Deck 10: Current Liabilities and Fair Value Accounting

Question 1

Working capital equals current assets plus current liabilities.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

All liabilities involve an obligation of one sort or another.

Answer 3

True

Question 4

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

Question 5

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

Question 6

Unearned revenue is an example of a definitely determinable liability.

Question 7

The payables turnover is the number of times, on average, that a company pays its accounts payable in an accounting period.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Liabilities generally arise from past transactions.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

Payables turnover is measured in number of days.

Question 20

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

Question 21

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

Question 22

Gross earnings minus deductions equals take-home pay.

Question 23

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

Question 24

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 25

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

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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 39

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

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

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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 47

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

Question 48

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

Question 49

The federal and state unemployment tax rates are identical.

Question 50

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 51

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

Question 52

Potential vacation pay should be accounted for as a commitment.

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

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

Question 62

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

Question 63

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 64

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

Question 65

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 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

A company wishes to make deposits at the end 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 71

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

Question 72

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

Question 73

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

Question 74

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 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

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 80

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.