5 Written questions
5 Matching questions
- exchange rate
- open account
- current assets
- cash discount
- a A markdown is a reduction in sales price normally due to decreased demand for an item. Markdowns are very common in the retail industry, especially at the close of the seasons. These discounts are designed to accelerate sales of old items (boosting inventory turnover), making room for new inventories market price The market price is the price at which an asset can be exchanged in the open (output) market as of a particular point in time. See fair market value and stock price.
- b The exchange rate is the value of one currency expressed in terms of another currency. Like the prices of all goods and services, the exchange rates among currencies vary from one day to the next. Companies that transact in more than one currency face the risks associated with fluctuating exchange rates, which can give rise to gains and losses—some of which are reflected on the financial statements. Fledging is a strategy that can be used to reduce such risks.
- c When a good or service is sold on credit, the selling company wishes to collect the cash as soon as possible. To encourage prompt payment, many companies offer cash discounts on the gross sales price. Cash discounts specify that an amount of cash less than the gross sales price is sufficient to satisfy the obligation.
- d Current assets are assets on the balance sheet expected to be converted to cash or expired in one year or the operating cycle, whichever is longer.
- e An open account is an informal credit trade agreement used in cases where frequent credit transactions are conducted and a running balance of the obligation or receivable is maintained. If payments are made regularly within reasonable time periods, interest charges are not usually assessed. Open account is normally used to describe the trade terms underlying accounts receivable and accounts payable.
5 Multiple choice questions
- Current assets/Current liabilities. The current ratio is often used to assess a company's current asset management and its solvency position. It is normally an important part of financial statement analysis.
- Operating cycle is the time it takes, in general, for a company to begin with cash, convert the cash to inventory (or a service), sell the inventory (or service), and receive cash payment.
- The allowance method, under generally accepted accounting principles (GAAP) is the preferred method to account for uncollectibles and sales returns, both of which have a direct effect on the reported value of accounts receivable. The allowance method involves estimating the dollar amount of the uncollectibles or sales returns at the end of each accounting period and, based on that estimate, records an entry that reduces both net income and the balance in accounts receivable with a contra account called 'allowance for uncollectibles'.
- Hedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.
- A small amount of cash kept on hand to cover minor expenses.
5 True/False questions
accounts receivable → Accounts receivable is a balance sheet account indicating the dollar amount due from customers from sales made on open account. It arises when revenues are recognized before receipt of the associated cash payment. Accounts receivable is normally included as a current asset and for some companies can be quite large.
quantity discount → The reduction in the per-unit price of an item if a certain quantity is purchased.
window dressing → Hedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.
multinational corporation → Current assets/Current liabilities. The current ratio is often used to assess a company's current asset management and its solvency position. It is normally an important part of financial statement analysis.
physical control → The procedures designed to ensure that the cash account on the balance sheet reflects the actual amount of cash in the company's possession.