Financial Accounting Reporting Analysis and Decision Making 5th Edition Carlon Test Bank

Financial Accounting Reporting
Analysis and Decision Making 5th

Edition Carlon Test Bank
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Testbank
to accompany
Financial Accounting:
Reporting, Analysis and
Decision Making 5e
by
Carlon et al.
© John Wiley & Sons Australia, Ltd 2016

Chapter 7: Reporting and analysing cash and receivables
Multiple-choice questions
1. From an internal control standpoint, the asset most susceptible to improper

diversion and use is:
a. prepaid insurance.
*b. cash.
c. buildings.
d. land.
Answer: b
Learning objective 7.3 – Explain the application of internal control principles to
handing cash.
Feedback: Cash is most liquid asset and therefore the most susceptible to improper
diversion and misappropriation from an internal control point.
2. Cash equivalents do not include:
a. money market accounts.

b. commercial paper.
c. Treasury bills.
*d. bill receivable in 6 months.
Answer: d
Learning objective 7.1 – Identify the effect of business transactions on cash.
Feedback: Cash equivalents are highly liquid investments that can be quickly
converted to cash.
3. Which one of the following items would not be considered cash?
a. coins.
b. money orders.
c. currency.
*d. postdated cheques.
Answer: d
Feedback: Cash consists of coins and paper money, cash at bank and cash
equivalents (highly liquid investments). Postdated cheques are not considered cash.
© John Wiley & Sons Australia, Ltd 2016 7.1

Testbank to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e
4. The reconciliation of the cash register tape with the cash in the register is an
example of:
a. other controls.
b. establishment of responsibility.
*c. independent internal verification.
d. segregation of duties.
Answer: c
Learning objective 7.3 – Explain the application of internal control principles for
handing cash.
Feedback: The reconciliation of the cash register tape and cash in the register is an
example of an independent internal verification.
5. Which of the following is not an internal control procedure for cash?
*a. Payments should be made with cash.

b. There should be limited access to cash.
c. The amount of cash on hand should be kept to a minimum.
d. Cash should be deposited daily.
Answer: a
handing cash.
Feedback: Generally, internal control over cash payments is more effective when
payments are made by using a bank account rather than cash on hand, except for
incidental amounts that are paid out of petty cash.
6. Which of the following is not a suggested procedure to establish internal control

over cash disbursements?
*a. Anyone can sign the cheques.

b. Different individuals approve and make the payments.
c. Blank cheques are stored with limited access.
d. The bank statement is reconciled monthly.
Answer: a
handing cash.
Feedback: One suggested procedure to establish internal control over cash
disbursements is to have only authorised persons such as a manager sign the cheques.

7. Control over cash disbursements is generally more effective when:
a. all bills are paid in cash.

b. disbursements are made by the accounts payable subsidiary clerk.
c. all purchases are made on credit.
*d. payments are made by cheque.
Answer: d
handing cash.
8. Supervisors counting cash receipts daily is an example of:
a. other controls.
*b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.
Answer: b
handing cash.
Feedback: The reconciliation of the cash register tape and cash in the register is an
example of an independent internal verification.
9. Which of the following is not an internal control procedure for cash?
a. Only designated personnel are authorised to handle cash.

*b. The same individual receives the cash and pays the bills.
c. Surprise audits of cash on hand should be made occasionally.
d. Access to cash is limited.
Answer: b
handing cash.
Feedback: Having the same individual receive the cash and pay the bills is not an
internal control procedure for cash.

10. The use of pre-numbered cheques is an example of:
a. segregation of duties
b. independent internal verification
c. establishment of responsibility
*d. documentation procedures
Answer: d
handing cash.
Feedback: Using pre-numbered cheques is an example of documentation.
11. An exception to disbursements being made by cheque is acceptable when cash is

paid:
a. to an owner.
b. to employees as wages.
*c. from petty cash.
d. to employees as loans.
Answer: c
handing cash.
12. An employee authorised to sign cheques should not record:
a. owner cash contributions.

b. mail receipts.
*c. cash disbursement transactions.
d. sales transactions.
Answer: c
handing cash.
Feedback: An employee who is authorised to sign cheques should not record cash
disbursement transactions. The responsibility for related duties should be assigned to
different individuals.

13. Allowing only the financial controller to sign cheques is an example of:
a. documentation procedures.
b. separation of duties.
c. other controls.
*d. establishment of responsibility.
Answer: d
handing cash.
Feedback: Allowing only the financial controller to sign cheques is an example of the
establishment of responsibility.
14. Which one of the following would not cause a bank to debit a depositor’s
account?
a. Bank service charge.

