Question 1

Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?
A)The current ratio will always be equal to or larger than the acid-test ratio for a specific company.
B)The acid-test ratio will always be equal to or larger than the current ratio for a specific company.
C)Either the current ratio or the acid-test ratio could be larger for a specific company.
D)One ratio will always exceed 1.0,while the other will always be less than 1.0.

Accepted Answer

The current ratio includes all current assets, while the acid-test ratio excludes inventory and prepaid expenses, making the current ratio equal to or larger than the acid-test ratio.

Question 2

Discount Travel has the following current assets: cash,$102 million;receivables,$94 million;inventory,$182 million;and other current assets,$18 million.Discount Travel also has the following liabilities: accounts payable,$98 million;current portion of long-term debt,$35 million;and long-term debt,$23 million.Based on these amounts,what is the current ratio?
A)2.54.
B)2.98.
C)4.04.
D)2.84.

Accepted Answer

The answer of Discount Travel has the following current assets:...

Question 3

Which of the following is a contingency that should be recorded?
A)The company is being sued and a loss is reasonably possible and reasonably estimable.
B)The company deducts life insurance premiums from employees' paychecks.
C)The company offers a two-year warranty and the expenses can be reasonably estimated.
D)It is probable that the company will receive $100,000 in settlement of a lawsuit.

Accepted Answer

A warranty expense that can be reasonably estimated should be recorded as a liability because it represents a probable future outflow of resources.

Question 4

Carpenter Inc.estimates warranty expense at 2% of sales.Sales during the year were $4 million and warranty expenditures were $44,000.What was the balance in the Warranty Liability account at the end of the year?
A)$44,000.
B)$80,000.
C)$36,000.
D)$480,000.

Accepted Answer

The formula for calculating the balance in the warranty liability account is: 
Beginning Balance + Expenses - Payments = Ending Balance 
We are given the expenses ($44,000) and the sales ($4 million), and we are told that the estimated warranty expense is 2% of sales. Therefore, the estimated warranty expense is $80,000 (2% of $4 million). 
Using the formula, we can solve for the ending balance: 
0 + $80,000 - $44,000 = $36,000. 
Therefore, the balance in the Warranty Liability account at the end of the year was $36,000.

Question 5

Working capital is
A)Current assets divided by current liabilities.
B)Current assets minus current liabilities.
C)Cash,short-term investments,and accounts receivable divided by current liabilities.
D)Cash,short-term investments,and accounts receivable minus current liabilities.

Accepted Answer

Working capital is the difference between current assets and current liabilities, which indicates a company's ability to meet short-term financial obligations. Option A calculates the current ratio, option C calculates the quick ratio, and option D calculates the net working capital.

Question 6

Reeves Co.filed suit against Higgins,Inc. ,seeking damages for copyright violations.Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000,with all amounts in the range considered equally likely.How should Higgins report this litigation?
A)As a liability for $100,000 with disclosure of the range.
B)As a liability for $150,000 with disclosure of the range.
C)As a liability for $200,000 with disclosure of the range.
D)As a disclosure only.No liability is reported.

Accepted Answer

The answer of Reeves Co.filed suit against Higgins,Inc. ,seeking damages...

Question 7

The acid-test ratio is
A)Current assets divided by current liabilities.
B)Cash and short-term investments divided by current liabilities.
C)Cash,short-term investments,and accounts receivable divided by current liabilities.
D)Cash,short-term investments,accounts receivable,and inventory divided by current liabilities.

Accepted Answer

The acid-test ratio, also known as the quick ratio, measures a company's ability to pay off its current liabilities without relying on the sale of inventory. It includes cash, short-term investments, and accounts receivable divided by current liabilities.

Question 8

Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:
A)Only if the amount is known.
B)Only if the amount is known or reasonably estimable.
C)Unless the amount is not reasonably estimable.
D)Even if the amount is not reasonably estimable.

Accepted Answer

The answer of Footnote disclosure is required for material potential...

Question 9

Gain contingencies usually are recognized in a company's income statement when:
A)The gain is certain.
B)The amount can be reasonably estimated.
C)The gain is reasonably possible and the amount can be reasonable estimated.
D)The gain is probable and the amount can be reasonably estimated.

Accepted Answer

The answer of Gain contingencies usually are recognized in a...

Question 10

Away Travel filed suit against West Coast Travel seeking damages for copyright violations.West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000,with all amounts in the range considered equally likely.How should West Coast Travel report this litigation?
A)As a liability for $100,000 with disclosure of the range.
B)As a liability for $150,000 with disclosure of the range.
C)As a liability for $200,000 with disclosure of the range.
D)As a disclosure only.No liability is reported.

Accepted Answer

The amount of the liability is not reasonably estimable, so only disclosure is required.

Question 11

At the beginning of 2015,Angel Corporation began offering a 1-year warranty on its products.The warranty program was expected to cost Angel 4% of net sales.Net sales made under warranty in 2015 were $180 million.Five percent of the units sold were returned in 2015 and repaired or replaced at a cost of $5.3 million.The amount of warranty expense on Angel's 2015 income statement is:
A)$ 5.3 million.
B)$ 7.2 million.
C)$ 9.0 million.
D)$27.0 million.

Accepted Answer

The warranty expense is 4% of net sales, which is $180 million x 4% = $7.2 million.

Question 12

A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:
A)The likelihood of a loss is remote.
B)The incurrence of a loss is reasonably possible.
C)The incurrence of a loss is probable.
D)The likelihood of a loss is eighty percent.

Accepted Answer

A contingent liability should be disclosed in a note to the financial statements rather than being recorded if the incurrence of a loss is reasonably possible. If the likelihood of a loss is remote, no disclosure is required. If the incurrence of a loss is probable, the liability should be recorded in the financial statements. Eighty percent likelihood is not a specific threshold for determining whether disclosure is required or not.

