BUS 251 Chapter 6
1. Liquidity refers to the ability of company to convert assets into cash in order to pay
2. While accounting for cash is not difficult, it does require management's attention to ensure it
is controlled and managed effectively.
3. A company should set its credit check policies to ensure that it never sells to a customer who
4. The percentage of credit sales method ensures that the balance sheet's “allowance for
doubtful accounts” is equal to the credit sales of the period multiplied by an appropriate
percentage (usually determined based on the company's collection history).
5. Consider the following assets:
i) An investment in the shares of a company that is publicly traded on a Canadian stock
ii) An investment in a Government of Canada treasury bill, which matures in nine months.
iii) Funds held in a chequing account at the bank.
Which of the following would be classified as a short-term investment on the balance sheet?
i, ii & iii
i & ii
C. i & iii
D. ii & iii 1. Stan's Stevedoring Ltd. is preparing their month-end bank reconciliation. Which of the
following will NOT require an adjusting entry in Stan's books?
A. an NSF cheque
B. bank service charges
an outstanding deposit
None of the above. Stan's Stevedoring Ltd will have to adjust for all three items.
2. Stan's Stevedoring Ltd. is preparing their month-end bank reconciliation. Which of the
following will IS required as an adjusting entry in Stan's books?
A. a payment of an accounts receivable made directly to their bank account
B. an outstanding deposit
C. an outstanding cheque
D. None of the above. Stan's Stevedoring Ltd will have to adjust for all three items.
3. On June 30, 2011, ABC Company shows a balance in the cash account in its ledger of
$1,115. That morning it receives a statement from the bank stating that the company's
balance is $1,700. The bank statement also indicates that interest earned on the account in the
last month is $10, and that there are bank service charges totalling $25. On June 20, 2011,
ABC Company wrote a cheque to a supplier for $600. This is the only cheque written that
has not yet been presented to the bank. What cash balance should ABC Company show on its
June 30, 2011, balance sheet?
None of the above.
4. In Canada, cash is measured at its face value, rather than by increases or decreases in
purchasing power due to inflation. This is described as:
A. the purchasing power parity theory
B. the unit-of-measure assumption
C. the constant consumer price assumption D. just plain wrong!
5. Internal controls over cash are very important to ensure that it is not lost or stolen. Which of
the following is not an internal control that helps protect cash?
A. depositing cash daily into the bank.
B. having different employees receive cash, write cheques, and record the receipts and
payments of cash in the accounting records
C. preparing a monthly bank reconciliation
D. They are all valid internal controls over cash.
6. Anderson Company owns shares in Reynolds Company and classifies this asset as a held for
trading short-term investment. The shares were purchased on January 1, 2012, for $10,000,
and on June 30, 2012, had a fair market value of $12,000. On March 31, 2012, Anderson
Company had received a $500 dividend from Reynolds Company. What would be the effect
on Anderson Company's net income for the six months ended June 30, 2012?
an increase of $500
B. an increase of $1,500
C. an increase of $2,000
D. an increase of $2,500
7. Anderson Company owns shares in Morris Company and classifies this asset as a held for
trading short-term investment. The shares were purchased on January 1, 2011, for $10,000.
The shares were not sold, and their fair market values on December 31, 2011, 2012, and 2013
respectively, were $11,000, $8,500, and $9,000. What would be the effect of this investment
on Anderson Company's 2013 income statement?
$500 unrealized gain
$1,000 unrealized loss
C. $1,500 unrealized gain
D. None of the above.
Use the following information to answer questions 8-10:
Connie's Clarinets Ltd. opened for business on January 1, 2011. The company's financial statements will be produced on a quarterly basis, using the portfolio
approach. Connie has invested the company's surplus cash in short-term investments,
the details of which are set out below:
Shares Date Cost Market, Market, Market,
owned Purchased March 31,2011 June 30, 2011 Sept. 30, 2011
AAA January 5, 2011 $10,000 $13,000 $8,000