FINANCIAL ACCOUNTING AND REPORTING CASH AND ACCOUNTS RECEIVABLE
1. An entity provided the following data on December 31, 2019: Checkbook balance Bank statement balance Check drawn on entity’s account, payable to supplier, dated and recorded on December 31, 2019 but not mailed until January 31,2020 Cash in sinking fund Treasury bills, purchased November 1, 2019 and maturing January 31, 2020 Time deposit, purchased October 1, 2019 and maturing January 31, 2020 What amount should be reported as cash and cash equivalents on December 31, 2019? a. 8,000,000 b. 8,500,000 c. 7,500,000 d. 6,000,000 2. An entity had the following cash balances on December 31,2019: Cash in bank Petty cash fund, all funds were reimbursed on December 31, 2019 Money market placement or commercial papers Saving deposit
5,000,000 4,000,000 1,000,000 1,500,000 2,500,000 2,000,000
5,000,000 50,000 1,500,000 800,000
Cash in bank included P500,000 of compensating balance against short-term borrowing arrangement on December 31, 2019. The compensating balance is legally restricted as to withdrawal. A check of P1,000,000 dated January 31, 2020 in payment of accounts payable was recorded and mailed on December 31, 2019. What amount should be reported as cash and cash equivalents on December 31, 2019? a. 6,350,000 b. 7,850,000 c. 6,850,000 d. 5,550,000 3. An entity had the following account balances on December 31, 2019: Cash on hand, including a customer check P100,000 dated January 31, 2020 Cash in bank – bank – current current account Cash in bank – bank – payroll payroll account Cash in bank – bank – restricted restricted account for plant addition expected to be disbursed in 2020 Cash in sinking fund set aside for bond payable due June 30, 2020 Three- month time deposit Traveler’s check Manager’s check Money order 1.
What total amount should be reported as cash under current assets? a. 7,500,000 b. 9,500,000 c. 7,600,000 d. 6,000,000
2.
What total amount should be reported as cash equivalents? a. 2,000,000 b. 2,600,000 c. 3,500,000 d. 4,000,000
4. Yasmin Company provided the following information on December 31, 2019: Petty cash fund Current account – account – First First Bank Current account – account – Second Second Bank (overdraft) Money market placement – placement – Third Third Bank Time deposit – deposit – Fourth Fourth Bank
500,000 4,000,000 1,000,000 500,000 1,500,000 2,000,000 200,000 300,000 100,000
50,000 4,000,000 (250,000) 1,000,000 2,000,000
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A check for P100,000 was drawn against Fir st Bank current account dated and recorded December 29, 2019 but delivered to payee on January 15, 2020. The Fourth Bank time deposit is set aside for land acquisition in early January 2020.
What amount should be reported as cash and cash equivalents on December 31, 2019? a. 5,050,000 b. 5,150,000 c. 4,900,000 d. 4,150,000 5. Kent Company provided the following information on December 31, 2019: Cash on hand Security Bank current account PNB Current account No. 1 PNB Current account No. 2 (overdraft) BSP treasury bill – 60 days
500,000 1,000,000 400,000 (500,000) 3,000,000
The cash on hand included a customer postdated check of P100,000 and postal money order of P40,000. A check for P200,000 in payment of account was drawn against Security Bank account, dated January 15, 2020, delivered to the payee and recorded December 31, 2019.
What total amount of cash and cash equivalents should be reported on December 31, 2019? a. 4,550,000 b. 5,050,000 c. 4,750,000 d. 1,950,000 6. In preparing the bank reconciliation for the month of August, Apex Company provided the following information: Balance per bank statement 1,805,000 Deposit in transit 325,000 Return of customer check for insufficient fund 60,000 Outstanding checks 275,000 Bank service charge for August 10,000 What is the adjusted cash in bank? a. 1,855,000 b. 1,795,000 c. 1,785,000 d. 1,755,000 7. Lira Company prepared the following bank reconciliation on June 30: Balance per bank Deposits in transit Outstanding checks Balance per book
9,800,000 400,000 (1,400,000) 8,800,000
There were total deposits of P6,500,000 and charges for disbursements of P9,000,000 for July per bank statement. All reconciliation items on June 30 cleared the bank on July 31. Checks outstanding amounted to P1,000,000 ad deposits in transit totaled P1,200,000 on July 31. 1.
