view all the answers

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

The direct write-off method Signup and view all the answers

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

Due to errors by both the business and the bank Signup and view all the answers

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

Service charges and NSF checks Signup and view all the answers

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

As current Signup and view all the answers

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

To provide a comprehensive view of cash movement Signup and view all the answers

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

Cash realizable value Signup and view all the answers

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

To contribute to good internal control over cash Signup and view all the answers

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

Cash realizable value method Signup and view all the answers

Why is reconciliation necessary according to the text?

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

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

Debits to Bad Debt Expense Signup and view all the answers

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

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

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

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

Why are notes receivable considered fairly liquid?

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

How do companies account for short-term notes receivable?

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

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

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

In what situations do companies accept notes receivable from customers?

From high-risk or new customers who need to extend payment periods. 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?

To provide financing options to parties involved in these transactions. 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