Short Essay Questions
1.Briefly described hedging.
2.The Porsha Bank has provided its auditor with the following selected financial data for 2010:
Cash
$ 7,000
Loans receivable—current
$21,000
Allowance for doubtful accounts
(3,000)
18,000
Total current assets
$25,000
Loans receivable—long-term
$36,000
(4,000)
$32,000
Current liabilities
$19,000
2010 net income
$30,000
In reviewing the loans outstanding, the auditors were troubled by the fact that the collectability of some loans to Brazil was questionable. In fact, Porsha Bank has been making new loans to Brazil so that they can pay the interest on the loans already outstanding. The economic situation of Brazil has forced the auditors to insist that Porsha Bank increases its allowance for its current loans to $9,000 and for its non-current loans to $16,000. Porsha Bank decided to adhere to their auditors’ suggestions.
Indicate the effects of adopting the auditor’s allowance requirements on Porsha Bank’s current ratio and 2010 net income.
3.Why might an operating cycle of one company differ from an operating cycle of another company?
4.What accounting requirements brought significant opposition from the banking industry?
5.Identify the limitations of current asset classification.
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