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Liabilities are
a. any accounts having
credit balances after closing entries are made.
b. deferred credits that
are recognized and measured in conformity with generally accepted accounting
principles.
c. obligations to
transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and
payable in assets or services in the future
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Which
of the following is a current liability?
a. A long-term debt
maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt
maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt
maturing currently, which is to be converted into common stock
d. None of these
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Which
of the following is true about accounts payable?
1. Accounts payable should not be
reported at their present value.
2. When accounts payable are
recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are
recorded at the gross amount, a Purchase Discounts Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are
true.
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Among
the short-term obligations of Lance Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Madison National
Bank. These are 90-day notes,
renewable for another 90-day period.
These notes should be classified on the balance sheet of Lance Company
as
a. current liabilities.
b. deferred charges.
c. long-term
liabilities.
d. intermediate debt.
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Which
of the following is not true about
the discount on short-term notes payable?
a. The Discount on Notes
Payable account has a debit balance.
b. The Discount on Notes
Payable account should be reported as an asset on the balance sheet.
c. When there is a
discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are
true.
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Which of the following may be a current
liability?
a. Withheld Income Taxes
b. Deposits Received
from Customers
c. Deferred Revenue
d. All of these
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Which of the following items is a current
liability?
a. Bonds
(for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due
in three years.
c. Bonds
(for which there is an adequate appropriation of retained earnings) due in
eleven months.
d. Bonds to
be refunded when due in eight months, there being no doubt about the marketability
of the refunding issue.
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Which
of the following should not be
included in the current liabilities section of the balance sheet?
a. Trade notes payable
b. Short-term
zero-interest-bearing notes payable
c. The discount on
short-term notes payable
d. All of these are
included
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Which
of the following is a current liability?
a. Preferred dividends
in arrears
b. A dividend payable in
the form of additional shares of stock
c. A cash dividend
payable to preferred stockholders
d. All of these
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Stock
dividends distributable should be classified on the
a. income statement as
an expense.
b. balance sheet as an
asset.
c. balance sheet as a
liability.
d. balance sheet as an
item of stockholders' equity.
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Of
the following items, the only one which should not be classified as a current
liability is
a. current maturities of
long-term debt.
b. sales taxes payable.
c. short-term
obligations expected to be refinanced.
d. unearned revenues.
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An
account which would be classified as a current liability is
a. dividends payable in
the company's stock.
b. accounts
payable—debit balances.
c. losses expected to be
incurred within the next twelve months in excess of the company's insurance
coverage.
d. none of these.
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Which
of the following is a characteristic of a current liability but not a long-term
liability?
a. Unavoidable
obligation.
b. Present obligation
that entails settlement by probable future transfer or use of cash, goods, or
services.
c. Liquidation is
reasonably expected to require use of existing resources classified as current
assets or create other current liabilities.
d. Transaction or other
event creating the liability has already occurred.
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Which
of the following is not considered a part of the definition of a liability?
a. Unavoidable
obligation.
b. Transaction or other
event creating the liability has already occurred.
c. Present obligation
that entails settlement by probable future transfer or use of cash, goods, or
services.
d. Liquidation is
reasonably expected to require use of existing resources classified as current
assets or create other current liabilities.
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Why
is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the
entity's credit quality.
b. To assist in
understanding the entity's liquidity.
c. To better understand
sources of repayment.
d. To evaluate operating
efficiency.
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What
is the relationship between current liabilities and a company's operating
cycle?
a. Liquidation of
current liabilities is reasonably expected within the company's operating cycle
(or one year if less).
b. Current liabilities
are the result of operating transactions.
c. Current liabilities
can't exceed the amount incurred in one operating cycle.
d. There is no
relationship between the two.
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What
is the relationship between present value and the concept of a liability?
a. Present values are
used to measure certain liabilities.
b. Present values are
not used to measure liabilities.
c. Present values are
used to measure all liabilities.
d. Present values are
only used to measure long-term liabilities.
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What
is a discount as it relates to zero-interest-bearing notes payable?
a. The discount
represents the lender's costs to underwrite the note.
b. The discount
represents the credit quality of the borrower.
c. The discount
represents the cost of borrowing.
d. The discount
represents the allowance for uncollectible amounts.
