ACCY 111 Chapter 7 Questions: Quiz!

A system of internal control is essential in financial accounting as it helps to enhance the accuracy and reliability of accounting information. By implementing internal controls, organizations can minimize errors and fraud, ensuring that financial statements reflect the true financial position of the company. Additionally, internal controls help safeguard assets by preventing unauthorized access and ensuring proper handling and storage of valuable resources. Therefore, the statement is true.

The balance sheet approach is a method of estimating the net realizable value of accounts receivable. Net realizable value is the amount of accounts receivable that a company expects to collect after deducting an estimate for bad debts. Bad debt expense is the amount that a company recognizes as an expense in anticipation of not being able to collect all of its accounts receivable. Therefore, bad debt expense is indirectly related to estimating the net realizable value of accounts receivable.

In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors. This means that if there are any errors made by the company in recording transactions, these errors can be adjusted in the book balance during the bank reconciliation process. This adjustment could involve adding or subtracting the amount of the error to correct the book balance and bring it in line with the actual bank balance.

The explanation for the given answer is that the receivables turnover ratio is a financial metric that measures how efficiently a company collects payments from its customers. A higher receivables turnover ratio indicates that the company is able to collect payments quickly, which is a positive sign of effective receivables management. On the other hand, a lower ratio suggests that the company may have difficulty collecting payments and may have a high level of outstanding receivables. Therefore, the statement is true as the receivables turnover ratio indeed provides insight into a company's ability to manage its investment in receivables.

Recognizing sales returns when they occur could result in an overstatement of income in the period of the related sale because sales returns represent products that have been returned by customers for various reasons such as defects or dissatisfaction. By recognizing these returns as a reduction in revenue in the same period, it ensures that the income is accurately reflected and does not include revenue from sales that have been reversed. This prevents the overstatement of income and provides a more accurate representation of the company's financial performance.

Discounts on notes receivable are recognized as interest earned over the term of the related note. This means that when a note receivable is issued at a discount, the discount amount is amortized over the life of the note and recognized as interest income. This is done using the effective interest method, where the discount is allocated to each period based on the carrying amount of the note. As a result, the interest income is spread out over the term of the note, rather than being recognized all at once. Therefore, the statement is true.

In a good system of internal control, the person who initiates a transaction should not be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records. This is because having one person control the entire process from initiation to recording creates a lack of segregation of duties and increases the risk of fraud or errors going undetected. It is important to have checks and balances in place where different individuals are responsible for different stages of the transaction process to ensure accuracy, completeness, and reliability of the accounting records.

If specific sales criteria are not met, the factoring of accounts receivable with recourse is accounted for as a loan. This means that if the accounts receivable are not collected or if the debtor defaults on payment, the factor can require the seller to repurchase the receivables. In such cases, the factoring arrangement is treated as a loan because the seller retains the risk and rewards of ownership.

The journal entry to record the replenishment of a petty cash fund does not include a credit to the petty cash fund. Instead, it includes a debit to the petty cash fund and a credit to the cash account. This is because when the petty cash fund is replenished, cash is being taken out of the cash account to replenish the fund.

The net method of accounting for cash discounts does not require adjusting entries for discounts taken. In this method, the seller records the sale at the net amount after deducting the discount, and no further adjustments are needed.

The income statement approach to estimating bad debts does not require an adjusting entry at the end of the period to reduce receivables to net realizable value. Instead, this approach estimates the bad debts expense directly on the income statement by using a percentage of sales or accounts receivable. This approach does not involve adjusting the receivables account on the balance sheet. Therefore, the statement is false.

Securitization of receivables is not a type of secured borrowing. Securitization involves the process of converting receivables, such as loans or credit card debt, into securities that can be sold to investors. It is a way for companies to raise funds by transferring their receivables to a special purpose vehicle (SPV), which then issues securities backed by those receivables. This process does not involve borrowing against the receivables as collateral, making the statement false.

Cash equivalents are short-term, highly liquid investments that are easily convertible into cash and have a maturity period of three months or less from the date of purchase. Marketable equity securities, on the other hand, are long-term investments in publicly traded companies. These securities are not considered cash equivalents as they are not easily convertible into cash within the next three months. Therefore, the statement is false.

In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges. This statement is false because adjustments to the bank balance could include adding deposits in transit but would not include deducting bank service charges. Bank service charges are typically deducted from the company's books, not the bank balance, during the bank reconciliation process.