Question 13

Volt Electronics sells equipment that includes a three-year warranty.Repairs under the warranty are performed by an independent service company under a contract with Volt.Based on prior experience,warranty costs are estimated to be $25 per item sold.Volt should recognize these warranty costs:
A)When the equipment is sold.
B)When the repairs are performed.
C)When payments are made to the service firm.
D)Evenly over the life of the warranty.

Accepted Answer

Under accrual accounting, warranty costs should be recognized in the same period in which the related revenue is recognized. Therefore, Volt Electronics should recognize the estimated warranty costs of $25 per item sold at the time the equipment is sold. This ensures that the expenses are matched with the related revenue and accurately reflects the true cost of the sale.

Question 14

When a gain contingency is probable and the amount of gain can be reasonably estimated,the gain should be:
A)Reported in the income statement and disclosed.
B)Offset against stockholders' equity.
C)Disclosed,but not recognized in the income statement.
D)Reported in the income statement,but not disclosed.

Accepted Answer

According to accounting principles, gain contingencies that are probable and can be reasonably estimated should be disclosed in the financial statements but not recognized in the income statement until they are realized.

Question 15

The current ratio is
A)Current assets divided by current liabilities.
B)Cash and short-term investments divided by current liabilities.
C)Cash,short-term investments,and accounts receivable divided by current liabilities.
D)Cash,short-term investments,accounts receivable,and inventory divided by current liabilities.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. It measures a company's ability to pay off its short-term debts using its current assets.

Question 16

Discount Travel has the following current assets: cash,$102 million;receivables,$94 million;inventory,$182 million;and other current assets,$18 million.Discount Travel also has the following liabilities: accounts payable,$98 million;current portion of long-term debt,$35 million;and long-term debt,$23 million.Based on these amounts,what is the acid-test ratio?
A)1.47.
B)2.00.
C)2.84.
D)3.86.

Accepted Answer

To calculate the acid-test ratio, we need to subtract inventory and other current assets from current assets since these are not considered to be as easily convertible to cash as the other current assets. 
Acid-test ratio = (cash + receivables) / (accounts payable + current portion of long-term debt)
= (102 + 94) / (98 + 35)
= 196 / 133
= 1.47
So, the acid-test ratio is 1.47. The best choice is A.

Question 17

Away Travel filed suit against West Coast Travel seeking damages for copyright violations.Away Travel's legal counsel believes it is probable (but not certain)that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000,with all amounts in the range considered equally likely.How should Away Travel report this litigation?
A)As a receivable for $100,000 with disclosure of the range.
B)As a receivable for $150,000 with disclosure of the range.
C)As a receivable for $200,000 with disclosure of the range.
D)As a disclosure only.No receivable is reported.

Accepted Answer

According to the accounting principles, a loss contingency such as a lawsuit must be recognized in the financial statements only if the likelihood of the loss occurring is probable and the amount can be reasonably estimated. In this case, the likelihood of winning the lawsuit is only probable (not certain) and the estimated amount is in a range with all amounts considered equally likely. Therefore, the litigation should only be disclosed in the notes to the financial statements and no receivable should be reported. Hence, option D is the best choice.

Question 18

A contingent liability should be recorded on a company's financial statements only if the likelihood of a loss occurring is:
A)At least remotely possible and the amount of the loss is known.
B)At least reasonably possible and the amount of the loss is known.
C)At least reasonably possible and the amount of the loss can be reasonably estimated.
D)Probable and the amount of the loss can be reasonably estimated.

Accepted Answer

A contingent liability is recorded when it is probable that a loss will occur and the amount can be reasonably estimated, according to accounting standards.

Question 19

Which of the following statements regarding liquidity ratios is true?
A)A low current ratio generally indicates the ability to pay current liabilities on a timely basis.
B)A low acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.
C)All current assets are due within one year and therefore have essentially equal liquidity.
D)A high working capital generally indicates the ability to pay current liabilities on a timely basis.

Accepted Answer

A high working capital, which is the difference between current assets and current liabilities, indicates that a company has sufficient assets to cover its short-term liabilities, thus suggesting a good ability to pay off current debts in a timely manner.

Question 20

Which of the following statements regarding liquidity ratios is false?
A)A high current ratio generally indicates the ability to pay current liabilities on a timely basis.
B)A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.
C)All current assets are due within one year and therefore have essentially equal liquidity.
D)As a rule of thumb,a current ratio of 1 or higher often reflects an acceptable level of liquidity.

Accepted Answer

Not all current assets have equal liquidity as some may take longer to convert to cash than others. For example, inventory may take longer to sell than accounts receivable.

Quiz 8: Current Liabilities

Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?

Which of the following is a contingency that should be recorded?

Carpenter Inc.estimates warranty expense at 2% of sales.Sales during the year were $4 million and warranty expenditures were $44,000.What was the balance in the Warranty Liability account at the end of the year?

Working capital is

The acid-test ratio is

Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:

Gain contingencies usually are recognized in a company's income statement when:

A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:

Volt Electronics sells equipment that includes a three-year warranty.Repairs under the warranty are performed by an independent service company under a contract with Volt.Based on prior experience,warranty costs are estimated to be $25 per item sold.Volt should recognize these warranty costs:

When a gain contingency is probable and the amount of gain can be reasonably estimated,the gain should be:

The current ratio is

A contingent liability should be recorded on a company's financial statements only if the likelihood of a loss occurring is:

Which of the following statements regarding liquidity ratios is true?

Which of the following statements regarding liquidity ratios is false?