CPA Exam – FAR Questions and Correct Answers

CPA Exam – FAR Questions and Correct Answers Cash - Correct Answer Money that is FREE and CLEAR and available to be spend in current operations. Not Cash: - Correct Answer Security deposits & bond sinking funds Three-Month Rule - Correct Answer Highly liquid securities with ORIGINAL maturity dates of three months or less are treated as cash. Bad Debts - Direct Write-Off Method - Correct Answer - No entry for bad debts until customer actually defaults. - At default, the cutomer's account is written off. - Theoretically weak, matching issue - Only allowed if bad debt expense is immaterial Bad Debts - Allowance Method - Correct Answer Income Statement Approach Balance Sheet Approach Income Statement Approach - Correct Answer - Matching Concept - Estimate of bad debt expense is based on the income statement - Allowance account balance has no bearing on the amount of adjustment Balance sheet reporting: - Correct Answer Accounts Receivable Less: Allowance for bad debts = Net realizable value of A/R Balance Sheet Approach - Correct Answer - Estimate of bad debt expense is based on the balance sheet - Period sales have no bearing on the amount of adjustment Written-off account later collected - Correct Answer Reverse write-off entry. Collect as usual. Assigning Accounts Receivable - Correct Answer - Assignment of A/R normally is done with recourse - Assignment usually is done without notification to customers Factoring Acc