Question 1

The trade payables turnover ratio can be manipulated by management through paying off more of their vendors at the end of the year, even though they have been paying late all year, so their ratio would look acceptable.

Accepted Answer

This is a common technique used by management to manipulate the trade payables turnover ratio. By paying off more vendors at the end of the year (even if they have been paying late all year), the ratio will appear better, making the company's financial health appear stronger than it is in reality. However, this is not a sustainable or ethical practice, and it can ultimately harm the company's reputation and relationships with vendors.

Question 2

Under IFRS, a distinction is made between provisions and contingencies. Provisions are estimated liabilities that are reported on the statement of ﬁnancial position whereas contingencies are not recognized as liabilities because of the uncertainty of the amount and timing of future payments.

Accepted Answer

This statement accurately describes the distinction between provisions and contingencies under IFRS.

Question 3

A note payable must always be paid before an account payable.

Accepted Answer

An account payable is typically due within a certain period of time (usually 30-60 days), while a note payable has a specific date for repayment. Therefore, a note payable may be due before or after an account payable depending on the specific terms of each.

Question 4

All contingent liabilities should be classiﬁed as either current or long-term liabilities on the statement of ﬁnancial position for the current period.

Accepted Answer

Contingent liabilities are not classified as current or long-term liabilities on the statement of financial position because they are potential obligations that depend on a future event that may or may not occur. They are disclosed in the notes to the financial statements unless the possibility of an outflow of resources embodying economic benefits is remote.

Question 5

In the recognition of revenues and expenses, temporary and permanent differences between the ﬁnancial statements and the tax return will result in a Future Income Tax Asset.

Accepted Answer

Temporary differences between financial statements and tax returns can result in either a future income tax asset or a future income tax liability, depending on whether the difference will result in deductible amounts in the future (leading to a future tax asset) or taxable amounts in the future (leading to a future tax liability). Permanent differences do not result in future tax assets or liabilities because they do not reverse over time.

Question 6

When the current assets of a company such as trade receivables or inventory increase during the year, the increase provides additional cash inﬂow from operating activities.

Accepted Answer

An increase in current assets such as trade receivables or inventory indicates that the company has used cash to purchase or produce these assets, and therefore it would be a cash outflow from operating activities. It is only when these assets decrease that it would result in additional cash inflow from operating activities.

Question 7

If a company intends to reﬁnance a liability that is due within one year, that liability should not be classiﬁed as a current liability.

Accepted Answer

If a company has the intent and ability to refinance a short-term liability on a long-term basis, it can be classified as a non-current liability according to accounting standards.

Question 8

A low trade payables turnover ratio caused by an aggressive cash management strategy, while the quick ratio is adequate, would be perceived by analysts as a weakness.

Accepted Answer

A low trade payables turnover ratio, in the context of an aggressive cash management strategy and an adequate quick ratio, indicates that the company is efficiently managing its cash by delaying payments to suppliers without jeopardizing its liquidity. This is generally seen as a strength because it shows effective cash management and the ability to maintain liquidity.

Question 9

Contingencies are disclosed in a note if it is probable that cash of other assets will be required to settle the obligation, or if the amount of the obligation cannot be measured with suﬃcient reliability.

Accepted Answer

The answer of Contingencies are disclosed in a note if...

Question 10

The balance in the Future Income Tax Asset account always will reverse or "turn around" over a period of one or more future periods if no new differences originate.

Accepted Answer

The Future Income Tax Asset account represents temporary differences between book and tax accounting, and these differences will eventually reverse as the book and tax treatment of items converges over time. Therefore, the balance in the account will always turn around or reverse over a period of one or more future periods if no new differences originate.

Question 11

Notes payable are sometimes used instead of trade payables.

Accepted Answer

Notes payable are a form of short-term borrowing where the borrower issues a written promissory note to the lender, usually with a fixed maturity date and interest rate. This may be used instead of trade payables for larger or more significant transactions or when the supplier requires payment sooner than the buyer can provide.

Question 12

A contingent liability that is "probable" and can be "reasonably estimated" must be accrued and reported as a liability.

Accepted Answer

According to accounting principles, a contingent liability that is probable and can be reasonably estimated must be accrued and reported as a liability.

Question 13

The time value of money refers to the fact that interest accrues on borrowed money with the passage of time.

Accepted Answer

The time value of money is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This is because money can earn interest and grow in value over time. Therefore, the longer you have the money, the more it will be worth.

Question 14

A commitment is a contractual agreement to enter into a transaction with another party in the future.

Accepted Answer

A commitment is indeed a contractual agreement to enter into a transaction with another party in the future.

Question 15

Notes payable usually require the borrower to pay interest.

Accepted Answer

Notes payable typically require the borrower to pay interest on the amount borrowed. This is the cost of borrowing money and is an important factor to consider when taking out a loan or issuing a note payable.

Question 16

Changes in trade payables and accrued liabilities affect cash ﬂows from operating activities.

Accepted Answer

Trade payables and accrued liabilities are both components of the operating activities section of a company's cash flow statement. An increase in trade payables represents an increase in the amounts owed to suppliers for goods and services received, which is a source of cash, while an increase in accrued liabilities represents an increase in expenses owed but not yet paid, which is also a source of cash. Conversely, a decrease in trade payables or accrued liabilities represents a use of cash.

Question 17

Time value of money is based on the concept that money received today is worth more than money to be received a year from today.

Accepted Answer

This is because money received today can be invested and earn interest, whereas money received in the future cannot be invested until it is received. Therefore, the value of money decreases over time due to inflation and the opportunity cost of not being able to invest it immediately.

Question 18

The trade payables turnover ratio tests how quickly our credit customers pay their bills.

Accepted Answer

The trade payables turnover ratio measures how quickly a company pays its suppliers, not how quickly customers pay their bills.

Question 19

With an interest-bearing note, the amount of cash received upon issue of the note generally exceeds the note's face value.

Accepted Answer

With an interest-bearing note, the amount of cash received upon issue is typically equal to the note's face value; the interest is paid separately over the life of the note or at maturity.

Question 20

A contingent liability that has a remote probability of occurrence must be disclosed in a note to the ﬁnancial statements.

Accepted Answer

Contingent liabilities that have a remote probability of occurrence do not need to be disclosed in the notes to the financial statements. Only those that have a reasonable possibility or are probable must be disclosed.

Quiz 9: Long-Lived Tangible and Intangible Assets