Spice+4e+Ch07+Qex+Sol - Question 7-1 Cash equivalents...

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Unformatted text preview: Question 7-1 Cash equivalents usually include negotiable instruments as well as highly liquid investments that have a maturity date no longer than three months from date of purchase. Question 7-2 Internal control procedures involving accounting functions are intended to improve the accuracy and reliability of accounting information and to safeguard the companys assets. The separation of duties means that employees involved in recordkeeping should not also have physical responsibility for assets. Question 7-3 Management must document the companys internal controls and assess their adequacy. The auditors must provide an opinion on managements assessment. The Public Company Accounting Oversight Boards Auditing Standard No. 2 further requires the auditor to express its own opinion on whether the company has maintained effective internal control over financial reporting Question 7-4 A compensating balance is an amount of cash a depositor (debtor) must leave on deposit in an account at a bank (creditor) as security for a loan or a commitment to lend. The classification and disclosure of a compensating balance depends on the nature of the restriction and the classification of the related debt. If the restriction is legally binding, then the cash will be classified as either current or noncurrent depending on the classification of the related debt. In either case, note disclosure is appropriate. If the compensating balance arrangement is informal and no contractual agreement restricts the use of cash, note disclosure of the arrangement including amounts involved is appropriate. The compensating balance can be included in the cash and cash equivalents category of current assets. Question 7-5 Trade discounts are reductions below a list price and are used to establish a final price for a transaction. The reduced price is the starting point for initial valuation of the transaction. A cash discount is a reduction, not in the selling price of a good or service, but in the amount to be paid by a credit customer if the receivable is paid within a specified period of time. Chapter 7 Cash and Receivables QUESTIONS FOR REVIEW OF KEY TOPICS Question 7-6 The gross method of accounting for cash discounts considers discounts not taken as part of sales revenue. The net method considers discounts not taken as interest revenue, because they are viewed as compensation to the seller for allowing the buyer to defer payment. Answers to Questions (continued) Question 7-7 When returns are material and a company can make reasonable estimates of future returns, an allowance for sales returns is established. At a financial reporting date, this provides an estimate of the amount of future returns for prior sales, and involves a debit to sales returns and a credit to allowance for sales returns for the estimated amount....
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Spice+4e+Ch07+Qex+Sol - Question 7-1 Cash equivalents...

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