CHAPTER 7

CASH AND RECEIVABLES

CHAPTER LEARNING OBJECTIVES

1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Define receivables and identify the different types of receivables.
4. Explain accounting issues related to recognition of accounts receivable.
5. Explain accounting issues related to valuation of accounts receivable.
6. Explain accounting issues related to recognition of notes receivable.
7. Explain accounting issues related to valuation of notes receivable.
8. Understand special topics related to receivables.
9. Describe how to report and analyze receivables.
*10. Explain common techniques employed to control cash.
*11. Describe the accounting for a loan impairment.
7-2 Test Bank for Intermediate Accounting: IFRS Edition, 2e

TRUE-FALSE—Conceptual
1. Savings accounts are usually classified as cash on the statement of financial position.

2. Certificates of deposit are usually classified as cash on the statement of financial position.

3. Companies include postdated checks and petty cash funds as cash.

4. Cash equivalents are investments with original maturities of six months or less.

5. Bank overdrafts are always included as part of cash in the statement of financial position.

6. Short-term, highly liquid investments may be included with cash on the statement of
financial position.

7. Receivables are classified in the statement of financial position as either trade or non-trade
receivables.

8. Trade receivables include notes receivable and advances to officers and employees.

9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.

10. In the gross method, sales discounts are reported as a deduction from sales.

11. Ideally, a company should measure receivables in terms of their present value, that is, the
discounted value of the cash to be received in the future.

12. The International Accounting Standard Board requires that companies assess their
receivables for impairment each reporting period and begin the impairment assessment by
considering whether objective evidence indicates that one or more loss events have
occurred.

13. The International Accounting Standard Board requires that when performing an impairment
assessment, all receivables that are individually significant should be considered for
impairment separately.

14. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes

matching over valuation of accounts receivable.

15. The percentage-of-sales method results in a more accurate valuation of receivables on the
balance sheet.

16. Companies record and report long-term notes receivable on a discounted basis.

17. When the stated rate of interest exceeds the effective rate, the present value of the note
receivable will be less than its face value.

18. When buying receivables with recourse, the purchaser assumes the risk of collectibility and
absorbs any credit loss.
 Cash and Receivables 7-3

19. If substantially all the risks and rewards of ownership of the receivables are transferred, then
they are derecognised.

20. The International Accounting Standards Board believes that historical cost for financial
instruments provides more relevant and understandable information than fair value.

21. Under IFRS, a company may select the fair value option or amortized cost for valuing a
group of receivables at each statement of financial position date.

22. Under IFRS, a company will derecognize its receivables when it elects to use the fair value
option for a receivable.

23. Under IFRS, a company will derecognize its receivables when the contractual rights to the
cash flows of the receivable no longer exist.

24. Under IFRS de-recognition of a receivable is determined by using lack of control as the
primary criterion.

25. The accounts receivable turnover is computed by dividing net sales by the ending net
receivables.

26. U.S. GAAP permits the reversal of impairment losses recorded on receivables, with the
reversal limited to the asset‘s amortized cost before the impairment.

27. The International Accounting Standards Board has indicated that they believe that financial
statements would be more transparent and understandable if companies recorded and
reported all financial instruments at amortized cost.

28. Under IFRS, the Cash Over and Short account is shown on the statement of financial
position as an addition to (over) or subtraction from (short) the cash account.

29. The percentage-of-sales and -receivables approaches are examples of impairment testing
based on the individual assessment approach for long-term receivables.

30. If a receivable is deemed to be individually impaired, the impairment loss is calculated as

the difference between the carrying amount (generally the principal plus accrued interest)
and the expected future cash flows discounted at the loan’s historical effective-interest rate.

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans.
1. T 9. T 17. F 25. F
2. F 10. T 18. F 26. F
3. F 11. T 19. T 27. F
4. F 12. T 20. F 28. F
5. F 13. T 21. F 29. F
6. T 14. F 22. F 30. T
7. F 15. F 23. T
8. F 16. T 24. F
7-4 Test Bank for Intermediate Accounting: IFRS Edition, 2e

MULTIPLE CHOICE—Conceptual
31. Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.’s

32. Which of the following is considered cash?

a. Certificates of deposit (CDs)
b. Money orders
c. Money market savings certificates
d. Postdated checks

33. Travel advances should be reported as

a. supplies.
b. cash because they represent the equivalent of money.
c. investments.
d. None of these answer choices are correct.

