← Accounting Ch 6 Test
5 Written Questions
5 Matching Questions
- allowance method
- multinational corporation
- aging schedule
- quantity discount
- operating cycle
- a The reduction in the per-unit price of an item if a certain quantity is purchased.
- b Multinational corporations have their home in one country but operate and have subsidiaries operating within and under the laws of other countries.
- c 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.
- d 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'.
- e 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 Multiple Choice Questions
- The procedures designed to ensure that the cash account on the balance sheet reflects the actual amount of cash in the company's possession.
- Escrow 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.
- 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.
- 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.
- 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.
5 True/False Questions
quick ratio → (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.
net realizable value → 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.
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.
compensating balance → 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.
cash discount → 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.