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Where
is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if
the creditor intends to call the debt within the year, otherwise a long-term
liability.
c. Current liability if
it is probable that creditor will call the debt within the year, otherwise a long-term
liability.
d. Current liability.
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Which
of the following is not a condition necessary to exclude a short-term
obligation from current liabilities?
a. Intend to refinance
the obligation on a long-term basis.
b. Obligation must be
due with one year.
c. Demonstrate the
ability to complete the refinancing.
d. Subsequently
refinance the obligation on a long-term basis.
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Which
of the following does not demonstrate evidence regarding the ability to
consummate a refinancing of short-term debt?
a. Management indicated
that they are going to refinance the obligation.
b. Actually refinance
the obligation.
c. Have capacity under
existing financing agreements that can be used to refinance the obligation.
d. Enter into a
financing agreement that clearly permits the entity to refinance the obligation.
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A
company has not declared a dividend on its cumulative preferred stock for the
past three years. What is the required accounting treatment or disclosure in
this situation?
a. Record a liability
for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount
of the dividends in arrears.
c. Record a liability
for the current year's dividends only.
d. No disclosure or
recognition is required.
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Which
of the following situations may give rise to unearned revenue?
a. Providing trade
credit to customers.
b. Selling inventory.
c. Selling magazine
subscriptions.
d. Providing
manufacturer warranties.
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Which
of the following statements is correct?
a. A company may exclude
a short-term obligation from current liabilities if the firm intends to
refinance the obligation on a long-term basis.
b. A company may exclude
a short-term obligation from current liabilities if the firm can demonstrate an
ability to consummate a refinancing.
c. A company may exclude
a short-term obligation from current liabilities if it is paid off after the
balance sheet date and subsequently replaced by long-term debt before the
balance sheet is issued.
d. None of these.
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The ability to consummate the
refinancing of a short-term obligation may be demon- strated by
a. actually refinancing
the obligation by issuing a long-term obligation after the date of the balance
sheet but before it is issued.
b. entering into a
financing agreement that permits the enterprise to refinance the debt on a
long-term basis.
c. actually refinancing
the obligation by issuing equity securities after the date of the balance sheet
but before it is issued.
d. all of these.
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Which of the following statements is false?
a. A company
may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis and demonstrates an
ability to complete the refinancing.
b. Cash
dividends should be recorded as a liability when they are declared by the board
of directors.
c. Under the cash basis method, warranty costs are
charged to expense as they are paid.
d. FICA
taxes withheld from employees' payroll checks should never be recorded as a
liability since the employer will eventually remit the amounts withheld to the
appropriate taxing authority.
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Which of the following is not a correct statement about sales taxes?
a. Sales
taxes are an expense of the seller.
b. Many
companies record sales taxes in the sales account.
c. If sales
taxes are included in the sales account, the first step to find the amount of
sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of
these are true.
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Which of these is not included in an employer's payroll tax expense?
a. F.I.C.A. (social
security) taxes
b. Federal unemployment
taxes
c. State unemployment
taxes
d. Federal income taxes
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Which
of the following is a condition for accruing a liability for the cost of
compensation for future absences?
a. The obligation
relates to the rights that vest or accumulate.
b. Payment of the
compensation is probable.
c. The obligation is
attributable to employee services already performed.
d. All of these are
conditions for the accrual.
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A
liability for compensated absences such as vacations, for which it is expected
that employees will be paid, should
a. be accrued during the
period when the compensated time is expected to be used by employees.
b. be accrued during the
period following vesting.
c. be accrued during the
period when earned.
d. not be accrued unless
a written contractual obligation exists.
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The
amount of the liability for compensated absences should be based on
1. the current rates of pay in
effect when employees earn the right to compensated absences.
2. the future rates of pay expected
to be paid when employees use compensated time.
3. the present value of the amount
expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is
acceptable.
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What
are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.
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Which gives rise to the requirement to accrue a
liability for the cost of compensated absences?
a. Payment is probable.
b. Employee rights vest
or accumulate.
c. Amount can be
reasonably estimated.
d. All of the above.
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Under what conditions is an employer required
to accrue a liability for sick pay?
a. Sick pay benefits can
be reasonably estimated.
b. Sick pay benefits
vest.
c. Sick pay benefits
equal 100% of the pay.
d. Sick pay benefits
accumulate.
