Chp.8.2 - current assets Flashcards

1
Q

define liquidity

A

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

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2
Q

what’s the most liquid asset and why?

A

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

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3
Q

define current assets

A

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

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4
Q

are long-term assets liquid?

A

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

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5
Q

define cash equivalents

A

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

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6
Q

what are some examples of cash equivalents

A
  • treasury bills
  • money market funds:
  • commercial paper
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7
Q

define treasury bills

A

short-term bonds issued by the government

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8
Q

define money market funds

A

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

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9
Q

define commercial paper

A

a type of short-term debt issued by corporations

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10
Q

how is cash stored?

A

in multiple accounts

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11
Q

define short-term investments

A

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

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12
Q

what types of investment do short-term investments include?

A

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

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13
Q

define government bonds

A

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

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14
Q

define corporate bonds

A

a type of debt issued by corporations to raise money

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15
Q

define certificates of deposit

A

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

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16
Q

what’s the main benefit of short-term investments

A

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

17
Q

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

A

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

18
Q

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

A

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

19
Q

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

A

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

20
Q

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

A

between the cash and AR line

21
Q

define a notes receivable

A

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

22
Q

define the creditor, in terms of notes receivables

A

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

23
Q

define maturity date, in terms of notes receivables

A

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

24
Q

accounts receivables vs notes receivables

A

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

25
book a journal entry for a notes receivables on women's blouses
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
26
book a journal entry on the interest income for a month on an outstanding note receivable
DR. Interest receivable CR. Interest income to record the interest income for a month on an outstanding note receivable
27
book a journal entry of the receipt of interest on a note receivable
DR. Cash CR. Interest receivable CR. interest income
28
book the journal entry for a receipt of a note receivable
DR. Cash CR. Notes receivables CR. Interest receivable CR. Interest income to record the receipt of a note receivable
29
where are prepaid expenses listed and why?
usually listed last in the current assets section as they tend to be the least liquid of all current assets
30
define net working capital
difference between a company's current assets and current liabilities
31
what's the purpose of net working capital
to measure a company's liquidity and indicates the company's operating efficiency and short-term financial health
32
what's the presentation rule for current assets? why?
order of current assets is sorted by liquidity, this satisfies the comparability characteristic of accounting info