Question 1

In terms of liquidity, it is to management's advantage to show investments under investments instead of marketable securities.

Accepted Answer

Marketable securities are more liquid than investments, so it is to management's advantage to show them separately and highlight their liquidity.

Question 2

Days' sales in receivables may be abnormally high if a material amount of sales are on a cash basis.

Accepted Answer

Days' sales in receivables measures the average number of days a company takes to collect its accounts receivable. If a material amount of sales are on a cash basis, they will not be included in accounts receivable and will not impact the calculation of days' sales in receivables. Therefore, abnormally high days' sales in receivables would not be caused by sales on a cash basis.

Question 3

Under the allowance method, the charge off of a specific account receivable does not influence the income statement nor the net receivable on the balance sheet at the time of the charge off.

Accepted Answer

Under the allowance method, the charge off of a specific account receivable is already anticipated and accounted for in the allowance for bad debts. Therefore, there is no impact on the income statement or net receivable on the balance sheet at the time of the charge off.

Question 4

The valuation problem from waiting to collect a receivable is ignored in the valuation of receivables and notes that are classified as current assets.

Accepted Answer

The valuation problem from waiting to collect a receivable is not typically accounted for in the valuation of current assets such as receivables and notes. Instead, they are usually recorded at their face value.

Question 5

Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?

Accepted Answer

The answer of Which of the following ratios would generally...

Question 6

The receivables of a company with installment receivables would normally be considered to be of higher quality than the receivables of a company that did not have installment receivables.

Accepted Answer

Installment receivables often come with higher risks of default compared to other types of receivables, as they are typically associated with customers who may not qualify for traditional financing, leading to a potentially lower quality of receivables.

Question 7

A firm that has been on lifo for many years may have some inventory costs that go back ten years or more.

Accepted Answer

This is true. LIFO (last in, first out) accounting method assumes that the most recently acquired inventory is sold first, which in turn leaves older inventory on the balance sheet. Therefore, a firm that has been using LIFO for many years may still have some inventory costs that date back ten years or more.

Question 8

To qualify as a marketable security, the investment must be readily marketable and it must be the intent of management to convert the investment to cash within the current operating cycle or a year, whichever is longer.

Accepted Answer

This is the definition of a marketable security as per accounting standards.

Question 9

Under inflationary conditions, fifo generally results in a lower profit than does lifo, and this difference can be substantial.

Accepted Answer

Under inflationary conditions, FIFO (First-In, First-Out) generally results in a higher profit than LIFO (Last-In, First-Out) because FIFO uses older, cheaper inventory costs, leading to lower cost of goods sold and higher profits.

Question 10

Using the direct write-off method, the bad debt expense is recorded when a specific customer's account is determined to be noncollectible.

Accepted Answer

The direct write-off method recognizes bad debt expense at the time when a specific customer's account is deemed uncollectible and written off as a bad debt. This method does not estimate or predict bad debt expense, and only records it when it becomes certain that a customer will not pay.

Question 11

Compensating balances reduce the amount of cash available to the borrower to meet obligations and they decrease the effective interest rate for the borrower.

Accepted Answer

Compensating balances reduce the amount of cash available to the borrower to meet obligations, but they increase the effective interest rate for the borrower because the borrower has to maintain a minimum balance that does not earn interest, effectively increasing the cost of borrowing.

Question 12

By reporting marketable equity securities under current assets, management picks up a liquidity advantage.

Accepted Answer

Marketable equity securities are easily tradable and can be sold quickly to generate cash, providing a liquidity advantage for the company. By reporting them as current assets, management is acknowledging their ability to generate cash quickly if needed.

Question 13

Inventory is particularly sensitive to changes in business activity.Therefore, management should keep inventory at a minimum.

Accepted Answer

The answer of Inventory is particularly sensitive to changes in...

Question 14

Days' sales in receivables may be abnormally high at the end of the year if sales volume expanded materially late in the year.

Accepted Answer

Days' sales in receivables measures the average number of days it takes for a company to collect payment for its sales. If a company's sales volume expanded substantially late in the year, it could lead to a backlog of unpaid invoices and result in a higher-than-normal days' sales in receivables at the end of the year.

Question 15

If days' sales in receivables are materially longer than the credit terms, this indicates a collection problem.

Accepted Answer

Days' sales in receivables measure the average number of days it takes a company to collect its accounts receivable. If this number is longer than the credit terms offered to customers, it indicates that the company is having difficulty collecting payment from its customers within a reasonable timeframe, which can result in cash flow problems.

Question 16

The direct write-off method frequently results in the bad debt expense being recognized in the year subsequent to the sale, and thus results in a proper matching of expense with revenue.

Accepted Answer

The direct write-off method does not result in proper matching of expense with revenue as bad debt expense is only recognized when a specific account is identified as uncollectible, which may happen in a later period than the sale.

Question 17

The days' sales in receivables ratio gives an indication of the length of time that the receivables have been outstanding at the end of the year.This indication can be misleading if sales are seasonal and/or the company uses a natural business year.

Accepted Answer

The days' sales in receivables ratio calculates an average based on the total sales and receivables for the year. If sales are seasonal, the ratio may not accurately reflect the actual length of time that receivables are outstanding. Additionally, if the company uses a non-calendar year for their financial reporting, the ratio may be skewed.

Question 18

When doing external analysis, many of the reasons why the days' sales in receivables is abnormally high or low cannot be determined without access to internal information.

Accepted Answer

External analysis only considers information that is publicly available, so factors affecting days' sales in receivables that are internal to the company cannot be determined without access to non-public information.

Question 19

When a company has receivables that are due beyond one year or accounting cycle from the balance sheet date, and when it is the industry practice to include these receivables in current assets, they will be included in current assets even though they do not technically meet the guidelines to qualify as current assets.

Accepted Answer