Essay Questions
180.Financial assets
(a.) Briefly explain what is meant by the term “financial assets.”
(b.) List the three major categories of assets comprising a company’s financial assets. For each category, indicate the basis for valuation in the balance sheet.
(a) The term financial assets refers to cash and also those assets easily and directly convertible into known amounts of cash.
(b) Financial assets are shown in the balance sheet at their currentvalues, meaning the amounts of cash that these assets represent. The three categories of financial assets and the basis of valuation in the balance sheet are summarized below:
181.Match the following terms with the explanations below. If no term fits the explanation write none
_________ (1) A means of accounting for uncollectibles which does not recognize any expense until specific receivables are determined to be worthless.
_________ (2) An account showing the amount of estimated uncollectible receivables.
_________ (3) The process of estimating uncollectible accounts by classifying accounts receivables by age groups.
_________ (4) Dividing net sales by average receivables to create a ratio to measure the liquidity of accounts receivable.
_________ (5) Very short-term liquid investments which must mature within 90 days of acquisition.
_________ (6) Cash and assets convertible directly into known amounts of cash.
_________ (7) An account showing the difference between the cost of an investment in marketable securities and its market value.
_________ (8) The value of a note at its maturity date.
_________ (9) Highly liquid investments that can be sold in organized securities exchanges.
182.Financial assets-effects of transactions
Five events involving financial assets are described below:
(a.) Sold merchandise on account.
(b.) Sold available for sale marketable securities at a gain. Cash proceeds from the sale were equal to the current market value of the securities reflected in the last balance sheet.
(c.) Collected an account receivable.
(d.) Adjusted the allowance for doubtful accounts to reflect the portion of accounts receivable estimated to be uncollectible at year-end.
(e.) Made the fair value accounting adjustment reducing the balance in the available for sale marketable securities account to reflect a decrease in the market value of securities owned.
Indicate the effects of each independent transaction or adjusting entry upon the financial measurements shown in the column headings below. Use the code letters, I for increase, D for decrease, and NE for no effect.
183.Financial assets–effects of transactions
Five events involving financial assets are described below:
(a.) Received dividends earned on investment in marketable securities.
(b.) Invested excess cash in marketable securities.
(c.) Determined that a specific account receivable is worthless and wrote it off against the allowance for doubtful accounts.
(d.) Made sale of merchandise for cash.
(e.) Sold available for sale marketable securities at a loss. Cash proceeds from the sale were equal to the current market value reflected in the last balance sheet.
Indicate the effects of each independent transaction or adjusting entry upon the financial measurements shown in the column headings below. Use the code letters, I for increase, D for decrease, and NE for no effect.
184.Accounting terminology
Listed below are nine technical accounting terms emphasized in this chapter.
Fair value accounting
Factoring
Direct write-off
Financial asset
Cash equivalent
Bank reconciliation
Allowance for doubtful accounts
Accounts receivable turnover
Uncollectible accounts expense
Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer “None” if the statement does not correctly describe any of the terms.
______ a. A transaction in which a business sells its accounts receivables to a financial institution.
______ b. An estimate of the portion of year-end accounts receivable that ultimately will turn out to be uncollectible.
______ c. Schedule explaining any differences between cash balances appearing in the accounting records and in the monthly bank statement.
______ d. Balance sheet valuation standard applicable to investments in marketable securities.
______ e. Cash and assets convertible directly into known amounts of cash, such as marketable securities and receivables.
______ f. A ratio, computed by dividing 365 days by average receivables, that indicates the liquidity of the receivables.
______ g. Method of accounting for uncollectible receivables that fails to match revenues and expenses.
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