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Which of the following taxes does not represent
a payroll deduction a company may incur?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment
taxes.
d. State income taxes.
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What is a contingency?
a. An existing situation
where certainty exists as to a gain or loss that will be resolved when one or
more future events occur or fail to occur.
b. An existing situation
where uncertainty exists as to possible loss that will be resolved when one or
more future events occur.
c. An existing situation
where uncertainty exists as to possible gain or loss that will not be resolved
in the foreseeable future.
d. An existing situation
where uncertainty exists as to possible gain or loss that will be resolved when
one or more future events occur or fail to occur.
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When is a contingent liability recorded?
a. When the amount can
be reasonably estimated.
b. When the future
events are probable to occur and the amount can be reasonably estimated.
c. When the future
events are probable to occur.
d. When the future
events will possibly occur and the amount can be reasonably estimated.
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Which of the following is an example of a
contingent liability?
a. Obligations related
to product warranties.
b. Possible receipt from
a litigation settlement.
c. Pending court case
with a probable favorable outcome.
d. Tax loss
carryforwards.
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Which of the following terms is associated with
recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
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Which of the following is the proper way to
report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account
receivable with additional disclosure explaining the nature of the contingency.
d. As a disclosure only.
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Which of the following contingencies need not be disclosed in the financial
statements or the notes thereto?
a. Probable losses not
reasonably estimable
b. Environmental
liabilities that cannot be reasonably estimated
c. Guarantees of
indebtedness of others
d. All of these must be
disclosed.
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Which of the following sets of conditions would
give rise to the accrual of a contingency under current generally accepted
accounting principles?
a. Amount of loss is
reasonably estimable and event occurs infrequently.
b. Amount of loss is
reasonably estimable and occurrence of event is probable.
c. Event is unusual in
nature and occurrence of event is probable.
d. Event is unusual in
nature and event occurs infrequently.
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Jeff Beck is a farmer who owns land which
borders on the right-of-way of the Northern Railroad. On August 10, 2010, due
to the admitted negligence of the Railroad, hay on the farm was set on fire and
burned. Beck had had a dispute with the Railroad for several years concerning
the ownership of a small parcel of land. The representative of the Railroad has
offered to assign any rights which the Railroad may have in the land to Beck in
exchange for a release of his right to reimbursement for the loss he has
sustained from the fire. Beck appears inclined to accept the Railroad's offer.
The Railroad's 2010 financial statements should include the following related
to the incident:
a. recognition of a loss
and creation of a liability for the value of the land.
b. recognition of a loss
only.
c. creation of a
liability only.
d. disclosure in note
form only.
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A contingency can be accrued when
a. it is certain that
funds are available to settle the disputed amount.
b. an asset may have
been impaired.
c. the amount of the
loss can be reasonably estimated and it is probable that an asset has been
impaired or a liability incurred.
d. it is probable that
an asset has been impaired or a liability incurred even though the amount of
the loss cannot be reasonably estimated.
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A contingent liability
a. definitely exists as
a liability but its amount and due date are indeterminable.
b. is accrued even
though not reasonably estimated.
c. is not disclosed in
the financial statements.
d. is the result of a
loss contingency.
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To record an asset retirement obligation (ARO),
the cost associated with the ARO is
a. expensed.
b. included in the
carrying amount of the related long-lived asset.
c. included in a
separate account.
d. none of these.
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A company is legally obligated for the costs
associated with the retirement of a long-lived asset
a. only when it hires
another party to perform the retirement activities.
b. only if it performs
the activities with its own workforce and equipment.
c. whether it hires
another party to perform the retirement activities or performs the activities
itself.
d. when it is probable
the asset will be retired.
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Assume
that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a
continuing policy of guaranteeing new products against defects for three years
that has resulted in material but rather stable warranty repair and replacement
costs. Any liability for the
warranty
a. should be reported as
long-term.
b. should be reported as
current.
c. should be reported as
part current and part long-term.
d. need not be
disclosed.