What is the amount of cash receipts per book in July? a. 6,500,000 b. 7,300,000 c. 5,700,000 d. 7,900,000
2.
What is the amount of cash disbursements per book in July? a. 8,600,000 b. 7,600,000 c. 9,400,000 d. 8,400,000
3.
What is the adjusted cash in bank on July 31? a. 7,300,000 b. 6,300,000
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c. d. 4.
7,500,000 6,500,000
What is the cash balance per ledger on July 31? a. 8,800,000 b. 8,500,000 c. 6,300,000 d. 7,500,000
8. An entity provided the following information for 2019: Accounts receivable – January 1 Credit sales Collection from customers, excluding the recovery of accounts written off Accounts written off as worthless Sales returns Recovery of accounts written off Estimated future sales returns on December 31 Estimated uncollectible accounts on December 31 per aging
2,000,000 10,000,000 8,000,000 100,000 500,000 50,000 150,000 300,000
What is the “amortized cost” of accounts receivable on December 31, 2019? a. 3,400,000 b. 3,100,000 c. 2,950,000 d. 2,900,000 9. On December 31, 2019, an entity reported accounts receivable of P6,000,000 and allowance for doubtful accounts of P1,000,000 on January 1, 2019.
2016 2017 2018 2019
Net credit sales 9,000,000 13,000,000 15,000,000 20,000,000
Writeoffs 400,000 600,000 700,000 650,000
Recoveries 30,000 70,000 120,000 150,000
Doubtful accounts are provided for as percentage of net credit sales. The percentage is computed annually by using the data of the three years prior to the current year. 1.
What amount should be reported as doubtful accounts expense for 2019? a. 800,000 b. 650,000 c. 500,000 d. 600,000
2.
What is the allowance for doubtful accounts on December 31, 2019? a. 1,300,000 b. 1,950,000 c. 1,150,000 d. 1,800,000
10. An entity provided the following unadjusted accounts at year-end: Accounts receivable Allowance for doubtful accounts Net credit sales
Debit 5,000,000 40,000
Credit
20,000,000
The entity estimated that 3% of the gross accounts receivable will become uncollectible. 1. What is the ending allowance for doubtful accounts? a. 640,000 b. 750,000 c. 100,000 d. 150,000 2.
What amount should be recognized as doubtful accounts expense for the current year?
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a. b. c. d.
110,000 150,000 190,000 600,000
11. From inception of operations, an entity provided for doubtful accounts under the all owance method and provisions were made monthly at 2% of credit sales. No year-end adjustments to the all owance account were made. The balance in the all owance for doubtful accounts was P1,000,000 on January 1, 2019. During 2019, credit sales totaled P20,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P200,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P50,000. An aging was made on December 31, 2019. Classification November – December July – October January – June Prior to January 1, 2019
Balance 6,000,000 2,000,000 1,500,000 500,000
Uncollectible 10% 20% 30% 50%
Based on the reviewer of collectibility of the account balances in the “prior to January 1, 2019” aging category, additional accounts totaling P100,000 are to be written off on December 31, 2019. Effectively December 31, 2019, the entity adopted aging method for estimating the allowance for doubtful accounts. 1.
What is the required allowance for doubtful accounts on December 31, 2019? a. 1,650,000 b. 1,950,000 c. 1,700,000 d. 1,450,000
2.
What amount should be reported as doubtful accounts expense for current year? a. 1,200,000 b. 1,650,000 c. 900,000 d. 950,000
3.
What is the adjustment to the allowance for doubtful accounts on December 31, 2019? a. 900,000 debit b. 900,000 credit c. 500,000 debit d. 500,000 credit
4.
