Deck 8: Current Liabilities and Fair Value Accounting

Question 1

Because accounting measures should be verifiable,liabilities should not be estimated.

Answer 1

False

Question 2

The classification of a liability as current or long-term is important because it may affect the evaluation of a company's liquidity.

Answer 2

True

Question 3

If an accrued liability for salaries is not recorded,income for the following period will be overstated.

Answer 3

False

Question 4

The costs associated with coupons and rebates are usually reflected in contra-revenue accounts.

Question 5

Interest on a promissory note is recognized when the note is issued.

Question 6

Lines of credit from the bank need not be disclosed in the financial statements or in the notes.

Question 7

Payables turnover is measured in number of days.

Question 8

Because failure to record a liability generally leads to failure to record an expense,it usually results in an overstatement of income.

Question 9

Commercial paper consists of secured loans that are sold to the public.

Question 10

A liability must never be classified as current if it is due in more than one year.

Question 11

Only the unused portion of a line of credit is recognized as a liability.

Question 12

The term wages refers to the compensation of employees who are paid at a monthly or yearly rate.

Question 13

Working capital equals current assets plus current liabilities.

Question 14

All liabilities involve an obligation of one sort or another.

Question 15

Unearned revenue is an example of a definitely determinable liability.

Question 16

At the time a company signs a contract to pay an employee a certain salary in the future,it records a liability.

Question 17

To determine the payables turnover,one first calculates the days' payable.

Question 18

The days' payable shows how long,on average,a company takes to pay its accounts payable.

Question 19

Liabilities generally arise from past transactions.

Question 20

The payables turnover is the number of times,on average,that accounts payable are paid in an accounting period.

Question 21

Product warranties are an expense of the period in which the product must be repaired or replaced.

Question 22

When a business sells an item and collects a state sales tax on it,a current liability to the state arises.

Question 23

The current portion of long-term debt is classified as a current liability only if it is due within the next year and is to be paid from current assets.

Question 24

There is no limit to the amount of income subject to the Medicare tax.

Question 25

Social security and Medicare taxes are borne entirely by the employer.

Question 26

A liability for dividends exists only when the board of directors declares them.

Question 27

If any portion of a long-term debt is to be paid in the next year,the entire debt should be classified as a current liability.

Question 28

Accrued liabilities often arise as a result of the passage of time.

Question 29

The amount recorded for Payroll Taxes and Benefits Expense is borne entirely by the employee.

Question 30

Gross earnings minus deductions equals take-home pay.

Question 31

There is no limit to the amount of income subject to the FUTA tax.

Question 32

The product warranty liability is an example of an estimated liability.

Question 33

Both the employee and the employer must bear the tax burden for unemployment benefits.

Question 34

For notes payable whose interest is stated separately,the adjusting entry would consist of a debit to Interest Expense and a credit to Interest Payable.

Question 35

The declaration of dividends is solely the decision of the corporation's stockholders.

Question 36

Wages are compensation of employees at a yearly or monthly rate.

Question 37

Unearned revenue arises from the acceptance of payment in advance for a service to be performed.

Question 38

Commercial paper normally is issued by companies with poor credit ratings.

Question 39

Current liabilities are classified as either definitely determinable liabilities or contingent liabilities.

Question 40

The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal Unemployment Tax Payable and State Unemployment Tax Payable.

Question 41

Vacation pay is charged properly as an expense in the month in which the employee takes a vacation.

Question 42

The most common examples of commitments are leases and purchase agreements.

Question 43

Promotional costs,such as coupons and rebates,should be recorded as an expense with a related liability.

Question 44

A contingent liability is a liability that may materialize in the future because of something that happened in the past.

Question 45

A contingent liability is recognized when the amount can be reasonably estimated and the likelihood of loss is probable.

Question 46

A commitment is a legal obligation that does not meet the technical requirements for recognition as a liability.

Question 47

The amount of property tax payable is usually an estimated liability for a portion of the year.

Question 48

Property Taxes Expense is recorded only in the month it is paid.

Question 49

The entry that includes a debit to Payroll Taxes and Benefits Expense would also include credits to Social Security Tax Payable and Medicare Tax Payable.

Question 50

An estimated liability is not a definite obligation of the firm because the amount cannot be definitely determined.

Question 51

Product warranties are an expense of the period in which the related product is sold.

Question 52

The federal and state unemployment tax rates are identical.

Question 53

A contingent liability is not entered into the accounting records under any circumstances.

Question 54

A liability rarely is established for product warranties because of uncertainty as to the amount of the liability.

Question 55

If the amount of a liability cannot be exactly determined,it should not be recorded.

Question 56

A contingent liability is recognized when any likelihood of loss exists and the amount can be reasonably estimated.

Question 57

Potential vacation pay should be accounted for as a commitment.

Question 58

When a company discounts a note receivable at the bank,it has a contingent liability.

Question 59

Lawsuits against a company in connection with an industrial accident would not be disclosed in the notes to the financial statements as a contingent liability until the lawsuits have been settled.

Question 60

A contingent liability eventually becomes either a true liability or no liability at all.

Question 61

Which of the following is not a component of the operating cycle?

A) Sales to customers
B) Collection of accounts receivable
C) Recognition of depreciation
D) Purchases from suppliers

Question 62

An asset purchased according to a deferred payment plan should be recorded based on the total cash paid.

Question 63

A company wishes to make deposits at the end of each of the next four years to accumulate a fund of $60,000.The annual contributions equal $60,000 multiplied by the appropriate present value of an ordinary annuity factor.

Question 64

The annual interest earned on an amount deposited into a bank account will increase each year when simple interest is used.

Question 65

All of the following are measures of liquidity except

A) the quick ratio.
B) return on assets.
C) the current ratio.
D) working capital.

Question 66

When compound interest is used,interest accumulates less quickly than when simple interest is used.

Question 67

Which of the following most likely would be classified as a current liability?

A) Mortgage payable
B) Dividends payable
C) Five-year notes payable
D) Bonds payable

Question 68

Future value refers to an amount received or paid now at a given rate of interest that is equivalent to another amount received or paid sometime in the future.

Question 69

A liability is recognized when

A) the exact due date is known.
B) it is paid for.
C) an obligation has arisen.
D) the exact amount of the liability is known.

Question 70

All factors in a future value table must be greater than or equal to 1.000.

Question 71

Decision makers rely on the future values,rather than on the present values,of future cash flows.

Question 72

All factors in a present value of a single sum table are less than 1.000.

Question 73

In a deferred payment arrangement,interest is charged only if it is stated.

Question 74

If the net present value of a proposed investment is negative,it means that the investment should not be made.

Question 75

The higher the interest rate,the lower the present value factor.

Question 76

The lower the interest rate,the lower the future value factor.

Question 77

An ordinary annuity is a series of equal payments made at the end of equal intervals of time.

Question 78

Assets purchased under a deferred payment plan should be recorded at the future value of the installment payments.

Question 79

The theoretical value of an asset is the present value of the expected benefits.

Question 80

The annual interest earned on an amount deposited into a bank account will be the same each year when compound interest is used.