34.
P
Which of the following items should not be included in the Cash caption on the statement
of financial position
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand

35. All of the following may be included under the heading of “cash” except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.

36. In which account are post-dated checks received classified?

a. Receivables
b. Prepaid expenses
c. Cash
d. Payables

37. In which account are postage stamps classified?

a. Cash
b. Supplies
c. Receivables
d. Inventory

38. What is a compensating balance?

a. Savings account balances
b. Margin accounts held with brokers
c. Temporary investments serving as collateral for outstanding loans
d. Minimum deposits required to be maintained in connection with a borrowing
arrangement
 Cash and Receivables 7-5

39. Under which section of the statement of financial position is “cash restricted for plant
expansion” reported?
a. Current assets
b. Non-current assets
c. Current liabilities
d. Equity

40.
S
A cash equivalent is a short-term, highly liquid investment that is readily convertible into
known amounts of cash and
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than its original cost.
c. bears an interest rate that is at least equal to the prime rate of interest at the date of
liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest rates.

41. Bank overdrafts generally should be

a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.

42. Deposits held as compensating balances

a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current
assets.
d. None of these answer choices are correct.

43. The category "trade receivables" includes

a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. None of these answer choices are correct.

44. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these answer choices are correct.

45.
S
What is the preferable presentation of accounts receivable from officers, employees, or
affiliated companies on a statement of financial position?
a. As offsets to equity
b. By means of footnotes only
c. As assets but separately from other receivables
d. As trade notes and accounts receivable if they otherwise qualify as current assets
7-6 Test Bank for Intermediate Accounting: IFRS Edition, 2e

46. Which of the following statement is incorrect regarding receivables on the statement of
financial position?
a. Receivables are a financial asset.
b. Receivables are financial instruments.
c. Non-trade receivables are generally reported as separate items in the statement of
financial position.
d. Accounts receivable are written promises of the purchaser to pay for goods or services.

47.
S
When a customer purchases merchandise inventory from a business organization, she
may be given a discount which is designed to induce prompt payment. Such a discount is
called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.

48.
P
Trade discounts are
a. not recorded in the accounts; rather they are a means of computing a price.
b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different quantities purchased.
d. All of these answer choices are correct.

49. If a company employs the gross method of recording accounts receivable from customers,
then sales discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other income and expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of
accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.

50. Why do companies provide trade discounts?

a. To avoid frequent changes in catalogs only
b. To induce prompt payment
c. To easily alter prices for different customers only
d. To avoid frequent changes in catalogs and to easily alter prices

51. Of the approaches to record cash discounts related to accounts receivable, which is more
theoretically correct?
a. Net approach
b. Gross approach
c. Allowance approach
d. All three approaches are theoretically correct.

52. All of the following are problems associated with the valuation of accounts receivable
except for
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.
 Cash and Receivables 7-7

53. Why is the allowance method preferred over the direct write-off method of accounting for
bad debts?
a. Allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under direct write-off method is difficult to do
d. Improved matching of bad debt expense with revenue

54. Which of the following concepts relates to using the allowance method in accounting for
accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective
information.
b. Bad debt expense is based on the actual amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the receivables
aging.
d. Bad debt expense is management’s determination of which accounts will be sent to
the attorney for collection.

55. How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off
b. Changing the percentage of sales recorded as bad debt expense
c. Using an aging of the accounts receivable balance to determine bad debt expense
d. Reversing previous write-offs

56. What is the normal journal entry for recording bad debt expense under the allowance
method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts

57. What is the normal journal entry when writing-off an account as uncollectible under the
allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts

58. Which of the following is included in the normal journal entry to record the collection of
accounts receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts

59. Assuming that the ideal measure of short-term receivables in the statement of financial
position is the discounted value of the cash to be received in the future, failure to follow
this practice usually does not make the statement of financial position misleading because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
7-8 Test Bank for Intermediate Accounting: IFRS Edition, 2e

60. Which of the following methods of determining bad debt expense does not properly match
expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method
b. Charging bad debts with an amount derived from a percentage of accounts receivable
under the allowance method
c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method
d. Charging bad debts as accounts are written off as uncollectible

61. Which of the following methods of determining annual bad debt expense best achieves the
matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write-off

62. Which of the following is a generally accepted method of determining the amount of the
adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in
the allowance

63. The advantage of relating a company’s bad debt expense to its outstanding accounts
receivable is that this approach
a. gives a reasonably correct statement of receivables in the statement of financial
position.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.