What is the net realizable value of accounts receivable on December 31, 2019? a. 9,900,000 b. 8,250,000 c. 8,350,000 d. 8,200,000
Theory
1. Which of the following should be considered cash? a. Certificates of deposit b. Money orders c. Money market instruments d. Treasury bills 2. What is compensating balance? a. b. c. d.
Saving account balance Loan account with bank Temporary investment serving as collateral for loan Minimum deposit required to be maintained in connection with borrowing arrangement.
3. Deposits held as compensating balance a. b.
Usually do not earn interest. If legally restricted and held against short-term credit may be included as cash.
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c. If legally restricted and held against long-term credit may be included among current assets. d. None of these. 4. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amount cash and a. b. c. d.
Is acceptable as a means to pay current liabilities. Has a market value greater than original cost Bears an interest rate that is least equal to the prime interest rate Is so near maturity that it presents insignificant risk of change in interest rate.
5. Highly liquid investments th at are readily convertible into cash can be shown as cash equivalents if the investments have a maturity of 90 days or less a. b. c. d.
From the date the investments are acquired From the end of the reporting period From the date of issue of financial statements From the date the investments are acquired or from the end of the reporting period
6. Which of the following could not be reported as cash or cash equivalents? a. b. c. d.
Money market accounts Demand deposits BSP treasury bills with an original maturity of sixty days from date purchased Legally restricted deposit held as compensating balance against borrowing arrangement
7. All of the following can be classified as cash and cash equivalents, except a. b. c. d.
Redeemable preference shares acquired and due in 60 days Commercial papers held and due for repayment in 90 days Equity investments A bank overdraft
8. What is the major purpose of an imprest petty cash fund? a. b. c. d.
To effectively plan cash inflows and outflows To ease the payment of cash to vendors To determine the honesty of the employees To effectively control cash disbursements
9. Which of the following statements in relation to petty cash fund is incorrect? a. b. c. d.
Each disbursement from petty cash should be supported by a petty cash voucher. The creation of a petty cash fund requires a journal entry to r eflect the transfer of fund out of the general cash account. At any time, the sum of the cash in the petty cash fund and the total of petty cash vouchers should equal the amount for which the imprest petty cash fund was established. With the establishment of an imprest petty cash fund, one person is given the authority and responsibility for issuing checks to cover minor disbursements.
10. When an imprest petty cash fund is used, which of the following statements is true? a. b. c. d.
The balance of the petty cash fund should be reported in the statement of financial position as a long-term investment. The petty cashier’s summary of petty cash payments serves a journey entry that is posted as a long -term investment. The reimbursement of the petty cash fund should be credited to the cash account. Entries that include a credit to the cash account should be recorded at the time the payments form the petty cash fund are made.
11. If the balance shown in the bank statement is less than the correct cash balance and neither the entity nor the bank has made any errors, there must be a. b. c. d.
Deposits credited by the bank but not yet recorded by the entity Outstanding checks Deposit in transit Bank charges not yet recorded by the entity
12. If the cash balance shown in the accounting records is less than the correct cash balance and neither the entity nor the bank has made any errors, there must be a. b. c. d.
Deposits credited by the bank but not yet recorded by the entity Deposits in transit Outstanding checks Bank charges not yet recorded by the entity
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13. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the depositor’s records and to identify bank errors. Adjustments on the part of the depositor should be recorded for a. b. c. d.
Bank errors, outstanding checks and deposit in transit. All items except bank errors, outstanding checks and deposits in transit. Book errors, bank errors, deposit in transit and outstanding checks. Outstanding checks and deposits in transit.
14. Bank statements provide information about all of the following, except a. Checks cleared during the period b. NSF checks c. Bank charges for the period d. Errors made by the depositor 15. The ideal measure of short-term receivables is the discounted value of cash to be received in the future. Failure to follow this practice usually does not make the statement of financial position misleading because a. b. c. d.
