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5 Written questions

5 Matching questions

  1. net realizable value
  2. current assets
  3. petty cash
  4. physical control
  5. percentage-of-credit-sales approach
  1. a A small amount of cash kept on hand to cover minor expenses.
  2. b The process designed to safeguard cash from loss or theft.
  3. c The 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. d 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.
  5. e 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.

5 Multiple choice questions

  1. A decrease in value due to changes in the exchange rate.
  2. 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.
  3. Hedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.
  4. The procedures designed to ensure that the cash account on the balance sheet reflects the actual amount of cash in the company's possession.
  5. (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.

5 True/False questions

  1. working capitalCurrent 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.


  2. open accountAn 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.


  3. exchange rateThe 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.


  4. quantity discountWhen 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. accounts receivableAccounts 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.