64. Under IFRS, which of the following is not permitted for accounting for material amounts of
uncollectable accounts receivable?
a. Percentage of receivables, allowance method
b. Percentage of sales, allowance method
c. Direct write-off method
d. All of these answer choices are acceptable under IFRS

65. Which of the following statement is incorrect regarding how the IASB requires that the
impairment assessment be performed?
a. Receivables that are individually significant should be considered for impairment
separately, if impaired, the company recognizes it.
b. Receivables that are not individually significant are assessed individually. If impaired,
the company recognizes it.
c. Any receivable individually assessed that is not considered impaired should be
included with a group of assets with similar credit-risk characteristics and collectively
assessed for impairment.
d. Any receivables not individually assessed should be collectively assessed for
impairment.
 Cash and Receivables 7-9

66. At the beginning of 2014, Gannon Company received a three-year zero-interest-bearing

$1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon
reported this note as a $1,000 trade note receivable on its 2014 year-end statement of
financial position and $1,000 as sales revenue for 2014. What effect did this accounting
for the note have on Gannon’s net earnings for 2014, 2015, 2016, and its retained
earnings at the end of 2016, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these answer choices are correct.

67. What is imputed interest?

a. Interest based on the stated interest rate
b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the coupon rate

68. Why would a company sell receivables to another company?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amounts collected
d. To comply with customer agreements

69. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale,
depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting
the receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection
period of the receivables.

70.
S
Which of the following statements is incorrect regarding the classification of accounts and
notes receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable
accounts.

71. Which of the following statements is incorrect when a company chooses the fair value
option for its receivables?
a. Receivables are recorded at fair value in the statement of financial position.
b. Unrealized holding gains and losses from fair value adjustments are reported as a
component of comprehensive income.
c. The International Accounting Standards Board believes that fair value measurement
for financial instruments provides more relevant and understandable information than
historical cost.
d. An unrealized holding gain or loss is the net change in the fair value of the receivable
from one period to another, exclusive of interest revenue recognized but not recorded.
7 - 10 Test Bank for Intermediate Accounting: IFRS Edition, 2e

72. Morley Manufacturing has notes receivable that have a fair value of $810,000 and a
carrying amount of $620,000. Morley decides on December 31, 2015, to use the fair value
option for these recently-acquired receivables. Which of the following statements is correct
regarding the election of the fair value option by Morley?
a. Morley can elect to use the fair value option or amortized cost for these notes at each
statement of financial position date.
b. Morley reports the receivables at fair value, with any unrealized holding gains and
losses reported as a separate component of comprehensive income.
c. The unrealized holding gain is the difference between the fair value and the carrying
amount.
d. All of the choices are correct regarding the fair value option.
73. Under IFRS Morley Manufacturing will derecognize its receivables in all of the following
cases except
a. When Morley elects to use the fair value option for a receivable.
b. When the contractual rights to the cash flows of the receivable no longer exist; for
example when one of Morley’s customers declares bankruptcy.
c. When Morley collects a receivable when due.
d. All of these answer choices require Morley Manufacturing to derecognize its
receivables.
74. On December 31, 2015, Hunter Corporation has elected to use the fair value option for
one of its notes receivable. The note was accepted in late September, 2015 from a
customer who was unable to pay its accounts receivable. The transaction with the
customer had been delivery of accounting services valued at €25,000. The customer
made a partial payment, resulting in a carrying value for the note of €22,000. At year-end,
Hunter Corporation estimates the fair value of the note to be €17,500. Which of the
following is incorrect regarding this note?
a. Hunter will report the note on its statement of financial position at €17,500.
b. Hunter will report an unrealized loss of €7,500 in its income statement for the year
ended December 31, 2015.
c. Hunter will be required to use the fair value option for this note for the duration of its
existence.
d. In 2016, Hunter will calculate the unrealized holding gain or loss as the net change in
the fair value of the receivable from 2015 to 2016, exclusive of interest revenue
recognized but not recorded.
75. IFRS requires all of the following when classifying receivables except
a. Indicate the receivables classified as current and non-current in the statement of
financial position.
b. Disclose any receivables pledged as collateral.
c. Disclose all significant concentrations of credit risk arising from receivables.
d. All of these answer choices are required by IFRS when classifying receivables.
 Cash and Receivables 7 - 11

