Chapter Six Questions

Chapter Six Questions - Chapter Six Questions 1 Give four...

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Chapter Six Questions 1. Give four examples of items included in a company's cash account. Cash includes currency, coins, deposits in bank checking accounts, and deposits in bank savings accounts. 2. What is a cash equivalent? A cash equivalent is a low risk investment that can be converted into known amounts of cash within 90 days . Two common cash equivalents are certificates of deposit and treasury bills. 3. What benefit is provided by a line of credit? A line of credit allows a company to borrow funds immediately whenever a need arises, as long as the company does not exceed its credit limit . Lines of credit are usually established well in advance of the time cash will be needed. 4. What term is used to identify the cost of borrowing money? The cost of borrowing money is called interest expense. 5. What term is used to identify the "cost" of obtaining resources from owners? Dividends are the "cost" of obtaining resources from owners. 6. Why are dividends not reported on the income statement? Dividends are the responsibility of the board of directors, not management . Since the income statement reports on the results of management operations, dividends are not reported on the income statement . Dividends are reported on the statement of retained earnings as a reduction of retained earnings. 7. List three ways in which a company can access the cash it has in a bank checking account. A company can access cash it has in a bank by (1) withdrawing it, (2) writing checks, and (3) using electronic funds transfers. 8. Why is the customer deposits account a liability in a bank's accounting system? When a bank receives a deposit from a customer, the bank increases its cash asset and increases its customer deposits liability . The customer deposits liability represents the dollar amount of cash the bank owes to the customer . To the bank, cash received is a resource, while
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the source of the resource is the customer deposit. 9. What is a bank statement? A bank statement is a monthly report sent by a bank to a checking account customer . The report summarizes all the activity in the customer's checking account for the month . For example, the bank statement will show all the customer's deposits and all checks processed by the bank . The bank statement is useful for preparing a bank reconciliation. 10. Define the term subsidiary ledger and give an example of one. A subsidiary ledger contains records relating to one general ledger account . The general ledger contains the detailed activity of all accounts used in a company's accounting system . An example of a subsidiary ledger is the customer deposits subsidiary ledger maintained by a bank . It is this customer deposits subsidiary ledger that provides the detailed information reported in the bank statement. 11. How does a subsidiary ledger compare to a general ledger?
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This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.

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Chapter Six Questions - Chapter Six Questions 1 Give four...

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