Chp.8.2 - current assets

Question 1

define liquidity

Answer 1

the ease/speed at which assets can be converted into cash

Question 2

what’s the most liquid asset and why?

Answer 2

cash = most liquid asset since it cam be immediately be used for a variety of purposes

Question 3

define current assets

Answer 3

assets that are expected to be used or received within 1 year

Question 4

are long-term assets liquid?

Answer 4

long-term assets are relatively illiquid as they cannot be converted to cash quickly and easily and are expected to be used for longer than 1 year

Question 5

define cash equivalents

Answer 5

represent short-erm investment that are highly liquid (typically mature in 90 days or less), are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value

Question 6

what are some examples of cash equivalents

Answer 6

• treasury bills
• money market funds:
• commercial paper

Question 7

define treasury bills

Answer 7

short-term bonds issued by the government

Question 8

define money market funds

Answer 8

a type of high liquid, short-term mutual fund (that does not invest in equities)

Question 9

define commercial paper

Answer 9

a type of short-term debt issued by corporations

Question 10

how is cash stored?

Answer 10

in multiple accounts

Question 11

define short-term investments

Answer 11

investments that typically mature or are sold within a period of 3-12 months

Question 12

what types of investment do short-term investments include?

Answer 12

cash equivalents + government bonds, corporate bonds, certificates of deposit - as long their maturity doesn’t extend beyond 1 year

Question 13

define government bonds

Answer 13

a type of debt issued by the government that typically carries the least risk when compared to other bonds

Question 14

define corporate bonds

Answer 14

a type of debt issued by corporations to raise money

Question 15

define certificates of deposit

Answer 15

similar to a savings account provided by the banks but with a fixed time to maturity and often a fixed rate of interest

Question 16

what’s the main benefit of short-term investments

Answer 16

allows the company to invest excess cash and earn income through the interest that these investments pay

Question 17

what’s the journal entry to purchase short-term investments

Answer 17

DR. Short-term Investments
CR. Cash
to purchase short-term investments

Question 18

why does a company book the full amount of interest earned when the investment matures

Answer 18

the interest gained from the investment is very small, so it’s impractical for the company to book a journal entry for every month that interest is earned

Question 19

what’s the journal entry to book the full amount of interest earned when the investment matures

Answer 19

DR. Cash
CR. Short-term investments
CR. Interest income
to book maturing short-term investment and corresponding interest income

Question 20

where are short-term investments listed on the balance sheet?

Answer 20

between the cash and AR line

Question 21

define a notes receivable

Answer 21

represents a written promise to receive a specified amount of money from another party at a future date, typically greater than 90 days and with interest

Question 22

define the creditor, in terms of notes receivables

Answer 22

the issuer or lender of the note, who sets the rate of interest and the terms of its payment

Question 23

define maturity date, in terms of notes receivables

Answer 23

the due date of payment for the principal amount (amount loaned)

Question 24

accounts receivables vs notes receivables

Answer 24

AR - informal, interest-free, typically no longer than 30 days

notes receivables - more legal formal contract, with an interest rate, and receipt of the principal amount plus interest

Question 25

book a journal entry for a notes receivables on women’s blouses

Answer 25

DR. notes receivables
CR. Women’s Blouses revenue
to record a sale of women’s blouses in exchange for a note receivable from fashion fiends

Question 26

book a journal entry on the interest income for a month on an outstanding note receivable

Answer 26

DR. Interest receivable
CR. Interest income
to record the interest income for a month on an outstanding note receivable

Question 27

book a journal entry of the receipt of interest on a note receivable

Answer 27

DR. Cash
CR. Interest receivable
CR. interest income

Question 28

book the journal entry for a receipt of a note receivable

Answer 28

DR. Cash
CR. Notes receivables
CR. Interest receivable
CR. Interest income
to record the receipt of a note receivable

Question 29

where are prepaid expenses listed and why?

Answer 29

usually listed last in the current assets section as they tend to be the least liquid of all current assets

Question 30

define net working capital

Answer 30

difference between a company’s current assets and current liabilities

Question 31

what’s the purpose of net working capital

Answer 31

to measure a company’s liquidity and indicates the company’s operating efficiency and short-term financial health

Question 32

what’s the presentation rule for current assets? why?

Answer 32

order of current assets is sorted by liquidity, this satisfies the comparability characteristic of accounting info