INTERMEDIATE ACCOUNTING EXAM 3-
CHAPTER #7 QUESTIONS AND
ANSWERS
Forms of cash considered current assets - Answer-- coin
- currency
- available funds on deposit at the bank
- money orders
- certified checks
- cashier's checks
- personal checks
- bank drafts
- savings account
- CDs
- money market savings certificate
- short-term paper
- petty cash funds
Postdated checks, I.O.Us are treated as - Answer-receivables
How to classify cash - Answer-current asset
How to classify cash equivalents - Answer-short-term, highly liquid investments that are
1. readily convertible to cash
2. near maturity; present insignificant risk of changes in interest rates
- included in cash calculation
Restricted cash - Answer-either classified in current assets or long-term assets
depending on date of availability/disbursement
1. plant expansion
2. retirement of long-term debt
3. compensating balances
Bank overdrafts - Answer-company writes a check for more than the amount in its cash
account
- current liability
- offset against other cash accounts only when they are with the same bank
Postage on hand - Answer-prepaid expenses
, Cash equivalent - Answer-short-term, highly liquid investments that are both
a) readily convertible to known amounts of cash
b) so near their maturity that they present insignificant risk of changes in value because
of changes in interest rates
- 3 months or less
Exception that requires bank overdrafts to be included in the cash account - Answer-
when available cash is present in another account in the same bank on which the
overdraft occurred
- offsetting
Receivables - Answer-claims held against customers and others for money, goods or
services
Accounts receivable - Answer-oral promises of the purchaser to pay for goods and
services sold
- open accounts
- collected within 30 to 60 days
Current or non-current - Answer-Current = short-term; collected within a year
Noncurrent= long-term
Gross method - Answer-discount taken = deduction to sales
- entering receivable and sale at the gross amount and using a sales discount only
when they receive payment within the discount period
Net method - Answer-discount not taken = show as other revenue
Trade discounts - Answer-reduction in sales prices
- not recognized in the accounting records
- customers are billed net of discounts
- quoted in percentages
Sales returns and allowances - Answer-contra revenue account to sales revenue
- offsets sales revenue on the income statement
Allowance for Sales return and allowances - Answer-contra asset account to A/R and
offsets accounts receivable on the balance sheet
Example: On 1/31/17, before preparing financial statements, Max estimates than an
additional $100 in sales returns and allowances will result from the sale to Oliver on
1/4/17. Record the adjusting entry to record this additional allowance - Answer-Sale
Returns and Allowances 100
Allowance for Sales returns and Allowances 100
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