5 Written questions
5 Matching questions
- allowance method
- quantity discount
- compensating balance
- net realizable value
- 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.
- b 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.
- c The reduction in the per-unit price of an item if a certain quantity is purchased.
- d Hedging is a strategy used by management to reduce the risk associated with fluctuations in the values of assets and liabilities.
- e 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'.
5 Multiple choice questions
- A small amount of cash kept on hand to cover minor expenses.
- Initially recognize the full sales price (gross) and later discount the gross.
- A decrease in value due to changes in the exchange rate.
- 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.
- 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.
5 True/False questions
current ratio → 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.
operating cycle → 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.
aging schedule → 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.
working capital → 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.
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.