Deck 8: Current and Contingent Liabilities

Question 1

A company expects to receive a substantial cash settlement from a lawsuit.Therefore,the company must record this on its accounting records if a reasonable estimate can be made of the amount to be received.

Answer 1

False

Question 2

An example of a current liability is a note payable that is due in eight months.

Answer 2

True

Question 3

A company's management expects to incur future expenses related to the repair or replacement of defective products sold.Those expenses must be matched to revenues in the period of the repair or replacement.

Answer 3

False

Question 4

A contingent liability must be recorded if it is reasonably possible and the amount can be reasonably estimated.

Question 5

Warranty expenses result when a company sells products then estimates the units and cost per unit for repairs and replacements that may occur during the warranty period.

Question 6

When a company sells goods or provides services for a customer but the customer intends to pay later,the company must record a current liability.

Question 7

A liability must be recognized when a business is required to transfer assets or provide services to another entity at some point in the future for activities that have already occurred.

Question 8

Federal excise taxes payable is not a current liability.

Question 9

An example of a current liability is the current maturity of a long-term debt.

Question 10

A probable loss from a lawsuit that can be reasonably estimated should not be reported on the balance sheet as a current liability.

Question 11

An example of a current liability is a note payable that is due in two years.

Question 12

Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority.

Question 13

Employers withhold taxes from their employees' gross pay and later pay these amounts withheld to the taxing authority.

Question 14

The proceeds from advance ticket sales for a concert to be held next month should be recorded as a current liability.

Question 15

For any given contingent liability,a company must choose between recording it on the accounting records or disclosing it in the footnotes to the financial statements

Question 16

When accrual basis accounting matches an expense to a period before it is actually paid,an adjusting entry is necessary to record the accrued expense and corresponding liability.

Question 17

When a company uses past experience to estimate the amount of likely warranty claims in the future,a current liability account must be created.

Question 18

A company provides a one-year warranty for its products.The estimated cost of parts and labor required to satisfy warranty claims should be recorded as a current liability in the period the products are sold.

Question 19

Current liabilities should include any amounts that have been accrued as expenses but not yet paid.

Question 20

Federal income taxes payable is not a current liability.

Question 21

Contingent liabilities must be recorded in the accounting records if they are probable and the amount can be reasonably estimated.

Question 22

The quick ratio is calculated as follows: (Cash + Marketable Securities + Accounts Receivable)/ Current Liabilities.

Question 23

Accounts payable represent amounts owed to outside suppliers of goods and services;whereas ____________________ reflect amounts owed in which a formal agreement or contract has been signed.

Question 24

If no reasonable estimate of the loss can be made,then a contingent liability should be recognized in the ____________________.

Question 25

The current ratio is calculated as follows: Current Assets / Current Liabilities.

Question 26

____________________ is the liability created when customers pay for goods or services in advance.

Question 27

The operating cash flow ratio is computed by dividing cash flows from operating activities by ____________.

Question 28

A contingent liability must be recognized in the accounting records if it ____________________ and a reasonable estimate of the loss can be made

Question 29

____________________ are commitments that represent probable future sacrifices of economic benefits.

Question 30

The current ratio is computed by dividing current assets by ____________________.

Question 31

The cash ratio is calculated by dividing cash flows from operating activities by current liabilities.

Question 32

A company has a note payable that is due on December 31,2013.In its December 31,2012,balance sheet,this note payable should be classified as a(n)____________________.

Question 33

Liquidity relates to a company's ability to sell its assets for amounts that exceed the assets' book values.

Question 34

Acceptable current ratios vary from industry to industry,but a general rule of thumb is that a current ratio greater than ____________________ is appropriate

Question 35

The cash ratio is calculated as follows: (Cash + Marketable Securities)/ Current Liabilities.

Question 36

An obligation that involves an existing condition for which the outcome is not known with certainty and depends upon some event that will occur in the future is called a(n)____________________.

Question 37

The operating cash flow ratio is calculated by dividing current assets by cash flows from operating activities.

Question 38

The operating cash flow ratio is calculated by dividing the cash flows from operating activities by current liabilities.

Question 39

Interest on a note payable can be calculated by multiplying the amount owed by the interest rate by the fraction of year that represents the time elapsed since borrowing.

Question 40

The cash ratio is calculated by dividing current liabilities by the total of cash and marketable securities.

Question 41

When a retail company sells products to customers on credit for the amount of the sales price plus the applicable sales tax,the related journal entry includes a debit to accounts receivable,a credit to sales revenue,and a credit to ____________________.

Question 42

What is the impact on the accounting equation of recording the accrual of wages expense?

