Name: Section: Date:

Test 1: Multiple Choice Questions

Instruction: Write the letter of the correct answer before the number.

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

2. Which of the following is considered cash?

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

3. Travel advances should be reported as

a. supplies. c. investments.
b. cash because they represent the d. none of these.
equivalent of money.

4. 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.

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

a. Receivables from officers c. Dividends receivable
b. Receivables from subsidiaries d. None of these

6. 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. c. enhancement discount.
b. nominal discount. d. cash discount.

7. 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 the above.

8. 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 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.

9. Why do companies provide trade discounts?

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

10. The accounting for cash discounts and trade discounts are
a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the account.

11. A 180-day, 10% interest-bearing note receivable is discounted to a bank at 12% after being held for 30
days. The proceeds recived from the bank upon discounting would be.
a. Maturity value less the discount at 10% c. Maturity value plus the discount at 10%
b. Maturity value less the discount at 12% d. Maturity value plus the discount at 12%

12. 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.
13. Which of the following forms of receivable financing does not require journal entry or disclosure in the
notes to financial statements related to accounts receivable?
a. Pledging c. Factoring
b. Assignment d. Discounting

14. 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.

15. The carrying value of an impaired note before recognizing a loan impairment
a. Included accrued interest.
b. Excludes accrued interest.
c. Is less than the carrying value after recognizing the impairment.
d. Is the same as the carrying value after recognizing the impairment.

16. 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.

17. 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.

18. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of
the cash to be received in the future, failure to follow this practice usually does not make the balance
sheet 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.

19. 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.

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

21. 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

22. 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 balance sheet.
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.
23. What is imputed interest?
a. Interest based on the stated interest c. Interest based on the average interest
rate. rate.
b. Interest based on the implicit interest d. Interest based on the coupon rate
rate.

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

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

25. When should a transfer of receivables be recorded as a sale?

a. The transferred assets are isolated from the transferor.
b. The transferor does not maintain effective control over the transferred assets through an agreement
to repurchase or redeem them prior to their maturity.
c. The transferee has the right to pledge or exchange the transferred assets.
d. All of the above.

26. The accounts receivable turnover ratio 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.

27. The accounts receivable turnover ratio is computed by dividing

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

28. Which of the following items should be included in accounts receivable reported on the balance sheet?
a. Notes receivable. c. Allowance for doubtful accounts.
b. Interest receivable. d. Advances to related parties and officers.

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

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

31. 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.

32. 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.

33. When preparing a bank reconciliation, bank credits are

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

34. Which of the following items are true?

I. Trade receivables include notes receivable and advances to officers and employees.
II. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different
quantities purchased.
III. The net amount reported for short-term receivables is not affected when a specific account
receivable is determined to be uncollectible.
IV. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes
matching over valuation of accounts receivable.
 a. I,II c. III,IV
b. II,III d. All of them are true

35. Which if the following items are false?

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

balance sheet.
II. Companies record and report long-term notes receivable at the present value of the cash they
expect to collect.
III. When the stated rate of interest exceeds the effective rate, the present value of the note
receivable will be less than its face value.
IV. Notes receivable are generally reported as noncurrent assets.
a. I,II,III c. I,III,IV
b. I,II,IV d. All of them are false

36. Which of the following choices are correct?

I. Recognition of a recourse liability will make a loss on sale of receivables larger than it would
otherwise have been.
II. When buying receivables with recourse, the purchaser assumes the risk of collectibility and
absorbs any credit loss.
III. For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor
fails to pay.
IV. Freeze order of bank account by the court is considered restricted cash is always reported under
current asset.
a. I and III are false c. I and II are false
b. II and IV are true d. I and III are true

37. ABC Cycle Shop sells a bicycle to XYZ, a customer who uses Express Charge ( a national credit card, but
not issued by a bank). In recording this sale, ABC Cycle Shop should record?
a. A cash receipt
b. An accounts receivable from XYZ
c. An accounts receivable from Express Charge
d. A small increase in the allowance for doubtful accounts.

38. Happy Jewelry sells to Jay, a sole proprietor, a diamond ring. The customer uses a credit card under
Metrobank Corporation as a means of payment. Happy Jewelry should record?
a. A cash receipt
b. An accounts receivable from Jay
c. An accounts receivable from Metrobank Corporation
d. A small increase in the allowance for doubtful accounts.

39. Which of the following is an advantage of using the net price method for recording cash discounts on
credit sales?
a. It properly reflects current period sales revenue.
b. It simplifies recording of sales returns and allowances.
c. It eases communication with customers about their balances.
d. It requires less record-keeping efforts than the gross method.

40. The allowance method of recognizing bad debt expense is generally considered a generally accepted
accounting principle. What two conditions must be met before the allowance method can be used?
a. Bad debts must be relevant and reliable.
b. Bad debts must be expected and material.
c. Bad debts must be probable and measurable.
d. Bad debts must be persistent over time and the method used to estimate them is consistently applied.

41. When accounts receivable are pledged, in addition to the disclosures required, total receivables will?
a. Increase
b. Decrease
c. Remain the same
d. Increase or decrease depending on the circumstances.