76. Which of the following is correct regarding differences between IFRS and U.S. GAAP with
regard to receivables?
a. Under IFRS de-recognition of a receivable is determined by using lack of control as the
primary criterion.
b. U.S. GAAP permits the reversal of impairment losses, with the reversal limited to the
asset‘s amortized cost before the impairment.
c. Under IFRS the fair value option is subject to certain qualifying criteria not in U.S.
GAAP.
d. All of these answer choices are differences between IFRS and U.S. GAAP for
receivables.
77.
P
The accounts receivable turnover measures the
a. number of times the average balance of accounts receivable is collected during the
period.
b. percentage of accounts receivable turned over to a collection agency during the period.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period.

78. The accounts receivable turnover is computed by dividing

a. gross sales by ending net receivables.
b. gross sales by average net receivables.
c. net sales by ending net receivables.
d. net sales by average net receivables.

79. Which of the following items affect the accounts receivable amount reported on the
statement of financial position?
a. Notes receivable
b. Interest receivable
c. Allowance for doubtful accounts
d. Advances to related parties and officers

80. How is days to collect accounts receivable determined?

a. 365 days divided by accounts receivable turnover
b. Net sales divided by 365
c. Net sales divided by average net trade receivables
d. Accounts receivable turnover divided by 365 days

81. What is a possible reason for accounts receivable turnover to increase from one year to
the next year?
a. Decreased credit sales during a recession
b. Write-off uncollectible receivables
c. Granting credit to customers with lower credit quality
d. Improved collection process

*82. Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a. Bank service charge
b. Deposit in transit
c. Bank interest
d. Chargeback for NSF check

*83. Which of the following is not true?

a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
7 - 12 Test Bank for Intermediate Accounting: IFRS Edition, 2e

b. Entries are made to the Petty Cash account only to increase or decrease the size of
the fund or to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these answer choices are not true.

*84. A Cash Over and Short account

a. is not generally accepted.
b. is debited when the petty cash fund proves out over.
c. is debited when the petty cash fund proves out short.
d. is a contra account to Cash.

*85. The journal entries for a bank reconciliation

a. are taken from the "balance per bank" section only.
b. may include a debit to Office Expense for bank service charges.
c. may include a credit to Accounts Receivable for an NSF check.
d. may include a debit to Accounts Payable for an NSF check.

*86. When preparing a bank reconciliation, bank credits are

a. added to the bank statement balance.
b. deducted from the bank statement balance.
c. added to the balance per books.
d. deducted from the balance per books.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
31. d S
40. d 49. a 58. d 67. b 76. c *85. b
32. b 41. d 50. d 59. c 68. c P
77. a *86. c
33. d 42. d 51. a 60. d 69. c 78. d
P
34. d 43. d 52. c 61. a 70. c 79. c
35. b 44. d 53. d 62. b 71. b 80. a
36. a S
45. c 54. a 63. a 72. c 81. d
37. b S
46. d 55. b 64. c 73. a *82. b
38. d P
47. d 56. c 65. b 74. b *83. c
39. b 48. d 57. a 66. d 75. d *84. c
Solutions to those Multiple Choice questions for which the answer is “none of these.”
33. As receivables.
42. Many answers are possible.
43. Open accounts resulting from short-term extensions of credit to customers.
44. Open accounts resulting from short-term extensions of credit to customers.
66. Overstate, understate, understate, zero.