A)Both assets and liabilities decrease.
B)Both assets and stockholders' equity decrease.
C)Liabilities decrease and stockholders' equity increases.
D)Liabilities increase and stockholders' equity decreases.

Question 43

A(n)____________________ usually guarantees the repair or replacement of defective goods during a period ranging from a few days to several years following the sale.

Question 44

Current liabilities require a transfer of assets or performance of services within the longer of ____________________ or one operating cycle

Question 45

What is the impact on the accounting equation of recording a payment to a supplier on account?

A)Both assets and liabilities decrease.
B)Both assets and stockholders' equity decrease.
C)Liabilities decrease and stockholders' equity increases.
D)Liabilities increase and stockholders' equity decreases.

Question 46

Which of the following statements regarding accounts payable is false?

A)Accounting for accounts payable is really just the flip side of accounts receivable.
B)Accounts payable arise when a business purchases goods or services on credit.
C)Accounts payable arise when a business promises to purchase goods or services in the future.
D)Accounts payable seldom require the payment of interest.

Question 47

____________________ refers to the ability of a company to meet its short-term obligations.

Question 48

When a company estimates the amount of expected warranty expenses to be incurred in the future pertaining to past product sales,the account to be credited is called the ____________________.

Question 49

The amount of a current liability reported on the balance sheet for interest payable includes

A)all interest to be paid within one year into the future related to amounts borrowed in past transactions.
B)all interest to be paid in the future related to amounts borrowed in past transactions.
C)all interest currently owed related to amounts borrowed in past transactions.
D)all interest paid-to-date related to amounts borrowed in past transactions.

Question 50

An adjusting entry to record accrued interest on a note payable includes a debit to Interest Expense and a credit to ____________________.

Question 51

What is the impact on the accounting equation of recording the issuance of a short-term note payable?

A)Both assets and liabilities increase.
B)Both assets and stockholders' equity decrease.
C)Both assets and stockholders' equity increase.
D)Liabilities increase and stockholders' equity decreases.

Question 52

A fast food restaurant sells gift cards which may be redeemed at any time;however,they expire in one year.At the time these gift cards are sold,the account to be credited is called ____________________.

Question 53

When a company records the gross wages paid to its employees,the accounts to be credited include various taxes payable and ____________________

Question 54

A flour mill orders grain sacks from a local farmer.When the company places an order for grain on account,the corresponding journal entry includes a debit to Supplies and a credit to ____________________.

Question 55

Which of the following statements regarding liabilities is true?

A)Liabilities must be legally enforceable to a known recipient.
B)Liabilities arise from past activities that require some future sacrifice of economic benefits.
C)The accounting principles followed in the U.S.require that current liabilities be listed in order of decreasing amounts on the balance sheet.
D)The accounting principles followed in the U.S.differ substantially from those of other countries,especially with respect to current liabilities.

Question 56

A current liability is defined as a commitment or obligation which requires a company to transfer assets,create a new current liability,or provide services to another entity at some point in the future that must occur

A)within one year.
B)within one year or within the operating cycle,whichever is shorter.
C)within one year or within the operating cycle,whichever is longer.
D)by the end of the operating cycle.

Question 57

A(n)____________________ arises when a business purchases goods or services on credit.

Question 58

What is the impact on the accounting equation of recording the accrual of interest expense?

A)Both assets and liabilities decrease.
B)Both assets and stockholders' equity decrease.
C)Liabilities decrease and stockholders' equity increases.
D)Liabilities increase and stockholders' equity decreases.

Question 59

Which of the following is not classified as a current liability account?

A)Accounts payable
B)Note payable,due in 2 years
C)Salaries and wages payable
D)Income taxes payable

Question 60

A current liability includes obligations which must be repaid

A)within one year.
B)within one year or within the operating cycle,whichever is shorter.
C)within one year or within the operating cycle,whichever is longer.
D)by the end of the operating cycle.

Question 61

Assume that a company has an operating cash flow ratio of 0.75.Payment of accrued wages payable would cause the operating cash flow ratio to

A)decrease.
B)increase.
C)be unchanged since the effects offset one another.
D)be unchanged since it has no impact on any current liability or operating cash flow accounts.

Question 62

GTO Division has $14,000 in current assets,$2,000 in accounts payable,and $2,000 in unearned sales revenue.What is the division's current ratio?

A)1.75
B)2.25
C)3.00
D)3.50

Question 63

A company has $8,000 in cash,$9,250 in accounts receivable,and $19,500 in inventory.If current liabilities are $14,350,then the quick ratio will be

A)5.0
B)2.6
C)2.0
D)1.2

Question 64

Assume a company has a current ratio of .75.The purchase of inventory on account would cause the current ratio to

A)decrease.
B)increase.
C)be unchanged since the effects offset one another.
D)be unchanged since it has no impact on any current asset or liability accounts.

