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5 Written Questions

5 Matching Questions

  1. accounts receivable
  2. quick ratio
  3. compensating balance
  4. gross method
  5. aging schedule
  1. a (Cash + Marketable Securities accounts Receivable)/Current liabilities. The quick ratio compares a company's highly liquid assets to its current liabilities, providing a measure of the portion of the current liabilities that could be paid off in the near future.
  2. b 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.
  3. c Initially recognize the full sales price (gross) and later discount the gross.
  4. d Compensating balances are minimum cash balances that must be maintained in savings or checking accounts until certain loan obligations are satisfied. Compensating balances help financial institutions reduce the risks of default on outstanding loans by ensuring that at least some cash is available for scheduled loan payments.
  5. e Aging is a method of estimating and analyzing collectible accounts receivable that categorizes individual accounts on the basis of the amount of time each has been outstanding. Each category is then multiplied by a different uncollectible percentage under the assumption that older accounts are more likely than new accounts to be uncollectable. This method is used primarily by management to identify and maintain control over uncollectible accounts receivables.

5 Multiple Choice Questions

  1. The process designed to safeguard cash from loss or theft.
  2. Net realizable value is the net cash amount expected from the sale of an item, usually equal to the selling price of the item less the cost to complete and sell it.
  3. The reduction in the per-unit price of an item if a certain quantity is purchased.
  4. 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.
  5. 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.

5 True/False Questions

  1. percentage-of-credit-sales approachThe percentage-of-credit- sales approach is a method of estimating bad debts that multiplies a given percentage by the credit sales of a given accounting period. Percentage-of-credit-sales is a common method of estimating uncollectibles, used in conjunction with the allowance method, when accounting for accounts receivable.

          

  2. hedgingHedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.

          

  3. petty cashEscrow is the state of an item (e.g., cash) that has been put into the custody of a third party until certain conditions are fulfilled. Damage deposits on rental agreements, for example, are often held in escrow until the end of the rental period.

          

  4. allowance methodInitially recognize the full sales price (gross) and later discount the gross.

          

  5. escrowHedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.

          

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