3) Having liabilities classified incorrectly will have a big impact on the company’s current ratio.
4) By NOT accruing warranty expense:
A) reported liabilities will be overstated and net income will be understated.
B) reported expenses will be overstated and reported liabilities will be understated.
C) reported liabilities will be understated and net income will be overstated.
D) reported expenses will be understated and net income will be understated.
5) Mackey Company has a 5-year mortgage for $100,000 which requires 5 equal payments of
principal plus interest. In the first year of the mortgage, Mackey will report this liability as a:
A) current liability of $100,000.
B) long-term liability of $100,000.
C) current liability of $80,000 and a long-term liability of $20,000.
D) current liability of $20,000 and a long-term liability of $80,000.
6) One type of liability that is easy to overlook is a(n):
A) tax liability.
B) note payable.
C) account payable.
D) contingent liability.
7) Which current liability is generally listed first?
A) Notes payable
B) Accounts Payable
C) Current portions of long-term debt
D) Accrued payables
9.7 Questions
1) The percentage of a company’s total assets that it would take to pay off all of the company’s
liabilities is called the debt ratio.
2) The debt ratio equals total assets divided by total liabilities.
3) The debt ratio is an indicator of a company’s profitability.
4) The debt ratio is an indicator of a company’s ability to incur more debt.
5) A debt ratio of 0.50 (50%) would mean that half of a company’s assets would need to be sold
to pay off all of its current liabilities.
6) Both the formulas for current ratio and debt ratio use current liabilities in the computation.
7) The interest coverage ratio equals interest expense divided by EBIT.
8) EBIT is also called operating profit.
9) A company will want a lower interest coverage ratio if it is unsure of its EBIT.
10) A company’s ability to pay the interest on its debt is often measured with the interest
coverage ratio.
11) Bach Instruments had total assets of $560,000; total liabilities of $250,000; and total
Stockholders’ Equity of $310,000. Bach’s debt ratio is:
A) 55.4%.
B) 80.6%.
C) 44.6%.
D) 28.7%.
12) Livingston Organization had total assets of $600,000; total liabilities of $175,000; and total
Stockholders’ Equity of $425,000. Livingston’s debt ratio is:
A) 17.1%.
B) 70.8%.
C) 41.2%.
D) 29.2%.
13) Dante’s Designs has current assets of $56,000; long-term assets of $135,000; current
liabilities of $44,000; and long-term liabilities of $90,000. Dante’s debt ratio is:
A) 127.3%.
B) 78.6%.
C) 239.3%.
D) 70.2%.
14) Vintage Boutique reported Interest expense of $5,200, Income tax expense of $23,000 and
Net income of $78,000. Vintage Boutique’s interest coverage ratio is (rounded to two decimals):
A) 19.42.
B) 0.50.
C) 0.05.
D) 20.42.
15) TLR Productions reported Interest expense of $8,300, Income tax expense of $26,400 and
Net income of $88,700. TLR’s interest coverage ratio is (rounded to three decimals):
A) 13.867.
B) 14.867.
C) 0.072.
D) 0.067.
16) Which of the following statements is TRUE regarding the debt ratio?
A) The debt ratio focuses on the total liabilities of an organization.
B) The debt ratio reveals the percentage of a business’ assets financed with liabilities.
C) The debt ratio is used to analyze a business’s ability to pay its current obligations as they
come due.
D) Both A and B are true statements regarding the debt ratio.
1) Payroll is also called employee compensation and can consist of many parts.
2) Benefits are extra compensation that is paid directly to the employee.
3) After being withheld, payroll taxes become an asset for the company.
4) A good internal control for payroll is for the Human Resource Department to be in charge of
distributing paychecks to employees.
5) A company may use two payroll accounts as a control for efficiency.
6) Ronaldo earns $20 per hour and works 40 hours a week. Last week he worked 45 hours; given
that his company pays time and a half for overtime—what is Ronaldo’s gross pay for the week?
A) $800
B) $850
C) $900
D) $950
7) Sydney earns $15 per hour and works 40 hours a week. Last week she worked 44 hours; given
that her company pays time and a half for overtime—what is Sydney’s gross pay for the week?
A) $600
B) $660
C) $690
D) $720
8) Which are generally paid for exceptional performance?
A) Salaries
B) Wages
C) Bonuses
D) Commissions
9) Which are generally paid at an hourly rate?
A) Salaries
B) Wages
C) Bonuses
D) Commissions
10) Pay stated at a monthly or annual rate is considered to be a:
A) salary.
B) wage.
C) bonus.
D) commission.
11) Many salespersons have part of their payroll determined by a percent of sales. These are
called:
A) salaries.
B) wages.
C) bonuses.
D) commissions.
12) Which of the following would NOT be a required payroll deduction for an employee?
A) FICA
B) 401(K) retirement
C) Federal income tax
D) State income tax
13) Which of the following would be a required payroll tax for both the employee and the
employer?
A) Federal income tax
B) FICA
C) FUTA
D) SUTA
14) Which of the following would NOT be part of an employer’s payroll taxes?
A) Federal income tax
B) FICA
C) FUTA
D) SUTA
15) Which of the following does NOT have an effect on the amount of federal income tax to be
withheld from an employee’s pay?
A) Age of employee
B) Marital status of employee
C) Number of withholding allowances claimed
D) Gross pay of employee
16) A W-4 filled out by the employee does not designate their:
A) marital status.
B) withholding allowances.
C) address.
D) age.
17) Most single individuals will claim:
A) 0 allowances.
B) 0 or 1 allowances.
C) 2 allowances.
D) more than 2 allowances.
18) The lower the number of withholdings claimed on a W-4, the:
A) higher the gross pay.
B) higher the net pay.
C) lower the gross pay.
D) lower the net pay.
19) Withheld payroll deductions become:
A) assets of the employer.
B) liabilities of the employer.
C) revenues of the employer.
D) liabilities of the employee.
20) The tax rate on the OASDI portion of FICA is:
A) 7.65%.
B) 1.45%.
C) 6.20%.
D) 0.80%.
21) The tax rate on the HI (Medicare) portion of FICA is:
A) 7.65%.
B) 1.45%.
C) 6.20%.
D) 0.80%.
22) The combined FICA rate for employees is:
A) 7.65%.
B) 1.45%.
C) 6.20%.
D) 0.80%.
23) The maximum tax credit an employer can get for FUTA if they pay unemployment taxes to a
state is:
A) 6.20%.
B) 5.40%.
C) 0.80%.
D) 7.65%.
24) FUTA is paid by the employer on:
A) the first $106,800 of an employee’s earnings.
B) the first $8,000 of an employee’s earnings.
C) the first $7,000 of an employee’s earnings.
D) all of the employee’s earnings.
25) Richard is paid a salary of $9,000. At the end of November, his cumulative gross earnings
were $99,000. How much will his employer take out for the OASDI portion of social security for
December?
A) $558.00
B) $688.50
C) $130.50
D) $483.60
26) Richard is paid a salary of $9,000. At the end of November, his cumulative gross earnings
were $99,000. How much will his employer take out for the HI portion of social security for
December?
A) $558.00
B) $688.50
C) $130.50
D) $483.60
27) Marla Smith, an employee of Clown College, earned $105,000 prior to December. Smith’s
salary for December is $10,000. For what amount will Smith’s December salary be subject to
OASDI tax and HI tax, respectively.
A) OASDI $8,700; HI $8,700
B) OASDI $8,700; HI $10,000
C) OASDI $10,000; HI $8,700
D) OASDI $10,000; HI $10,000