Question 65

Giff Services Company experienced some difficulties with cash flow so it approached one of its vendors about a payment extension.The vendor agreed to the extension on the condition that the company sign a note that includes 9% interest.What is the impact on the accounting equation of recording a note payable in exchange for the account payable?

A)Both assets and liabilities increase.
B)Both assets and liabilities decrease.
C)Liabilities increase and stockholders' equity decreases.
D)There is no net impact,as there are corresponding increases and decreases in liability accounts.

Question 66

GT Company has $200 in cash,$500 in accounts receivable,and $700 in inventory.The company also has $200 in accounts payable and $200 in unearned sales revenue.What is the company's quick ratio?

A)1.75
B)2.25
C)3.00
D)3.50

Question 67

Assume a company has a current ratio of 2.Payment of accrued wages payable would cause the current ratio to

A)decrease.
B)increase.
C)be unchanged since the effects offset one another.
D)be unchanged since it has no impact on any current asset or liability accounts.

Question 68

A company has long-term assets of $2,000,current liabilities of $1,250,and long-term liabilities of $1,500.If the current ratio is 2.5,then current assets must be

A)$5,000
B)$3,125
C)$1,563
D)$500

Question 69

A company has cash of $800,current liabilities of $500,and long-term liabilities of $600.If the cash ratio is 2.5,then marketable securities must be

A)$ 700
B)$ 800
C)$ 450
D)$2,000

Question 70

GTX Corp.has $100,000 in cash,$40,000 in inventory,$25,000 in accounts payable and $15,000 in accrued liabilities (salaries,interest,taxes,etc. ).If the company has $280,000 in cash flows from operating activities,what is its operating cash flow ratio?

A)0.5
B)2.0
C)7.0
D)3.5

Question 71

Which of the following statements about current liabilities is true?

A)Current liabilities are listed in order of decreasing amounts in the current liability section of a classified balance sheet.
B)The amount of current liabilities has little implication for a company's liquidity.
C)Current liabilities are the denominator in the formula for the current ratio.
D)The current liabilities section of a classified balance sheet will never contain any portion of long-term liabilities.

Question 72

A company has current assets of $4,400,current liabilities of $2,750,and long-term liabilities of $5,500.If the operating cash flow ratio is 1.5,then cash flows from operating activities must be

A)$4,125
B)$6,600
C)$8,250
D)$12,375

Question 73

A company has total assets of $350,000 consisting of current assets of $115,000,property,plant,and equipment of $200,000,and other assets of $35,000.The company has total liabilities of $100,000 consisting of current liabilities of $65,000 and other liabilities of $35,000.What is the current ratio?

A)3.50
B)1.15
C)1.77
D)5.38

Question 74

The payment of Accounts Payable results in a(n)

A)decrease in both liabilities and assets.
B)decrease in liabilities and increase in assets.
C)decrease in liabilities and increase in stockholders' equity.
D)increase in liabilities and decrease in stockholders' equity.

Question 75

If a business has current assets of $62,000,total assets of $350,000,current liabilities of $31,000,and total liabilities of $125,000,then its current ratio will be

A)0.5
B)2.0
C)2.8
D)3.0

Question 76

A landlord records the collection of a tenant's security deposit as a(n)

A)prepaid expense
B)liability
C)contingent liability
D)contra liability

Question 77

Go Cars has $200 in cash,$500 in accounts receivable,$400 in marketable securities,and $700 in inventory.Assuming the company also has $200 in accounts payable and $200 in unearned sales revenue,what is its cash ratio?

A)4.50
B)3.00
C)2.75
D)1.50

Question 78

Assume that a company has a cash ratio of .45.Recording the estimated warranties expense on the period's sales would cause the cash ratio to

A)decrease.
B)increase.
C)be unchanged since the effects offset one another.
D)be unchanged since it has no impact on any current asset or liability accounts.

Question 79

A company has property,plant,and equipment of $500,000,current liabilities of $70,000,and long-term liabilities are $300,000.If the company's current ratio is 3.0,what are current assets?

A)$900,000
B)$690,000
C)$430,000
D)$210,000

Question 80

Assume that a company has a current ratio of 3.Failure to record estimated warranty costs will cause the current ratio to be

A)overstated.
B)understated.
C)unchanged since the effects offset one another.
D)unchanged since it has no impact on any current asset or liability accounts.