Chapter 6

Question 1

What is the definition of cash in accounting?

Answer 1

Cash refers to currency, coins, and deposits available for withdrawal.

Question 2

True or False: Cash equivalents are short-term investments that are easily convertible to cash.

Answer 2

True

Question 3

What are cash equivalents?

Answer 3

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash.

Question 4

Fill in the blank: The _______ method is used to recognize revenue when cash is received.

Answer 4

cash

Question 5

What is the primary purpose of a bank reconciliation?

Answer 5

To ensure that the company’s cash records match the bank’s records.

Question 6

True or False: Accounts receivable represent amounts owed to a company by its customers.

Answer 6

True

Question 7

What is the formula for calculating accounts receivable turnover?

Answer 7

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Question 8

What does a high accounts receivable turnover ratio indicate?

Answer 8

It indicates efficient collection of receivables.

Question 9

Fill in the blank: The _______ method estimates uncollectible accounts based on a percentage of sales.

Answer 9

percentage of sales

Question 10

What is the aging of accounts receivable method?

Answer 10

It categorizes accounts receivable based on the length of time they have been outstanding.

Question 11

True or False: A company can have negative cash flow and still be profitable.

Answer 11

True

Question 12

What is the difference between gross accounts receivable and net accounts receivable?

Answer 12

Gross accounts receivable are the total amounts owed, while net accounts receivable are gross accounts receivable minus estimated uncollectible amounts.

Question 13

What is a note receivable?

Answer 13

A note receivable is a written promise for amounts to be received, typically involving interest.

Question 14

Fill in the blank: The _______ method records bad debt expense based on historical data.

Answer 14

aging

Question 15

What is the significance of the cash flow statement?

Answer 15

It provides information about a company’s cash inflows and outflows.

Question 16

True or False: Cash flows from operating activities include cash transactions related to the company’s primary business operations.

Answer 16

True

Question 17

What is the direct method of cash flow reporting?

Answer 17

It lists cash inflows and outflows directly from operating activities.

Question 18

What are the three main sections of a cash flow statement?

Answer 18

Operating activities, investing activities, and financing activities.

Question 19

Fill in the blank: The _______ method adjusts net income for changes in working capital.

Answer 19

indirect

Question 20

What is the purpose of internal controls over cash?

Answer 20

To prevent fraud and ensure accurate reporting.

Question 21

True or False: Petty cash is used for small, incidental expenses.

Answer 21

True

Question 22

What is the role of a cash budget?

Answer 22

To plan for future cash inflows and outflows.

Question 23

What is the difference between cash flow and profit?

Answer 23

Cash flow refers to the actual cash moving in and out, while profit is the revenue minus expenses.

Question 24

Fill in the blank: A _______ is a financial instrument that represents a promise to pay a certain amount at a future date.

Answer 24

note receivable

Question 25

What does the term 'write-off' mean in accounts receivable?

Answer 25

It means removing an uncollectible account from the books.

Question 26

True or False: A company should always write off accounts receivable immediately when they become uncollectible.

Answer 26

False

Question 27

What is a cash discount?

Answer 27

A reduction in the amount owed if payment is made within a specified time frame.

Question 28

Fill in the blank: The _______ method of estimating bad debts involves evaluating individual accounts.

Answer 28

specific identification

Question 29

What is the purpose of a cash reserve?

Answer 29

To provide liquidity for unexpected expenses.

Question 30

True or False: Cash flows from investing activities include purchasing equipment and selling investments.

Answer 30

True

Question 31

What is the term for the risk of loss due to a borrower's failure to make required payments?

Answer 31

Credit risk

Question 32

What does the term 'current ratio' measure?

Answer 32

It measures a company's ability to pay short-term obligations.

Question 33

Fill in the blank: The _______ method uses historical data to estimate future cash flows.

Answer 33

forecasting

Question 34

What is the key advantage of using the indirect method for cash flow statements?

Answer 34

It reconciles net income to cash flow from operations.

Question 35

What is liquidity?

Answer 35

Liquidity refers to how quickly an asset can be converted into cash.

Question 36

True or False: A company should only accept cash payments to avoid credit risk.

Answer 36

False

Question 37

What is the significance of the cash conversion cycle?

Answer 37

It measures the time taken to convert investments in inventory and accounts receivable into cash.

Question 38

Fill in the blank: The _______ method of cash flow reporting is preferred by most users for its clarity.

Answer 38

direct

Question 39

What is a credit policy?

Answer 39

A set of guidelines that determine how credit is extended to customers.

Question 40

What does it mean if a company has a high days sales outstanding (DSO)?

Answer 40

It indicates that the company is taking longer to collect receivables.

Question 41

True or False: Cash management is only important for large corporations.

Answer 41

False

Question 42

What is the main goal of cash management?

Answer 42

To optimize the amount of cash available for operations.

Question 43

Fill in the blank: The _______ ratio is calculated as current assets divided by current liabilities.

Answer 43

current