*b. Collection of a note receivable.
c. EFT of funds to other locations.
d. Cheques marked NSF.
Answer: b
Feedback: A debit to a depositor’s account decreases the depositor’s account
balance. The collection of a note receivable will increase the depositor’s account and
will cause a credit.
15. A bank statement:
a. let’s a depositor know the financial position of the bank as of a certain date.
b. is a credit reference letter written by the depositor’s bank.
c. is a bill from the bank for services rendered.
*d. shows the activity that increased or decreased the depositor’s account balance.
Answer: d
Learning objective 7.4 – Prepare a bank reconciliation.
Feedback: A bank statement shows the activities that caused changes to the
depositor’s bank balance.

16. A company maintains the asset account, Cash, on its books, while the bank
maintains a reciprocal account that is:
a. a contra asset account.

*b. a liability account.
c. also an asset account
d. an equity account
Answer: b
handling cash.
Feedback: If a company maintains an asset account, Cash, then the bank maintains a
reciprocal account that is a liability account.
17. Which of the following would be added to the balance as per bank statement in a
bank reconciliation?
a. Outstanding cheques.
*b. Outstanding deposits.
c. Notes collected by the bank.
d. Service charges.
Answer: b
Feedback: Outstanding deposits (deposits in transit) are added to the balance as per
bank statement.
18. A deposit made by a company will appear on the bank statement as a:
a. debit.
*b. Credit.
c. debit memorandum.
d. credit memorandum
Answer: b
Feedback: A deposit made by a company will appear on the bank statement as a
credit.

19. Which of the following would be added to the balance of the cash at bank account
in the books on a bank reconciliation?
b. Outstanding deposits.
*c. Notes collected by the bank.
d. Service charges.
Answer: c
Learning objective 7.8 – Describe how to value accounts receivable.
Feedback: Notes collected by the bank are added to the book balance in a bank
reconciliation.
20. Which of the following would be deducted from the balance per bank statement in
a bank reconciliation?
a. Notes collected by the bank.

b. Outstanding deposits.
*c. Outstanding cheques.
d. Service charges.
Answer: c
Feedback: Outstanding cheques are deducted from the bank balance in a bank
reconciliation.
21. Outstanding deposits (or deposits in transit):
*a. have been recorded on the company's books but not yet by the bank.
b. have been recorded by the bank but not yet by the company.
c. have not been recorded by the bank or the company.
d. are customers’ cheques that have not yet been received by the company.
Answer: a
Feedback: Outstanding deposits (deposits in transit) have been recorded on the
company’s books but not yet by the bank.

22. Which of the following would be added to the balance per bank on a bank
reconciliation?
*b. Outstanding deposits.
c. Notes collected by the bank
d. Service charges.
Answer: b
Feedback: Outstanding deposits (deposits in transit) are added to the bank balance
on a bank reconciliation.
23. A bank reconciliation should be prepared:
a. whenever the bank refuses to lend the company money.

b. when an employee is suspected of fraud.
*c. to explain any difference between the depositor's balance per books with the
balance per bank.
d. by the person who is authorised to sign cheques.
Answer: c
Feedback: A bank reconciliation should be prepared on a regular basis to explain any
difference between the depositor’s balance per books and the balance per bank.
24. In preparing a bank reconciliation, outstanding cheques are:
a. added to the balance per bank.

b. deducted from the balance per books.
c. added to the balance per books.
*d. deducted from the balance per bank.
Answer: d
Feedback: In preparing a bank reconciliation, outstanding cheques are deducted from
the balance per bank statement.

25. If a cheque correctly written and paid by the bank for $354 is incorrectly recorded
on the company's books for $345, the appropriate treatment on the bank reconciliation
would be to:
a. add $9 to the bank's balance.

b. add $9 to the cash at bank book balance.
c. deduct $9 from the bank's balance.
*d. deduct $9 from the cash at bank book balance.
Answer: d
Feedback: The appropriate treatment in this situation is to deduct $9 from the cash at
bank book balance.
26. A cheque for $157 is incorrectly recorded by a company as $175. On the bank
reconciliation, the $18 error should be:
*a. added to the balance per books.

b. deducted from the balance per books.
c. added to the balance per bank.
d. deducted from the balance per bank.
Answer: a
Learning objective 7.4– Prepare a bank reconciliation.
Feedback: In this situation the $18 error should be added to the balance per books.
27. For which of the following errors should the appropriate amount be added to the
balance per bank on a bank reconciliation?
a. Cheque for $93 recorded as $39.

b. A returned $400 cheque recorded by bank as $40.
c. Cheque for $68 recorded as $86.
*d. Deposit of $350 recorded by bank as $35.
Answer: d
Feedback: A deposit recorded by the bank as less than it actually is would be added
to the balance per bank on a bank reconciliation.