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Ortiz Corporation, a manufacturer of household
paints, is preparing annual financial statements at December 31, 2010. Because
of a recently proven health hazard in one of its paints, the government has
clearly indicated its intention of having Ortiz recall all cans of this paint
sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded
this situation?
a. No recognition
b. Note disclosure only
c. Operating expense of
$800,000 and liability of $800,000
d. Appropriation of
retained earnings of $800,000
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Information
available prior to the issuance of the financial statements indicates that it
is probable that, at the date of the financial statements, a liability has been
incurred for obligations related to product warranties. The amount of the loss
involved can be reasonably estimated.
Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor
disclosed.
d. classified as an
appropriation of retained earnings.
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Espinosa Co. has
a loss contingency to accrue. The loss amount can only be reasonably estimated
within a range of outcomes. No single amount within the range is a better
estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the
range.
c. the mean of the
range.
d. the maximum of the
range.
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Dean Company
becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the
financial statements if the amount can be reasonably estimated, an unfavorable
outcome is highly probable, and
a. the Dean Company
admits guilt.
b. the court will decide
the case within one year.
c. the damages appear to
be material.
d. the cause for action
occurred during the accounting period covered by the financial statements.
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Use of the
accrual method in accounting for product warranty costs
a. is required for
federal income tax purposes.
b. is frequently
justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense
account being charged when the seller performs in compliance with the warranty.
d. represents accepted
practice and should be used whenever the warranty is an integral and
inseparable part of the sale.
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Which of the following best describes the
accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when
warranty claims are certain.
c. Expensed based on
estimate in year of sale.
d. Expensed when
incurred.
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Which of the following best describes the
cash-basis method of accounting for warranty costs?
a. Expensed based on
estimate in year of sale.
b. Expensed when liability
is accrued.
c. Expensed when
warranty claims are certain.
d. Expensed when
incurred.
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Which of the following is a characteristic of
the expense warranty approach, but not the sales warranty approach?
a. Estimated liability
under warranties.
b. Warranty expense.
c. Unearned warranty
revenue.
d. Warranty revenue.
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An electronics store is running a promotion
where for every video game purchased, the customer receives a coupon upon
checkout to purchase a second game at a 50% discount. The coupons expire in one
year. The store normally recognized a gross profit margin of 40% of the selling
price on video games. How would the store account for a purchase using the
discount coupon?
a. The reduction in
sales price attributed to the coupon is recognized as premium expense.
b. The difference
between the cost of the video game and the cash received is recognized as
premium expense.
c. Premium expense is
not recognized.
d. The difference
between the cost of the video game and the selling price prior to the coupon is
recognized as premium expense.
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What condition is necessary to recognize an
asset retirement obligation?
a. Company has an
existing legal obligation and can reasonably estimate the amount of the
liability.
b. Company can
reasonably estimate the amount of the liability.
c. Company has an
existing legal obligation.
d. Obligation event has
occurred.
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Which of the following are not factors that are
considered when evaluating whether or not to record a liability for pending
litigation?
a. Time period in which
the underlying cause of action occurred.
b. The type of
litigation involved.
c. The probability of an
unfavorable outcome.
d. The ability to make a
reasonable estimate of the amount of the loss.
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How do you determine the acid-test ratio?
a. The sum of cash and short-term
investments divided by short-term debt.
b. Current assets
divided by current liabilities.
c. Current assets
divided by short-term debt.
d. The sum of cash,
short-term investments and net receivables divided by current liabilities.
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What does the current ratio inform you about a
company?
a. The extent of
slow-moving inventories.
b. The efficient use of
assets.
c. The company's liquidity.
d. The company's
profitability.
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Which of the
following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current
liabilities in order of maturity
b. Listing current
liabilities according to amount
c. Offsetting current
liabilities against assets that are to be applied to their liquidation
d. Showing current
liabilities immediately below current assets to obtain a presentation of
working capital
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The ratio of current
assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset
turnover ratio.
d. current liability
turnover ratio.
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Accrued liabilities are disclosed in financial
statements by
a. a footnote to the
statements.
b. showing the amount
among the liabilities but not extending it to the liability total.
c. an appropriation of
retained earnings.
d. appropriately
classifying them as regular liabilities in the balance sheet.
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The
numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable
securities.
c. cash and net
receivables.
d. cash, marketable
securities, and net receivables.
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Each of the following are included in both
the current ratio and the acid-test ratio except
a. cash.
b. short-term
investments.
c. net receivables.
d. inventory.
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