Most short-term receivables are noninterest bearing. The allowance for uncollectible accounts includes a discount element. The amount of the discount is not material. Most receivables can be sold to a bank or factor.
16. Which is more theoretically correct to record cash discount? a. Net approach b. Gross approach c. Allowance approach d. All three approaches are theoretically correct 17. All are problems associated with the valuation of accounts receivable, except a. b. c. d.
Uncollectible accounts Returns Cash discounts under the net method Allowances granted
18. Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? a. b. c. d.
A percentage of sales adjusted for the balance in the allowance A percentage of sales not adjusted for the balance in the allowance A percentage of accounts receivable not adjusted for the balance in the allowance An amount derived from aging accounts receivable and not adjusted for the balance in the allowance
19. Which method of determining bad debt expense best achieves the matching concept? a. b. c. d.
Percentage of sales Percentage of ending accounts receivable Percentage of average accounts receivable Direct writeoff
20. Which is not permitted for accounting for uncollectible accounts receivable? a. b. c. d.
Percentage of accounts receivable using allowance method Percentage of sales using allowance method Direct writeoff method All of the choices are acceptable
21. The advantage of relating bad debt expense to accounts receivable is that this approach a. b. c. d.
Gives a reasonably correct statement of receivables in the statement of financial position. Best relates bad debt expense to the period of sale. Is the only generally accepted method for valuing accounts receivable. Makes estimates of uncollectible accounts unnecessary.
22. Which concept relates to the allowance method in accounting for accounts receivable? a. b. c. d.
Bad debt expense is an estimate that is based on historical and prospective information. Bad debt expense is based on the actual amounts determined to be uncollectible. Bad debt expense is an estimate that is based only on an aging analysis of accounts receivable Bad debt expense is management’s determination of which accounts will be sent to the attorney for collection.
23. Which method does not properly match expense and revenue?
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a. b. c. d.
Charging bad debts with a percentage of sales under the allowance method. Charging bad debts using a percentage of accounts receivable under the allowance method. Charging bad debts using aging accounts receivable under the allowance method. Charging bad debts as accounts are written off as uncollectible.
24. When an entity uses the allowance method for recognizing doubtful accounts, the entry to record the writeoff of a specific uncollectible account a. b. c. d.
Affects neither net income nor working capital Affects neither net income nor accounts receivable Decreases both net income and working capital Decreases both net income and accounts receivable
25. When the direct writeoff method is used, the entry to write off a customer account would a. b. c. d.
Increase net income Have no effect on net income Increase both accounts receivable and net income Decrease both accounts receivable and net income
26. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off would a. b. c. d.
Decrease the allowance for doubtful accounts Increase net income Have no effect on the allowance for doubtful accounts Have no effect on net income
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CASH AND CASH EQUIVALENTS CASH
Bank Overdraft Current Liability Should not be offset against other bank accounts with Debit balance Exceptions: Can be offset if accounts are in 1 Bank o Can be offset against other bank account if the o amount is not material
Readily available in the payment of current obligations Unrestricted in use
CASH Personal checks Manager checks Certified checks Money order Traveler’s checks
Coins and currency Petty cash fund Checking deposit Demand deposit Customer’s checks
Measurement: @ Face Value Current exchange rate (if in Foreign Currency) Estimated Realizable Value (if under bankruptcy/financial difficulty)
Undelivered company checks Postdated company checks Undelivered customer checks Postdated customer checks
should be restored to CASH should be restored to Accounts Receivable
Compensating Balance Not legally restricted as to part of Cash, Current Asset withdrawal classified separately as “cash Legally restricted as to held as compensating balance”, withdrawal Current Asset If the related loan is longterm Cash Shortage Cash Overage
classified as noncurrent investment, Noncurrent Asset
Cash count < Cash balance per Book Cash count > Cash balance per Book
Petty Cash Fund Money set aside to pay small expenses
Cash Fund for the payment of liability due within 1 year Current as part of CASH
fund for the acquisition of noncurrent asset even within 1 year Noncurrent
Two Methods of handling Petty Cash Fund: Imprest Fund System All cash receipts should be deposited intact and all o cash disbursements should be made by means of check
CASH EQUIVALENTS PAS 7, short-term and highly liquid investments readily convertible into cash insignificant risk of changes in value because of changes in interest rates
Fluctuating Fund System Checks drawn to replenish the fund do not o necessarily equal the petty cash fund disbursement
CASH EQUIVALENTS Treasury bills Money market Time deposit
with maturity of 3 months or less from the date of purchase
Note:
If problem is silent, treasury bills, money market and time deposit are assumed to be Cash Equivalents. Equity Securities – cannot qualify as cash equivalents Preference shares with specified redemption date – can qualify as cash equivalent if acquired 3 months before redemption date Investment of excess Cash Term
a.
