978-1337276337 Test Bank Chapter 9 Part 1

Chapter 9

Page 1

1. A note payable due in two years is a current liability.

a. True

b. False

2. The current maturity of long-term debt is a current liability.

a. True

b. False

3. A note payable that is due in six months is a current liability.

a. True

b. False

Page 2

4. If a bank discounts a note, then the borrower needs to only pay the cash received and not the face value of the note.

a. True

b. False

5. A remotely possible loss from a lawsuit is not reported on the balance sheet as a current liability.

a. True

b. False

6. Discount on Notes Payable is treated as a reduction of notes payable on the balance sheet.

a. True

b. False

Page 3

7. For users of financial statements, the current liability classification in the balance sheet is important because it is most

closely tied to the concept of profitability.

a. True

b. False

8. When a liability is accrued, the account debited in the transaction is a stockholders’ equity account.

a. True

b. False

9. U.S. standards require a classified balance sheet, but international accounting standards do not require companies to

present classified balance sheets with liabilities classified as either current or long term.

a. True

b. False

Page 4

10. Accrued wages is a current liability.

a. True

b. False

11. Income taxes payable is a current liability.

a. True

b. False

12. A company gives a two-year warranty for its product. The estimated liability for product warranties for the upcoming

year is a current liability.

a. True

b. False

Page 5

13. Income taxes payable are recognized as an expense once they are paid to the respective government or taxing

authority.

a. True

b. False

14. An amount that has been incurred as an expense, but has not yet been paid should be considered an accrued liability.

a. True

b. False

15. International accounting standards require companies to present classified balance sheets with liabilities classified as

either current or long term.

a. True

b. False

Page 6

16. Generally, an increase in a current liability results in an increase in the Operating Activities category of the cash flow

statement.

a. True

b. False

17. In the statement of cash flows, a decrease in accounts payable would be shown as an increase in the Operating

Activities category.

a. True

b. False

18. In the statement of cash flows, an increase in a current liability will appear as an increase in the Financing category.

a. True

b. False

Page 7

19. Estimated liability for product warranties to be paid in the upcoming year is a current liability.

a. True

b. False

20. Warranty expenses are the result of the selling company’s estimate of the number of units sold during the current year

that may become defective and need repair or replacement during the warranty period.

a. True

b. False

21. When a company uses coupon or premium offers in conjunction with the sale of its products, there is no need to

record any contingent liability.

a. True

b. False

Page 8

22. Curtain Corp. stands to receive a sufficient cash settlement from a lawsuit. Curtain needs to record this on its

accounting records.

a. True

b. False

23. Advance ticket sales for a concert next month are a current liability.

a. True

b. False

24. The liability for a premium offer estimated to be redeemed is not a current liability.

a. True

b. False

Page 9

25. A contingent liability is recorded if it is probable and can be reasonably estimated.

a. True

b. False

26. For a given contingent liability, a company has the choice of either recording it on the balance sheet or disclosing it in

the notes.

a. True

b. False

27. The terms referring to contingencies differ between U.S. GAAP and IFRS.

a. True

b. False

Page 10

28. International accounting standards use the term provision for those contingent items that must be recorded on the

balance sheet.

a. True

b. False

29. Contingent assets may be disclosed in the notes if probable and reasonably estimable.

a. True

b. False

30. Accountants need not worry about calculations based on the concept of the time value of money.

a. True

b. False

Page 11

31. Compound interest is a repeated calculation of the interest only on the principal over certain periods of time.

a. True

b. False

32. Simple interest on a loan can be calculated by multiplying the principal by the annual interest rate expressed as a

percentage of the time in years or a fraction of the time in years.

a. True

b. False

33. If the annual interest is 12%, but the compounding is done quarterly, then the interest rate is 4% per period.

a. True

b. False

Page 12

34. $2,000 invested today at 12% with compound interest will yield $2,480 in two years.

a. True

b. False

35. When borrowing money to be repaid in regular future payments, the payment is based on the present value of the loan,

the interest rate, and the length of the loan.

a. True

b. False

36. The present value is the value today of a single amount to be paid or received at a specific date in the future.

a. True

b. False

Page 13

37. An annuity is a series of equal payments made at equal intervals in the future.

a. True

b. False

38. If you plan to invest $10,000 and want to determine how much will be accumulated in six years if you earn interest at

7% per year, you would calculate this using the future value of an annuity.

a. True

b. False

39. In a compound interest problem, if you know the future value, the present value, and the number of periods, then you

can solve for the interest rate.

a. True

b. False

Page 15

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

a. Note payable, due in three years

b. Taxes payable

c. Salaries payable

d. Accounts payable

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

a. Bonds payable

b. Capital lease obligations

c. Current portion of long-term debt

d. Mortgage payable

44. Current liabilities are defined as those liabilities that will be satisfied

a. by the end of the operating cycle.

b. within one year.

c. within one year or within the operating cycle, whichever is longer.

d. within one year or within the operating cycle, whichever is shorter.

Page 16

45. Which of the following statements is true of liabilities?

a. Accounts payable are listed in the Current Liabilities section in alphabetical order by vendor.

b. Classification of current liabilities is important because of the liquidity concept.

c. Current liabilities are listed in order of decreasing amounts in the Current Liabilities section of the balance sheet.

d. U.S. accounting principles differ from those of other countries; this is especially true for current liabilities.

46. Which of the following statements about current liabilities is true?

a. Current liabilities are listed in order of decreasing amounts in the Current Liabilities section of the balance sheet.

b. The amount of current liabilities has little implication for a company’s liquidity.

c. The Current Liabilities section never contains any portion of long-term liabilities.

d. The current ratio is defined as current assets divided by current liabilities.

Page 17

47. 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

a. 1.75 to 1.

b. 3.50 to 1.

c. 3.00 to 1.

d. 2.25 to 1.

48. 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

a. 1.75 to 1.

b. 2.25 to 1.

c. 3.00 to 1.

d. 3.50 to 1.

Page 18

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

ratio is

a. 2.12 to 1.

b. 2.31 to 1.

c. 3.03 to 1.

d. 3.50 to 1.

50. 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

a. $200.

b. $625.

c. $1,250.

d. $2,000.

Page 19

51. If a company purchases $3,200 worth of inventory with terms of 3/10, n/30 on March 3 and pays March 12, then the

amount paid to the seller would be

a. $96.

b. $3,104.

c. $3,200.

d. None of these are correct.

52. The payment of accounts payable results in a(n)

a. decrease in liabilities and a decrease in assets.

b. decrease in liabilities and an increase in assets.

c. increase in liabilities and a decrease in owners’ equity.

d. decrease in liabilities and an increase in owners’ equity.

Page 20

53. 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

a. $3,136.

b. $3,150.

c. $3,168.

d. $3,200.

54. 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

a. a loss.

b. an expense.

c. a discount.

d. prepaid interest.

55. A bank loaned Darden Company $10,000 on a one-year, 6% note, but deducted the interest in advance. The journal

entry made by Darden to record receipt of the cash would include a(n)

a. increase in cash for $9,400.

b. increase in cash for $600.

c. decrease in notes payable for $10,600.

d. decrease in notes payable for $9,400.

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