28. Which of the following items on a bank reconciliation would require an adjusting
entry on the company’s books?
a. An error by the bank

*b. A bank service charge
c. Outstanding cheques
d. An outstanding deposit
Answer: b
Feedback: A bank service charge would require an adjusting entry following a bank
reconciliation.
29. Which of the following is not a basic principle of cash management?
a. Increase collection of receivables.

*b. Keep inventory levels high.
c. Don’t pay liabilities earlier than expected.
d. Invest idle cash.
Answer: b
Learning objective 7.5 – Discuss the basic principles of cash management.
Feedback: Maintaining high inventory levels is not a principle of cash management.
30. Management of cash is the responsibility of the company:
a. accountant.
*b. finance director or finance manager.
c. president.
d. chief executive officer.
Answer: b
Feedback: Cash management is usually the responsibility of the finance director or
finance manager.

31. Which of the following is not a basic principle of cash management?
a. Increase collection of receivables.

b. Keep inventory levels low.
*c. Pay all liabilities late.
d. Invest idle cash.
Answer: c
Feedback: Paying liabilities no earlier than when expected, i.e. not late and not early,
is a principle of cash management.
32. The ratio of cash to daily cash expenses is calculated by dividing:
a. cash by total expenses.

*b. cash and cash equivalents by average daily cash expenses.
c. cash and cash equivalents by total expenses.
d. cash by daily cash expenses.
Answer: b
Learning objective 7.6 – Assess the adequacy of cash.
Feedback: The ratio of cash to daily cash expenses is calculated by dividing cash and
cash equivalents by average daily cash expenses.
33. The following information is available for Chancellor Company: profit $3.600
million; net cash provided by operating activities $1,250 million; total expenses
$2,500 million; depreciation expense $350 million; cash dividends $400 million;
capital expenditures $650 million; and cash and cash equivalents $900 million.
Chancellor’s cash to daily cash expenses ratio is calculated as:
a. $1,250 ÷ ($2,500 ÷ 365)

*b. $900 ÷ [($2,500 - $350) ÷ 365]
c. $900 ÷ ($2,500 ÷ 365)
d. $1,250 ÷ [($2,500 - $350) ÷ 365]
Answer: b

34. The following information is available for Grosvenor Company: profit $2,200
million; net cash provided by operating activities $1,200 million; total expenses
$1,700 million; depreciation expense $275 million; cash dividends $330 million;
capital expenditures $750 million; and cash and cash equivalents $700 million.
Grosvenor’s cash to daily cash expenses ratio is calculated as:
a. $1,200 ÷ ($1,700 ÷ 365)

b. $700 ÷ ($1,700 ÷ 365)
*c. $700 ÷ [($1,700 - $275) ÷ 365]
d. $1,200 ÷ [($1,700 - $275) ÷ 365]
Answer: c
35. Receivables are claims that are expected to be met in:
*a. cash.
b. inventory.
c. liabilities.
d. shares.
Answer: a
Learning objective 7.7 – Identify the different types of receivables.
Feedback: Receivables are claims that are expected to be met in cash.
36. Accounts receivable includes:
a. non-trade receivables.
*b. amounts owed by customers on account.
c. interest receivable.
d. loans to company officers.
Answer: b
Learning objective 7.7 – Identify the different types of receivables.
Feedback: Receivables are amount owed by customers on account and they are
expected to be met in cash.

37. Accounts receivable are reported on the statement of financial position as a/an:
a. liability.
b. equity.
*c. asset.
d. revenue.
Answer: c
Learning objective 7.9 – Describe how receivables are reported in financial
statements.
Feedback: Accounts receivable that mature within the current operating cycle are
reported as a current asset in the balance sheet or statement of financial position.
38. Under the direct write-off method, when a particular account is considered to be
uncollectible, the loss is charged to:
a. revenue.
b. accounts receivable.
c. allowance for doubtful debts.
*d. bad debts expense.
Answer: d
Learning objective 7.8 – Describe how to value receivables.
Feedback: Under the direct write-off method, when a particular account is considered
to be uncollectible, the loss is charged to bad debts expense.
39. The method being used to determine the amount of the allowance for doubtful
debts that relies on a schedule in which customers balances are classified by the
length of time they have been unpaid, is known as the:
a. direct write-off method.

b. net realisable method.
*c. aged accounts receivable method.
d. conservatism method.
Answer: c
Learning objective 7.8 – Describe how to value receivables.
Feedback: Ageing the accounts receivable allows the allowance for doubtful debts to
be determined.