3 months or less
b.
More than 3 months but within 1 year
c.
More than 1 year
Classification Cash Equivalent, Current Asset Short-term financial asset/temporary investment, Current Asset Long-term investments, Noncurrent Asset
BANK RECONCILIATION Bank Reconciliation a statement which brings into agreement the cash balance per book and cash balance per bank. Forms of Bank Reconciliation a. Adjusted Balance Method Book Balance + Note Receivable collected by Bank NSF and Service Charge ± Errors Adjusted Book Balance
X X X X X
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Bank Balance + Deposits in Transit Outstanding Checks ± Errors Adjusted Bank Balance Note:
X X X X X
ACCOUNTS RECEIVABLE Trade Receivable expected to be realized in cash within the normal operating cycle or one year, whichever is longer, are classified as CURRENT ASSET
Certified checks are NO longer outstanding
b. Book to Bank Method
Nontrade Receivable
Book Balance + Note Receivable collected by Bank + Outstanding checks NSF and Service Charge Deposits in transit Bank Balance
X X X X X X
c. Bank to Book Method
- collectible beyond 1 year
- NONCURRENT ASSETS
-
X X X X X X
ASSETS
Balance per Book – beg. + Book debits during the period Book credits during the period Balance per Book – end
X X X X
Computation for Bank Balance Balance per Bank – beg. + Bank credits during the period Bank debits during the period Balance per Bank – end
Face Amount or Original Invoice Amount
Subsequent
-
Amortized Cost or Net Realizable Value
Note: X X X X
X X X X
Outstanding Checks – beg. + Checks drawn by depositor during the period Checks paid by bank during the period Outstanding Checks – end PROOF OF CASH Beginning Receipts Px Px
Disbursement Px
(x) x
(x)
(x)
Ending Px
(x) x
(x)
(x) Px Px
Px
Px
Px
Px
Px
x
(x) x
Px
Writeoff
-
Required allowance Required allowance Doubtful accounts expense
Allowance for Doubtful Accounts Beg. Balance Recovery DA Expense End
x
(x) X Px
(x)
Accounts Receivable Collections Sales discounts Sales returns and allowances Writeoff
Recovery of Accounts - IGNORE in computing accounts receivable, unless included in collections in which case DEDUCT from collections
Aging of AR % of AR % of Sales
Computation for Outstanding Checks
Px
-
End
Computation for Deposits in Transit
x
Initial
Beg. Balance Credit sales
X X X X
Deposits in Transit – beg. + Cash receipts deposited during the period Deposits acknowledged by bank during the period Deposits in Transit – end
Current Liabilities NOT offset against the debit balances in other customer’s accounts
Accounts Receivable Measurement:
Computation for Book Balance
Balance per Bank Deposits in Transit: Beginning End Outstanding Checks Beginning End Adjusted Bank Balance
- CURRENT
Customer’s Credit Balances
Bank Balance + Deposits in transit + NSF and Service Charge Outstanding checks Note Receivable collected by Bank Book Balance
Balance per Book Note collected: Beginning End NSF Check: Beginning End Service charge: Beginning End Adjusted Book Balance
- expected to be realized in cash within 1 year
x (x) x Px
(x) Px
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