Question 1

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

Accepted Answer

Note payable, due in three 3) years is a long-term liability, not a current liability. The other options (taxes payable, salaries payable, and accounts payable) are all examples of current liabilities.

Question 2

The payment of accounts payable results in an)

Accepted Answer

Paying off accounts payable decreases liabilities (as the obligation to pay is fulfilled) and decreases assets (as cash or another asset is used to make the payment).

Question 3

Assume the current ratio is 2 to 1.Payment on accrued salaries payable would cause the current ratio to

Accepted Answer

A

Question 4

If current assets amount to $150, total assets $350, current liabilities $65, and total liabilities $100, then the current ratio is

Accepted Answer

Current ratio = Current assets/Current liabilities
Current ratio = $150/$65
Current ratio = 2.31 to 1.

Question 5

A bank loaned Darden Company $10,000 on a 1-year, 6% note, but deducted the interest in advance.The journal entry made by Darden to record receipt of the cash would include a

Accepted Answer

The interest on a $10,000 loan at 6% for one year is $600. If the bank deducts the interest in advance, Darden receives $10,000 - $600 = $9,400. Therefore, the journal entry would include an increase in Cash for $9,400.

Question 6

Which of the following statements about current liabilities is true?

Accepted Answer

The current ratio is defined as current assets divided by current liabilities, which means that current liabilities have a significant impact on a company's liquidity. A is incorrect because current liabilities are typically listed in order of maturity, not decreasing amounts. B is incorrect because the amount of current liabilities is a key indicator of a company's ability to meet short-term obligations. C is incorrect because the current liability section can contain portions of long-term liabilities that are due within the next year.

Question 7

Assume the current ratio is 3 to 4.Purchases of inventory on account would cause the current ratio to

Accepted Answer

The answer of Assume the current ratio is 3 to...

Question 8

Which of the following is not classified as a noncurrent liability?

Accepted Answer

The current portion of long-term debt is classified as a current liability as it is expected to be settled within one year. Bonds payable, capital lease obligations, and mortgage payable are classified as noncurrent liabilities as they are expected to be settled over a period of time greater than one year.

Question 9

Assume the current ratio is 3 to 1.Estimating the warranties expense on the period's sales would cause the current ratio to

Accepted Answer

Estimating the warranties expense on the period's sales would cause an increase in the current liabilities, thus decreasing the current ratio.

Question 10

The landlord records the security deposit she collects from the tenant as an)

Accepted Answer

The answer of The landlord records the security deposit she...

Question 11

If a company purchases $3,200 worth of inventory with terms of 2/10, n/30 on March 3 and pays April 2, then the amount paid to the seller would be

Accepted Answer

The terms 2/10, n/30 mean that the buyer can take a 2% discount if the invoice is paid within 10 days; otherwise, the net (full) amount is due within 30 days. Since the payment was made on April 2, which is beyond the 10-day discount period from March 3, the full amount of $3,200 is due.

Question 12

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory.If current liabilities are $400, then the current ratio would be

Accepted Answer

The answer of A company has $200 in cash, $500...

Question 13

Current liabilities are defined as those liabilities which will be satisfied

Accepted Answer

Current liabilities are defined as those obligations of the firm which are expected to be satisfied within one year or within the operating cycle, whichever is longer. The operating cycle is defined as the time it takes for a company to convert cash into inventory, sell the inventory, and collect cash from customers. Therefore, current liabilities are those liabilities which are due and payable within the next year or operating cycle, whichever is longer.

Question 14

If a company purchases $3,200 worth of inventory with terms of 2/10, n/30 on March 3 and pays March 12, then the amount paid to the seller would be

Accepted Answer

The terms 2/10, n/30 mean a 2% discount is available if paid within 10 days. Since the payment is made on March 12, within the discount period, the company pays $3,200 - ($3,200 * 0.02) = $3,136.

Question 15

All of the following are characteristics of current liabilities except:

Accepted Answer

All three of the given characteristics are correct and accurate regarding current liabilities. They can be replaced with another short-term liability instead of being paid in cash, they may involve estimated amounts, and they are due within one year or within the operating cycle, whichever is longer. Therefore, option D is the correct answer.

Question 16

A company has $200 in cash, $500 in accounts receivable, and $700 in inventory.If current liabilities are $400, then the quick ratio would be

Accepted Answer

The quick ratio (also known as acid-test ratio) calculates a company's ability to meet short-term obligations using only quick assets (assets that can be easily converted into cash). To calculate the quick ratio, we add up the quick assets, which are cash and accounts receivable in this case, and divide by current liabilities. 
Quick assets = $200 (cash) + $500 (accounts receivable) = $700
Quick ratio = Quick assets / current liabilities = $700 / $400 = 1.75 to 1. 
Therefore, the correct answer is A.

Question 17

Redfearn Company has current assets of $150,000 and current liabilities of $60,000.How much inventory could it purchase on account and achieve its minimum desired current ratio of 2 to 1?

Accepted Answer

To achieve a minimum desired current ratio of 2 to 1, Redfearn Company needs to have current assets that are twice its current liabilities.

Current assets = $150,000 
Current liabilities = $60,000

Therefore, the current ratio is:

$150,000 / $60,000 = 2.5 to 1

To bring the current ratio down to 2 to 1, the company needs to decrease current assets by $30,000.

Therefore, the maximum inventory purchase on account would be:

$30,000, which is answer choice C.

Question 18

Long-term assets are $800, current liabilities are $500, and long-term liabilities are $600.If the current ratio is 2.5 to 1, then current assets are

Accepted Answer

The answer of Long-term assets are $800, current liabilities are...

Question 19

If a company borrows money from its bank and the bank deducts the interest in advance, the company would record the amount of the interest deduction as

Accepted Answer

The interest deducted in advance is recorded as a discount, which represents the cost of borrowing and is amortized over the life of the loan.

Question 20

Which of the following statements is true of liabilities?

Accepted Answer

Classification of current liabilities is important because the liquidity concept requires that they be paid within one year. This information helps users of financial statements assess a company's ability to pay its short-term obligations. Option A is incorrect because accounts payable are usually listed in order of due date. Option C is incorrect because current liabilities are typically listed in order of due date, not decreasing amounts. Option D is incorrect because principles for current liabilities are generally consistent across countries.

Quiz 9: Current Liabilities, Contingencies, and the Time Value of Money