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5 Written questions

5 Matching questions

  1. window dressing
  2. net realizable value
  3. open account
  4. escrow
  5. exchange rate loss
  1. a 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.
  2. b 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.
  3. c Window dressing is a phrase used to describe the activity of managers who use accounting methods, judgments, and estimates or make operating decisions purely to make the financial statements appear more attractive to financial statement users.
  4. d 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. e A decrease in value due to changes in the exchange rate.

5 Multiple choice questions

  1. 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.
  2. Initially recognize the full sales price (gross) and later discount the gross.
  3. 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.
  4. Current assets - Current liabilities. Working capital measures the extent to which a company's current assets cover its current liabilities. It is viewed as a measure of solvency and is often used in debt covenants to ensure that the borrower maintains a sufficient buffer of current assets to current liabilities. Like the current and quick ratio, however, working capital is a relatively weak measure of a company's solvency position.
  5. A small amount of cash kept on hand to cover minor expenses.

5 True/False questions

  1. multinational corporationMultinational corporations have their home in one country but operate and have subsidiaries operating within and under the laws of other countries.


  2. operating cycleCompensating 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.


  3. 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.


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


  5. aging scheduleOperating 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.


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