Question 1

The debt to total assets ratio measures the percentage of the total assets provided by creditors.

Accepted Answer

The debt to total assets ratio is a financial metric that indicates what proportion of a company's assets are financed through debt, essentially showing the percentage of assets that creditors have a claim on.

Question 2

If a company's fiscal year is the same as the calendar year used for property tax purposes, there should be no prepaid property tax on its year-end financial statements but there may be a property tax liability.

Accepted Answer

If a company's fiscal year aligns with the calendar year used for property tax purposes, any property tax for the year would have been due within that fiscal year. Therefore, there wouldn't be prepaid property tax (which represents taxes paid in advance for future periods). However, if the tax bill was issued but not paid by year-end, the company would record a property tax liability for the amount due.

Question 3

Provisions are liabilities of uncertain timing or amount, along with some uncertainty as to whether the liability will have to be paid.

Accepted Answer

False

Question 4

When a business sells an item and collects Harmonized Sales Tax (HST) on it, a current liability arises.

Accepted Answer

When a business collects Harmonized Sales Tax (HST) on a sale, it is collecting tax on behalf of the government, which it must remit at a later date. Until it is remitted, the collected HST is considered a current liability because it is an obligation that the business owes and is typically due within the next operating cycle or year.

Question 5

A financial liability means there is a contractual obligation to pay cash in the future.

Accepted Answer

A financial liability indeed represents a contractual obligation to deliver cash or another financial asset to another entity in the future.

Question 6

While short-term notes are generally repayable in full at maturity, most long-term notes are repayable in a series of periodic payments called instalments.

Accepted Answer

Long-term notes are often structured to be repaid in periodic installments over their term, rather than in a single lump sum at maturity, which is more typical of short-term notes.

Question 7

If drawing on an operating line of credit results in a negative cash balance, a current liability known as bank indebtedness results.

Accepted Answer

Drawing on an operating line of credit beyond the available cash balance creates a liability for the company, as it owes the bank money, thus resulting in bank indebtedness, which is classified as a current liability because it is typically due within one year.

Question 8

Payroll liabilities include the employer's share of CPP contributions and EI premiums.

Accepted Answer

Payroll liabilities indeed include the employer's share of Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, as these are amounts the employer is responsible for remitting to the government on behalf of both themselves and their employees.

Question 9

Unsecured notes are issued against the general credit of the borrower.

Accepted Answer

Unsecured notes are not backed by collateral but are issued based solely on the issuer's creditworthiness and promise to repay.

Question 10

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

Accepted Answer

The classification of a liability as current or non-current reflects the timing of payment, which can affect a company's ability to meet its short-term obligations. This information is important for evaluating a company's liquidity position, which is a measure of its ability to meet short-term liabilities with its current assets. Therefore, the classification of liabilities as current or non-current is relevant to assessing a company's financial health and creditworthiness.

Question 11

Instalment payments consist of a mix of interest on the unpaid balance of the loan and a reduction of the loan principal.

Accepted Answer

Instalment payments are structured so that each payment includes both interest charges on the outstanding loan balance and a portion that goes toward reducing the principal amount of the loan, gradually paying off the debt over time.

Question 12

Property tax payable is classified as a non-current liability because it is related to property, which is a non-current asset.

Accepted Answer

Property tax payable is typically classified as a current liability because it is usually due within one year, regardless of the nature of the asset it is associated with.

Question 13

Under IFRS, contingent liabilities should be recorded in the accounts if there is a remote possibility that the contingency will occur.

Accepted Answer

Under IFRS, contingent liabilities are only recorded in the financial statements if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount can be estimated reliably. If the possibility is remote, it is not recorded.

Question 14

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

Accepted Answer

A contingent liability is a potential financial obligation that may arise in the future as a result of past events or transactions, depending on the outcome of a specific event or set of circumstances.

Question 15

Long-term notes payable can only have floating interest rates.

Accepted Answer

Long-term notes payable can have either fixed or floating interest rates, depending on the terms agreed upon by the lender and borrower.

Question 16

Interest expense on a bank loan payable is only recorded at maturity.

Accepted Answer

Interest expense on a bank loan payable is typically recorded periodically over the term of the loan, not just at maturity, to accurately reflect the cost of borrowing over time in accordance with the accrual basis of accounting.

Question 17

Amounts available to be drawn in the future from an operating line of credit improve a company's liquidity.

Accepted Answer

Amounts available to be drawn in the future from an operating line of credit provide a company with access to additional funds when needed, thereby improving its ability to meet short-term obligations and enhancing its liquidity.

Question 18

Interest (finance) expenses are separately reported in the "other gain and revenues" section of the statement of income.

Accepted Answer

Interest expenses are typically reported in the finance costs or interest expense section of the income statement, not under "other gains and revenues."

Question 19

Secured notes are often also referred to as mortgages.

Accepted Answer

Secured notes are a type of loan backed by collateral, and when this collateral is real estate, the secured note is commonly referred to as a mortgage.

Question 20

Deferred revenue is a financial liability.

Accepted Answer

The answer of Deferred revenue is a financial liability....

Quiz 10: Reporting and Analyzing Liabilities