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Chapter 09 Reporting and Interpreting Liabilities Answer Key
True / False Questions
1.
When a liability is initially recorded, it is recorded at the future amount of all payments.
2.
A current liability is always a short-term obligation expected to be paid within one year of the
balance sheet date.
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3.
The accrual of interest results in an increase liabilities and a decrease in cash.
4.
Cash received from customers may result in a current liability.
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5.
A current liability is created when a customer pays cash for services to be provided in the
future.
6.
Accounts payable and accrued liabilities are interchangeable account titles.
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7.
Income taxes payable is an example of an accrued liability.
8.
Wages expense is an example of an accrued liability account.
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9.
An employee has an obligation to pay his payroll taxes to the employer.
10.
The FICA (social security) tax is a matching tax with a portion paid by both the employer and
the employee.
11.
A liability that is estimated because the final settlement amount is unknown cannot be
reported on the balance sheet.
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12.
Purchasing inventory on account increases the accounts payable turnover ratio.
13.
The choice of inventory method has an impact on the accounts payable turnover ratio.
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14.
The accounts payable turnover ratio is calculated by dividing accounts payable by cash
payments to suppliers.
15.
The accounts payable turnover ratio is difficult to manipulate.
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16.
The accrual of interest on a short-term note payable decreases working capital and current
assets.
17.
A company borrowed $100,000 at 6% interest on September 1, 2016. Assuming adjusting
entries have not been made during the year, the entry to record interest accrued on December
31, 2016 would include a debit to interest expense and a credit to interest payable for $2,000.
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18.
A contingent liability is reported on the balance sheet if it is probable and can be estimated.
19.
A contingent liability is disclosed in a note to the financial statements when the liability is
reasonably possible and can be estimated.
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20.
The journal entry to record a contingent liability creates an accrued liability on the balance
sheet and a loss on the income statement.
21.
A contingent liability can not be disclosed in a note to the financial statements unless it can
be estimated.
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22.
Working capital is a measure of short-run liquidity and is measured by dividing current assets
by current liabilities.
23.
Working capital is a measure of long-term liquidity and is calculated by subtracting the
current liabilities from the current assets.
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24.
Working capital decreases when accrued wages expense is recorded at year-end.
25.
Working capital decreases when a company pays taxes payable.
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26.
Working capital increases when a company purchases equipment and signs a 2-year note
payable.
27.
Working capital increases when a company accrues sales revenue at year-end.
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28.
Long-term liabilities are reported on the balance sheet at an amount equal to the future cash
flows.
29.
Operating leases are reported on the balance sheet at an amount equal to the present value
of the future cash flows.
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30.
For the present value of a single amount, the compounding period may only be once a year.
31.
An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount
over the payment amount of the prior year.
32.
An annuity is a series of consecutive and unequal payments over time.
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33.
In order to calculate the cost of a long-term asset that is financed with long-term debt,
present values concepts would be used.
Multiple Choice Questions
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34.
Which of the following statements is correct?
35.
Which of the following is not a current liability?
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36.
Which of the following is incorrect?
37.
Which of the following is correct?
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38.
When a company receives cash before products or services are provided the following
results:
39.
Which of the following statements is correct?
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Topic Area: Current liabilities-Compensation and costs
40.
Which of the following describes an accrued liability?
41.
Landseeker’s Restaurants reported cost of goods sold of $322 million and accounts payable of
$84 million for 2017. In 2016, cost of goods sold was $258 million and accounts payable was
$72 million. Landseeker’s accounts payable turnover ratio in 2017 is closest to: