Question 1

Bonus agreements can be structured in various ways. A typical bonus calculation could involve income before or after taxes and income before or after the bonus.

Accepted Answer

Bonus agreements can indeed be structured in various ways, including calculations based on income before or after taxes and before or after the bonus is applied, allowing for flexibility in how bonuses are determined and distributed.

Question 2

Assets and liabilities with differing implications for financial flexibility should be reported together.

Accepted Answer

Assets and liabilities have different implications for financial flexibility and therefore should be reported separately to accurately reflect a company's financial position. Assets provide economic benefits, while liabilities represent future obligations.

Question 3

Which of the following statements does not describe an essential characteristic of a liability?

Accepted Answer

The identity of the recipient is not always required to classify an obligation as a liability. Examples include warranty obligations and environmental remediation obligations, where the specific recipients may not be known at the time the liability is recognized. The other statements describe essential characteristics of a liability.

Question 4

Which of the following is a legal liability?

Accepted Answer

Sales taxes payable to the state is a legal liability as it is required by law and failure to pay can result in penalties or legal action.

Option A is a benefit offered to employees and not a liability. 
Option C is a personal debt and not a business liability. 
Option D is an illegal and unethical activity and not a liability.

Question 5

Assume that a company is facing a loss contingency. GAAP requires the company to categorize the likelihood of occurrence of a future event that will confirm the loss as being plausible, remotely plausible, or remote.

Accepted Answer

GAAP requires the company to categorize the likelihood of occurrence of a future event that will confirm the loss as probable, reasonably possible, or remote.

Question 6

The ability to refinance short-term obligations on a long-term basis can be demonstrated if the company has already refinanced those obligations after the date of the balance sheet but before it is issued.

Accepted Answer

This is because the refinancing of short-term obligations to long-term after the balance sheet date but before the issuance of the financial statements provides evidence of the company's ability to manage its debt and liquidity, allowing for the reclassification of the obligation as long-term in the financial statements.

Question 7

Assume that a company is facing a loss contingency. GAAP requires the company to recognize a liability even if the company cannot determine whether or not the event has occurred.

Accepted Answer

GAAP requires a company to recognize a liability for a loss contingency only if it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. If the company cannot determine whether the event has occurred, it cannot recognize a liability.

Question 8

Under current standards of the FASB, liabilities include

Accepted Answer

Liabilities include both legal and nonlegal obligations according to the current standards of the FASB. Nonlegal obligations may arise from past events such as warranties or from constructive obligations that arise from the conduct of business.

Question 9

Which of the following is not an issue associated with liabilities?

Accepted Answer

Assessment is not typically categorized as an issue associated with liabilities. The main issues related to liabilities are identification (recognizing what constitutes a liability), valuation and measurement (determining the monetary value of the liability), and reporting (how the liability is presented in financial statements). Assessment, in the context of liabilities, is not a standard term used to describe a specific issue; it might be part of the broader processes of identification, valuation, and reporting, but it is not recognized as a separate, distinct issue.

Question 10

Vacation pay and year-end bonuses would be considered legal liabilities.

Accepted Answer

Vacation pay and year-end bonuses are considered legal obligations or accrued expenses, not liabilities, until they are paid out.

Question 11

Liabilities are defined as probable future sacrifices of economic benefits arising from present obligations of a company to provide services or assets in the future as defined by the FASB.

Accepted Answer

Liabilities are indeed defined by the Financial Accounting Standards Board (FASB) as probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services to other entities in the future.

Question 12

All of the following are examples of legal liabilities except

Accepted Answer

Sick pay payable is not considered a legal liability because it is a benefit provided by the employer and not required by law. The other options (notes payable, sales tax payable, and property taxes payable) are legal obligations that must be paid.

Question 13

The FASB recommends that assets and liabilities with differing liquidities be arranged as separate items in the balance sheet.

Accepted Answer

The Financial Accounting Standards Board (FASB) recommends that assets and liabilities be presented in the balance sheet based on their liquidity. This means that assets expected to be converted into cash within one year (current assets) and liabilities expected to be settled within one year (current liabilities) are presented separately from those assets and liabilities not expected to be converted or settled within one year (non-current assets and liabilities). This arrangement helps in assessing the liquidity and financial flexibility of an entity.

Question 14

Which is not a characteristic of a liability?

Accepted Answer

Liabilities are defined by their probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. A legally enforceable claim is not a necessary condition for a liability; obligations can also arise from equitable or constructive duties.

Question 15

Short-term debt that is expected to be refinanced on a long-term basis may be excluded from the current liability classification if the company has the intent to refinance or the ability to refinance.

Accepted Answer

A company must have both the intent and the ability to refinance short-term debt on a long-term basis to exclude it from current liabilities.

Question 16

The FASB is concerned with the accurate portrayal of liquidity because users evaluate future cash flows in their decision making practices.

Accepted Answer

The Financial Accounting Standards Board (FASB) is concerned with the accurate portrayal of liquidity because it directly impacts how users of financial statements, such as investors and creditors, evaluate an entity's ability to generate future cash flows, which is crucial for their decision-making practices.

Question 17

Which of the following is not a characteristic of a liability?

Accepted Answer

All the options listed (A, B, and C) are indeed characteristics of a liability. Liabilities are defined by the need for a future transfer of assets or services, an obligation that the company cannot avoid, and an event that has already occurred creating the obligation.

Question 18

Which of the following statements is true?

Accepted Answer

Liabilities require a present obligation that results from past events, where the entity has a duty or responsibility to transfer resources to another party. This obligation does not necessarily need to be legally enforceable (as in C), nor does the future event create the obligation—it merely settles it (contrary to A). Also, the specific identity of the recipient does not need to be known for a liability to exist (contrary to D).

Question 19

Compensated absences include vacation, holiday, sick, or other activities for which the company pays its employees.

Accepted Answer

Compensated absences are periods where employees are not at work but are still paid, which includes vacation, holiday, and sick leave among others.

Question 20

The ability to utilize financial resources and to adapt to changes in the business environment is referred to as a company's financial flexibility.

Accepted Answer

Financial flexibility refers to a company's ability to manage its financial resources effectively, allowing it to adapt to changes and opportunities in the business environment, such as investing in new projects, paying off debt, or navigating economic downturns.

Quiz 9: Current Liabilities and Contingent Obligations