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5 Written questions

5 Matching questions

  1. working capital
  2. accounts receivable
  3. aging schedule
  4. exchange rate loss
  5. multinational corporation
  1. a Multinational corporations have their home in one country but operate and have subsidiaries operating within and under the laws of other countries.
  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 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.
  4. d A decrease in value due to changes in the exchange rate.
  5. e 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 Multiple choice questions

  1. The reduction in the per-unit price of an item if a certain quantity is purchased.
  2. 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'.
  3. Initially recognize the full sales price (gross) and later discount the gross.
  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. Hedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.

5 True/False questions

  1. 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.

          

  2. percentage-of-credit-sales approachA decrease in value due to changes in the exchange rate.

          

  3. net realizable valueThe 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. current ratioCurrent 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. 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.

          

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