40. Receivables that mature within the entity’s operating cycle are classified in the
statement of financial position as:
a. equity.
b. liabilities.
*c. current assets.
d. non-current assets.
Answer: c
statements.
Feedback: Receivables that mature within the entity’s operating cycle are classified in
the statement of financial position as current assets.
41. The recoverable amount of trade receivables is shown in the:
a. income statement.
*b. statement of financial position.
c. statement of changes in equity.
d. statement of cash flows.
Answer: b
statements.
Feedback: The recoverable amount of receivables is shown in the statement of
financial position as an asset.
42. Managing accounts receivable involves five steps of which the following occurs
first:
*a. determine to whom to extend credit.

b. accelerate cash receipts from receivables.
c. establish a payment period.
d. monitor the collections.
Answer: a
Learning objective 7.10 – Analyse and manage receivables.
Feedback: The management of accounts receivable firstly involves the determination
of whom to extend credit to.

43. The credit risk ratio is calculated by dividing the allowance for doubtful debts by:
a. total sales.
b. total assets.
*c. accounts receivable.
d. 365 days.
Answer: c
Feedback: The credit risk ratio is calculated by dividing the allowance for doubtful
debts by accounts receivable.
44. Receivables turnover is used to assess the liquidity of the:
a. customer.
*b. receivables.
c. business.
d. assets.
Answer: b
Feedback: Receivables turnover is used to assess the liquidity of the receivables.
45. Which of the following will not help minimise potential losses resulting from
credit customers:
a. Letters of credit/bank guarantees.

b. Cash on delivery.
c. bank/supplier references.
*d. Extended payment period
Answer: d
Learning objective 7.10– Analyse and manage receivables.
Feedback: An extended payment period will not minimise potential losses from credit
customers.

46. A factor is used to:
a. borrow money
b. apply for credit
*c. accelerate cash receipts
d. increase sales
Answer: c
Feedback: A factor is one way of accelerating cash receipts.

Exercises
47. Listed below are seven errors or problems that might occur in the processing of
cash transactions. Also shown is a list of internal control principles. Evaluate each
possible error and cite a principle that is listed that would reduce the probability of the
error occurring. If none of the principles given will correct the problem, write ‘None’.
If you think more than one principle is appropriate, list all principles that apply.
Possible Errors or Problems

1. An employee steals the cash collected from a customer for an account receivable
and conceals this theft by issuing a credit memorandum indicating that the
customer returned the merchandise.
2. A small fire destroys 3 days of cash receipts.
3. The official designated to sign cheques is able to steal blank cheques and issue
them without fear of detection.
4. A sales person, when serving customers, often rings up a sale for less than the
actual amount and then keeps the additional cash collected from the customer.
5. Three cashiers use one cash register drawer and the cash in the drawer is often
short of the balance kept on hand.
6. Each cashier counts their own register drawer each day and verbally reports the
results to the supervisor.
7. Cashiers with over 5-years’ experience are not required to take holidays.
Internal Control Principles

a. Establishment of responsibility
b. Segregation of duties
c. Physical, mechanical, and electronic control devices
d. Documentation procedures
e. Independent internal verification
f. Other controls
Answers below.
Learning objective 7.1 – 7.11.
1. b 5. a and e
2. c and f 6. d and e
3. c and d 7. f
4. c

48. Using the following information, prepare a bank reconciliation for Everest Ltd for
31 July.
a. The bank statement balance is $2,306.

b. The cash account balance is $2,930
c. Outstanding cheques totalled $585.
d. Outstanding deposit $1,175.
e. The bank service charge is $25.
f. A cheque for $98 for supplies was recorded as $89 in the ledger.
Answers below.
Everest Ltd
Bank Reconciliation
31 July
Cash balance per bank $ 2,306

Add: (d) Outstanding deposit 1,175
3,481
Less: (c) Outstanding cheques 585
Adjusted cash balance per books $ 2,896
Cash balance per books $ 2,930

Less: (f) Accounts payable error $ 9
(e) Bank service charge 25 34

49. Using the following information, prepare a bank reconciliation for Mont Blanc
Ltd for 31 May.
a. The bank statement balance is $9,100.

b. The cash account balance is $7,412
c. Outstanding cheques totalled $1,600.
d. Outstanding deposit $300.
e. The bank service charge is $12.
f. Collection of a note receivable by bank, $400.
Answers below.
Mont Blanc Ltd

Bank Reconciliation
31 May

Add: (d) Outstanding deposit 300
9,400
Less: (c) Outstanding cheques 1,600

Add: (f) Collection of a note receivable 400
7,812
Less: (e) Bank service charge 12