42. When accounts receivable are assigned, in addition to the disclosures required, total receivables will?
a. Increase
b. Decrease
c. Remain the same
d. Increase or decrease depending on the circumstances.
43. Loans and receivables are non-derivative financial assets?
a. With fixed or determinable payments that are quoted in an active market.
b. Without fixed or determinable payments that are quoted in an active market.
c. With fixed or determinable payments that are not quoted in an active market.
d. Without fixed or determinable payments that are not quoted in an active market.

44. All of the following are characteristics of financial assets classified as loan and receivables, except?
a. They are not quoted in an active market.
b. They have fixed or determinable payments.
c. The holder has demonstrated positive intention and ability to hold them to maturity.
d. The holder can recover substantially all of its investment (unless there has been credit deterioration).

45. Assuming that the total ideal measure of short term receivable in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make the
balance sheet misleading because
a. The amount of discount is not material
b. Most receivables can be sold to a bank or factor.
c. Most short-term receivables are not interest-bearing.
d. The allowance for uncollectible accounts includes a discount element.

46. After being held for 60 days, a 120-day 8% interest-bearing note receivable was discounted at a bank at
12%. The amount received from the bank is equal to
a. Face value less discount rate at 8% c. Maturity value less discount rate at 8%
b. Face value less discount rate at 12% d. Maturity value less discount rate at 12%

47. On January 1 of the current year, an entity obtained a two-year 8% note receivable for services rendered.
At that time, the market rate of interest was 10%. The face amount of the note and the entire amount of
interest are due on the date of maturity. Interest receivable on June 30 of the current year is
a. 4% of the face amount of the note
b. 5% of the face amount of the note
c. 4% of the present value of the note
d. 5% of the present value of the note

48. On January 1 of the current year, an entity obtained a two-year 8% note receivable for services rendered.
At that time, the market rate of interest was 10%. The face amount of the note and the entire amount of
interest are due on the date of maturity. Interest revenue on June 30 of the current year is
a. 4% of the face amount of the note
b. 5% of the face amount of the note
c. 4% of the present value of the note
d. 5% of the present value of the note

49. The carrying value of an impaired note immediately after the recognition of the impairment loss is the
a. Nominal sum of remaining cash flows to be received.
b. The book value before impairment is recognized less accrued interest.
c. Present value of remaining cash flows to be received, discounted at the current market rate of
interest.
d. Present value of remaining cash flows to be received, discounted at the original interest rate implicit
in the note.

50. If there is evidence that an impairment loss on loan receivable has been incurred, the loss is equal to the
excess of the
a. Principal amount of the loan over its carrying amount.
b. Carrying amount of the loan over the principal amount of the loan.
c. Carrying amount of the loan receivable over the present value of the cash flows related to the loan.
d. Present value of cash flows related to the loan over the carrying amount of the loan receivables.

51. After being held for 30 days, a 90-day, 15% interest-bearing note receivable was discounted at a bank at
18%. The proceeds received from the bank upon discounting would be
a. Face value less the discount at 15%
b. Face value less the discount at 18%
c. Maturity value less the discount at 15%
d. Maturity value less the discount at 18%

52. When individual customers’ accounts have credit balances of material amounts, there amounts
a. Should be omitted from the balance sheet.
b. Must be reported separately in the liability section of the balance sheet.
c. May be shown as “credit balances of customers’ accounts” in the current asset section.
d. May be deducted from the debit balance in other customers’ accounts in the asset section.
53. When accounts receivable are factored without recourse, what account does the transferor credit?
a. Accounts receivable factored
b. Accounts receivable assigned
c. Liability.
d. Sales.

54. Which of the following methods may not be appropriate for estimating bad debt expense?
a. Percentage of income
b. Aging of accounts receivable
c. Percentage of outstanding accounts receivable
d. Individual or collective assessment of outstanding receivables.

55. Cash control system are the methods and procedures used to ensure
a. That current obligations are met
b. That excess cash does not exist
c. That unused cash is invested
d. The safeguarding of cash

56. Which is not a key element of internet control over cash receipts?
a. Cash deposit on a regular basis
b. Daily entry in a voucher register
c. Daily recording of all cash receipts in the accounting records
d. Immediate accounting by the person opening the mail or using the cash register.

57. Which of the following is an internal control measure to control major company fund disbursements?
a. Voucher system
b. Petty cash system
c. Issuance of official receipt
d. Preparation of standard accounting worksheet

58. A deficiency in cash control that may occur when the cashier performs the bookkeeping function
a. Defalcation
b. Kiting
c. Lapping
d. Window dressing

59. Happy Jewelry sells to Jay, a sole proprietor, a diamond ring. The customer uses a credit card under
Metrobank Corporation as a means of payment. Metrobank should record?
a. A cash receipt
b. An accounts receivable from Jay
c. An accounts receivable from Happy Jewelry
d. A small increase in the allowance for doubtful accounts.

60. On January 1 of the current year, an entity obtained a 10-year 12% note receivable for services rendered.
At that time, the market rate of interest was 14%. The face amount of the note and the entire amount of
interest are due on the date of maturity. Interest revenue on June 30 of the current year is
e. 6% of the face amount of the note
f. 7% of the face amount of the note
g. 6% of the present value of the note
h. 7% of the present value of the note