50. Given the following information, determine the adjusted cash balance per books
from the following information:
a. Balance per books as of 30 June, $7,600.

b. Outstanding cheques, $600.
c. NSF cheque returned with bank statement, $120.
d. Deposit mailed the afternoon of 30 June, $300.
e. Cheque printing charges, $15.
f. Interest earned on cheque account, $40.
Answers below.
$7,505 (7,600 - 120 - 15 + 40)

51. The Tarragon Trading Company's bank statement for the month of November
showed a balance per bank of $7,000. The company's Cash account in the general
ledger had a balance of $5,659 at 30 November. Other information is as follows:
(1) Cash receipts for 30 November recorded on the company's books were $5,200
but this amount does not appear on the bank statement.
(2) The bank statement shows a debit memorandum for $40 for cheque printing
charges.
(3) Cheque No. 119 payable to Burns Company was recorded in the cash payments
journal and cleared the bank for $248. A review of the accounts payable
subsidiary ledger shows a $36 credit balance in the account of Burns Company
and that the payment to them should have been for $284.
(4) The total amount of cheques still outstanding at 30 November amounted to
$5,800.
(5) Cheque No. 138 was correctly written and paid by the bank for $409. The cash
payment journal reflects an entry for Cheque No. 138 as a debit to Accounts
Payable and a credit to Cash in Bank for $490.
(6) The bank returned a dishonoured cheque from a customer for $560.
(7) The bank included a credit memorandum for $1,260, which represents collection
of a customer's note by the bank for the company; principal amount of the note
was $1,200 and interest was $60. Interest has not been accrued.
Required:
(a) Prepare a bank reconciliation for the Tarragon Trading Company at 30

November.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

Answers below.
(a) TARRAGON TRADING COMPANY

Bank Reconciliation
30 November

Add: (1) Outstanding deposit 5,200
12,200
Less: (4) Outstanding cheques 5,800

Add: (5) Accounts Payable Error $ 81
(7) Collect $1,200 note and interest $60 1,260 1,341
7,000
Less: (2) Cheque printing 40
(6) Dishonoured Cheque 560 600
Note: Item (3) is not a reconciling item.
(b)
Nov. 30 Cash ................................................................................. 81
Accounts Payable ..................................................... 81
(To correct error in recording Cheque No. 138)
30 Cash ................................................................................... 1,260

Notes Receivable ..................................................... 1,200
Interest Earned ......................................................... 60
(To record collection of note receivable and
interest by the bank)
30 Miscellaneous Expense ..................................................... 40

Cash .......................................................................... 40
(To record cheque printing charges)
30 Accounts Receivable ......................................................... 560

Cash .......................................................................... 560
(To record NSF cheque)

52. Using the code letters below, indicate how each of the items listed would be
handled in preparing a bank reconciliation. Enter the appropriate code letter in the
space to the left of each item.
Code
A Add to cash balance per books
B Deduct from cash balance per books
C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation
Items:
____ 1. Outstanding cheques
____ 2. Bank service charge
____ 3. Cheque for $320 correctly written and paid by the bank but incorrectly
entered in the cash payments journal for $230
____ 4. Outstanding deposit (deposit in transit)
____ 5. Bank returns deposited cheque marked NSF
____ 6. Bank collects notes receivable and interest for depositor
____ 7. Bank debit memorandum for cheque printing fees
____ 8. Petty cash custodian has $86 in paid petty cash vouchers that have not
been reimbursed.
____ 9. Bank charged a cheque against the company, which should have been
charged to another company.
____ 10. A cheque for $236 was correctly paid by the bank but was incorrectly
entered in the cash payments journal for $263
Answers below.
1. D 6. A
2. B 7. B
3. B 8. E
4. C 9. C
5. B 10. A

53. K2 Limited received a notice with its bank statement that the bank had collected a
note receivable for $8,000 plus $400 of interest. The bank had credited these amounts
to K2's account less a collection fee of $10. K2 Ltd had already accrued the interest
for this note on its books.
(a) How will these items affect K2’s bank reconciliation?
(b) Prepare the journal entry that K2 Ltd will make to record this information on its
books.
Answers below.
(a) K2 Ltd must add the amount of the note plus interest less the collection charge
to its cash balance per books on the bank reconciliation.
Add: Collection of note receivable $8,390
(b) Cash ............................................................................................... 8,390

Miscellaneous Expense ................................................................. 10
Note Receivable ................................................................... 8,000
Interest Receivable ............................................................... 400

54. The cash records of the Kilimanjaro Ltd show the following:
1. The 30 June bank reconciliation indicated that deposits in transit totalled $390.
During July the general ledger account, Cash shows deposits of $9,700, but the
bank statement indicates that only $9,540 in deposits were received during the
month.
2. The 30 June bank reconciliation also reported outstanding cheques of $800.
During the month of July, Kilimanjaro’s books show that $11,170 of cheques
were issued, yet the bank statement showed that $11,500 of cheques cleared the
bank in July.
There were no bank debit or credit memoranda and no errors were made by either the
bank or Kilimanjaro Ltd.
Answer the following questions:

(a) What were the outstanding deposits (deposits in transit) at 31 July?
(b) What were the outstanding cheques at 31 July?
Answers below.
(a) Outstanding deposits:
Deposits per books in July ............................................. $ 9,700

Deposits per the bank in July ......................................... $ 9,540
Less: 30 June outstanding deposits ................................ 390
July receipts deposited in July ....................................... 9,150
Outstanding deposits, 31 July ....................................... $ 550
(b) Outstanding Cheques:
Cheques per books in July ............................................. $11,170

Cheques clearing the bank in July ................................. $11,500
Less: Outstanding cheques, 30 June ............................ 800
July cheques clearing in July ......................................... 10,700
Outstanding cheques, 31 July ........................................ $ 470

55. Siew Lan uses the allowance method to record bad debts expense. When accounts
receivable is aged at the end of December, it is estimated that 2% of Siew Lan’s
accounts receivable will be uncollectable.
Accounts receivable at 31 December are $300,000 and the Allowance for doubtful
debts has a credit balance of $5,000.
Required
(a) Prepare the adjusting journal entry to record bad debts expense for the year
ended 31 December.
(b) Determine the amount of the bad debts expense if the balance in the
Allowance account is a debit of $500 instead of a credit of $5,000.
Answers below.
(a) Dr Bad debts expense .................................................. $1,000

Cr Allowance for bad and doubtful debts ................. $1,000
(b) $6,500 ($6,000 + $500)

Completion statements
56. Please complete the following statements:
1. Internal control over cash disbursements is more effective when payments are
made by ______________, rather than by ______________.
2. A disbursement system that uses wire, telephone, computers, etc. to transfer

cash from one location to another is referred to as ______________.
3. A debit memorandum issued by the bank ______________ the cash balance in

the depositor's account.
4. The difference between the cash in bank balance shown on the company's
books and the cash balance shown on the bank statement may be caused by
______________ in recording transactions by either party.
5 In preparing a bank reconciliation, outstanding cheques are ______________

from the cash balance per ______________.
6. A cheque correctly written for $350 was incorrectly entered in the cash
payments journal for $530. In preparing a bank reconciliation, $____________
must be ______________ the cash balance per ______________.
7. A basic principle of cash management is to delay payment of _____________.
8 A __________________ fund is used to pay relatively small expenditures.
9. A debit balance in Cash Over and Short is reported in the income statement as
______________.
10. One method of accounting for ________ debts involves estimating

uncollectible accounts at the end of each period and recognising an
_____________ account as a contra account.
11. A ______________ note is a written promise to pay a specified amount on a
defined date.

Answers below.
1. cheque, cash
2. electronic funds transfer (EFT)
3. reduces
4. errors
5. deducted, bank
6. $180, added to, books
7. liabilities
8. petty cash
9. miscellaneous expense
10. doubtful, allowance
11. promissory

Matching
57. Match the items below by entering the appropriate code letter in the space
provided.
A. Direct write-off method

B Cash
C. Receivables turnover
D. Aged accounts receivable
E. Invest idle cash
F. Cancelled cheques
G. NSF cheques
H. Outstanding cheques
I. Petty cash receipt
J. Cash equivalents
1. __ A measure that computes the allowance for doubtful debts.

2. __ Cheques which have been returned by the maker's bank for lack of funds.
3___ Cheques which have been paid by the depositor's bank.
4. __ A measure of the liquidity of receivables, calculated by dividing net credit sales
by average net receivables.
5. __ Anything that a bank will accept for deposit.
6. __ A basic principle of cash management.
7. __ A method of accounting for bad debts that involves expensing accounts
receivable at the time they are determined to be uncollectible.
8. __ Document indicating the purpose of a petty cash expenditure.
9. __ Issued cheques that have not been paid by the bank.
10. _ Highly liquid investments.
Answers below.
1. D
2. G
3. F
4. C
5. B
6. E
7. A
8. I
9. H
10. J

Short-answer/essay Questions
58. The preparation of a bank reconciliation is an important cash control procedure. If

a company deposits cash receipts daily and makes all cash disbursements by cheque,
explain why the cash balance per books might not agree with the cash balance shown
on the bank statement. Identify specific examples that may cause differences between
the cash balance per books and the cash balance per bank.
Answer below.
The cash balance per books will not agree with the cash balance shown on the bank
statement due to time lags and errors by either party. A time lag could mean the bank
records a transaction in a period later than the company records it (outstanding
cheques, deposits-in-transit) or the company records a transaction in a period later
than the bank records it (Dishonoured cheque, collection of a note, etc.).

59. Comparative analysis problem: Computershare’s financial statements can be

accessed via the investor relations link on the website www.computershare.com.au.
Data3’s financial statements can be accessed via the investor relations link on the
website www.data3.com.au.
Required
(a) Based on the information contained in the most recent financial statements,
calculate the following ratios for each company:
(1) accounts receivable turnover ratio
(2) average collection period for receivables.
(b) What conclusions concerning the management of accounts receivable can be
drawn from these data?
Answers below.
(a)
Computershare Data3
2011 2011
1. Accounts receivable 1 598 932 586 354 + 109 804

turnover ratio (177 701 + 179 282)/2 (82 037 + 85 286)/2
NOTE: Only trade related
debtors have been included = 8.96 times = 8.32 times
2. Average collection 365 365

period for receivables 8.96 8.32
= 41 days = 44 days
Note: financial reports do not report the cash and credit breakdown of sales. Data3’s
sales include revenue from both sales and services.
(b) The average receivables collection period is 41 days for Computershare and 44
days for Data3. Assuming both companies’ terms of sales is 30 days; Data3 is
slightly slower in collecting its receivables than Computershare, with both taking
in excess of 10 days over the time specified in the sales term. Overall, both
companies need to be more efficient in the collection of accounts receivable.

60. Interpreting financial statements – a global focus: NAB saw its share price fall by
more than 12% after it announced provisions for a potential loss of $830 million on
debt-related investments due to the global credit crisis and fall in the US housing
market. The $830 million was in addition to the $181 million NAB had already
provided for to cover risky investments. NAB chief executive John Stewart said that
the losses were likely due to rapidly increasing mortgage defaults, stating,
‘Unfortunately the behaviour of the housing market in the US leads us to believe that
the worst case scenario may not be too far away from the most likely scenario’.
Numbers indicating US home sales have fallen to a 10-year low and Ford booking a
record loss of $US9.1 billion in its latest quarterly results sparked a steep decline on
the US share market.
Required
(a) Viewing the most recent annual report available on its website (www.nab.com.au),
identify how NAB determines impaired receivables.
(b) Compare NAB’s policy with Barclays’. (You can access Barclays’ most recent
annual report via www.barclays.com.)
Answers below.
(a) National Australia Bank does not specifically address how impaired receivables
are determined in its annual report. However, the bank does provide details of
how impairment of financial assets (which covers receivables) is estimated.
(b) When addressing this question lecturers should be using some of the
following points for discussion:
• Do they impair assets receivables individually or as a group?
• If as a group how do they determine what is grouped together?
• What triggers an assessment of impairment for both companies?
• Do both companies apply the requirements in IFRS?

61: Exploring the web: To learn more about factoring from the website of a business
that provides factoring services.
Address: www.tradedebtorfinance.com.au
Steps: Go to the website and answer the following questions.
Required:
(a) What are some of the benefits of factoring?
(b) What is the range of the percentages of the typical discount rate?
(c) If a business factors its receivables, what percentage of the value of the receivables
can it expect to receive from the factor in the form of cash, and how quickly will it
receive the cash?
Answers below.
(a) Benefits of factoring receivables
Factoring is a flexible financial solution where a business sells all or part of their
debtors’ ledger (Unpaid Invoices) to a financier to raise working capital (Cash) for
expenses, wages or fuel. It can help a business be more competitive while improving
cash flow, credit rating and supplier discounts.
Some of the benefits of factoring include:
• Trade Debtor Finance offers the business flexibility, as the following benefits
illustrate:
• Funds are readily available: credit sales are converted into cash normally
within 48 hours.
• With cash in the bank, the client can negotiate better trading terms with
suppliers, including early settlement discounts and the ability to buy in bulk.
• Eliminate the need to offer settlement discounts to customers. Invoice-
Discounting fees are usually cheaper than settlement discounts. With Invoice-
Finance, the client knows with certainty when they will receive the cash.
(b) Different Factoring lenders charge different fees based upon setup structure,
size and risk. The average cost of debtor-finance is 3% per month; however this
will vary depending on your debtors’ payment terms. The longer it takes for
them to pay the higher the cost.
(c) The Factoring Financier would advance up to 80% of the un paid invoices value
within 24-48 hours. The remaining 20% is advanced after the invoice is paid
less a small fee of about 1-3% to the factoring financier.

62. Ethics case: The financial officer of Suit Ltd believes that the yearly allowance for
impaired receivables for Shirt Ltd should be $185 000. The CEO of Suit Ltd, nervous
that the shareholders might expect the business to sustain its 10% growth rate,
suggests that the financial controller increase the allowance for impairment to $285
000. The CEO thinks that the lower profit, which reflects a 7% growth rate, will be a
more sustainable rate for Suit Ltd.
Required
(a) Who are the stakeholders in this case?
(b) Does the CEO’s request pose an ethical dilemma for the controller?
(c) Should the financial controller be concerned with Suit Ltd’s growth rate in
estimating the allowance? Explain your answer.
Answers below.
(a) The stakeholders in this situation are:
• The CEO of Suit Co.

• The financial controller of Suit Co.
• The shareholders.
(b) Yes. The controller is posed with an ethical dilemma — should he/she
follow the CEO’s ‘suggestion’ and prepare misleading financial records
(understated net profit) or should he/she attempt to stand up to and
possibly anger the CEO by preparing a fair (realistic) income statement.
(c) Suit Co.’s growth rate should be a product of fair and accurate financial
records, not vice versa. That is, one should not prepare financial records
with the objective of achieving or sustaining a predetermined growth rate.
The growth rate should be a product of management and operating results,
not of creative accounting.

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Financial Accounting Reporting

Analysis and Decision Making 5th

© John Wiley & Sons Australia, Ltd 2016

Chapter 7: Reporting and analysing cash and receivables

1. From an internal control standpoint, the asset most susceptible to improper

2. Cash equivalents do not include:

a. money market accounts.

3. Which one of the following items would not be considered cash?

© John Wiley & Sons Australia, Ltd 2016 7.1

5. Which of the following is not an internal control procedure for cash?

*a. Payments should be made with cash.

6. Which of the following is not a suggested procedure to establish internal control

*a. Anyone can sign the cheques.

© John Wiley & Sons Australia, Ltd 2016 7.2

7. Control over cash disbursements is generally more effective when:

a. all bills are paid in cash.

8. Supervisors counting cash receipts daily is an example of:

9. Which of the following is not an internal control procedure for cash?

a. Only designated personnel are authorised to handle cash.

© John Wiley & Sons Australia, Ltd 2016 7.3

10. The use of pre-numbered cheques is an example of:

11. An exception to disbursements being made by cheque is acceptable when cash is

12. An employee authorised to sign cheques should not record:

a. owner cash contributions.

© John Wiley & Sons Australia, Ltd 2016 7.4

a. Bank service charge.

15. A bank statement:

© John Wiley & Sons Australia, Ltd 2016 7.5

a. a contra asset account.

18. A deposit made by a company will appear on the bank statement as a:

© John Wiley & Sons Australia, Ltd 2016 7.6

a. Notes collected by the bank.

21. Outstanding deposits (or deposits in transit):

© John Wiley & Sons Australia, Ltd 2016 7.7

23. A bank reconciliation should be prepared:

a. whenever the bank refuses to lend the company money.

24. In preparing a bank reconciliation, outstanding cheques are:

a. added to the balance per bank.

© John Wiley & Sons Australia, Ltd 2016 7.8

a. add $9 to the bank's balance.

*a. added to the balance per books.

a. Cheque for $93 recorded as $39.

© John Wiley & Sons Australia, Ltd 2016 7.9

a. An error by the bank

29. Which of the following is not a basic principle of cash management?

a. Increase collection of receivables.

30. Management of cash is the responsibility of the company:

© John Wiley & Sons Australia, Ltd 2016 7.10

31. Which of the following is not a basic principle of cash management?

a. Increase collection of receivables.

32. The ratio of cash to daily cash expenses is calculated by dividing:

a. cash by total expenses.

a. $1,250 ÷ ($2,500 ÷ 365)

© John Wiley & Sons Australia, Ltd 2016 7.11

a. $1,200 ÷ ($1,700 ÷ 365)

35. Receivables are claims that are expected to be met in:

36. Accounts receivable includes:

© John Wiley & Sons Australia, Ltd 2016 7.12

a. direct write-off method.

© John Wiley & Sons Australia, Ltd 2016 7.13

41. The recoverable amount of trade receivables is shown in the:

*a. determine to whom to extend credit.

© John Wiley & Sons Australia, Ltd 2016 7.14

44. Receivables turnover is used to assess the liquidity of the: