accounting chapter 8

liability

a present responsibility to sacrifice assets in the future due to a a transaction or other event that happened in the past.

unemployment taxes

a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees.

an _____ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.

accounts

A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)

accounts payable

a company purchases inventory or supplies and promises to pay within 30-45 days. no formal agreement is signed. this transaction is recorded as an

accounts payable

fringe benefits

additional employee benefits paid for by the employer.

debt covenant

an agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt.

commercial paper

borrowing from another company rather than from a bank.

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)

annual, 12 month rate.

What will be the effect of paying off an accounts payable balance on the current and the acid-test ratios? Assume that both ratios are greater than 1.

both current and acid test ratio will increase.

quick assets

cash, current investments, and accounts receivable.

Product warranties, effects of environmental problems, and lawsuits are examples of transactions or events that give rise to________ liabilities.

contingent

the feature that distinguishes loss_____ from other liabilities is the uncertain outcome.

contingent

notes payable is classified as a liability that has which of the following effects?

creates interest expense on the income statement

notes payable is classified as a liability that has which of the following effects?

creates interest expense on the income statement.

long-term debt maturing within one year

current portion of long-term debt.

The term referring to a company having a sufficient amount of cash to pay its current debts is

liquidity

higher current ratio= better liquidity and lower current ratio=worse liquidity. same thing with the acid test ratio.

true

sales taxes collected from customers by the seller are not an expense. instead, hey represent current liabilities payable to the government.

true

since a company is borrowing directly from another company, the interest rate on commercial paper is usually lower than on a bank loan.

true

the acid test ratio may provide a better indication of a company's liquidity than does the current ratio.

true

when no amount within the range appears more likely than others, we record the minimum amount and disclose the range of potential loss.

true

when a company receives cash in advance from customers, it debits cash and credits deferred revenue, a current liability account. when the company provides those goods to its customers, it debits deferred revenue and credits sales revenue.

true

when customers make warranty claims and dell incurs costs to satisfy those claims, the liability is reduced.

true

gift card breakage

the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote. companies reduce deferred revenue and recognize sales revenue.

classifying liabilities as either current or long-term helps investors and creditors assess this

the riskiness of a business's obligations.

a contingent liability is recorded as a debit to a loss and a credit to a contingent liability.

true

a contingent liability is recorded only if a loss is probable and the amount is reasonably estimable.

true

a lack of liquidity can result in financial difficulties or even bankruptcy

true

a large positive working capital is an indicator of liquidity.

true

both ratios have the same denominator, current liabilities, so a decrease in current liabilities will increase the ratios. likewise, an increase in current liabilities will decrease the ratios.

true

both ratios include cash, current investments, and accounts receivable. an increase in any of those will increase both ratios. however, only the current ratio includes inventory and other current assets. an increase in inventory or other current assets will increase the current ratio, but not the acid-test ratio.

true

companies ofter use short-term debt because it usually offers lower interest rates than long term debt.

true

current liabilities are also called short term liabilities or short term debt.

true

finally, if the likelihood of payment is remote, disclosure usually is not required.

true

if the likelihood of payment is only reasonably possible rather than probable, we record no entry but make full disclosure in a note to the financial statements to describe the contingency.

true

if the likelihood of payment is probable and if one amount within a range appears more likely, we record that amount.

true

in a pending lawsuit, one side-the defendant-faces a contingent liability, while the other side-the plaintiff has a contingent gain.

true

in comparing companies, the current ratio and the acid-test ratio are better measures of a company's ability to pay its debts on time, because working capital does not control for the relative size of each company.

true

journal entries show the transaction while t accounts give you the balance.

true

many companies are involved in litigation disputes, in which the final outcome is uncertain.

true

many companies prearrange the terms of a note payable by establishing a line of credit with a bank.

true

notes payable is recorded each time the company borrows money under the line of credit. however, no entry is made up front when the line of credit is first negotiated, since no money has yet been borrowed.

true

the loss is reported in the income statement as either an operating or a nonoperating expense. the contingent liability is reported in the balance sheet as either a current or long-term liability depending on when management expects the probable loss to be paid.

true

the warranty liability account is increased when the estimated warranty liability is recorded, but then is reduced over time by actual warranty expenditures.

true

to record payment for warranty work, we debit warranty liability and credit cash.

true

unlike contingent liabilities, contingent gains are not recorded until the gain is known with certainty and is no longer a contingency.

true

warranties are perhaps the most common example of contingent liabilities.

true

we record interest expense in the period in which we incur it, rather than in the period in which we pay it.

true

we report the currently maturing portion of a long term debt as a current liability in the balance sheet.

true

when a company borrows money, it pays the lender interest in return for using the lenders money during the term of the loan.

true

FICA and FUTA

payroll taxes

a current ratio greater than one indicates that there are more current assets than current liabilities.

true

accounts payable are sometimes called trade accounts payable. they are the amounts the company owes to suppliers of merchandise or services that it has bought on credit.

true

because the numerator consists of only a portion of the current assets used in the current ratio, the acid-test ratio will be smaller than the current ratio.

true

schmidt company borrows 10,000 from its bank and signs a 6-month note. interest, which is due quarterly, is specified in the note as 6%. the 6% interest rate is an...

annual, 12 month rate.

current assets

cash, current investments, accounts receivable, inventories, and prepaid expenses.

liquidity

having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts.

obtaining a note payable for cash results in an

increase in assets and an increase in liabilities.

an IOU promising to repay the amount borrowed plus interest.

note payable

common current liabilities include

the current portion of long term debt, sales tax payable, and deferred revenues.

contingent liability

an existing uncertain situation that might result in a loss depending on the outcome of a future event. ex include lawsuits, product warranties, environmental problems, and premium offers.

line of credit

an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures aterm-18nd prepare paperwork.

an interest rate, unless otherwise specified, is typically an _____ rate.

annual

mixture of liabilities and equity a business uses

capital structure

deferred revenue

cash received in advance from a customer for products or services to be provided in the future.

acid test ratio (quick ratio)

cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.

amount of note payable x annual interest rate x fraction of the year

interest on debt

what are the three liquidity measures?

working capital, the current ratio, and the acid-test ratio.

the likelihood of payment is...

1.probable-likely to occur. 2.reasonably possible- more than remote but less than probable; or 3.remote- the chance is slight.

the amount of payment is

1.reasonably estimable; or 2.not reasonably estimable.

deferred revenues and sales tax payable typically are reported as ______ liabilities.

current

what obligations do firms most frequently report as current liabilities?

notes payable, accounts payable, and payroll liabilities are the three main categories. other current liabilities include deferred revenue, sales tax payable, and the current portion of long term debt.

payment amount is probable and is reasonably estimable

recording of a contingent liability.

sales tax payable

sales tax collected from customers by the seller, representing current liabilities payable to the government. when the company collects the sales taxes, it increases (debits) cash and increases (credits) sales tax payable.

Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should record the following credit amounts.

sales tax payable of 100 and sales revenue of 1000.

a contingent liability is recorded only if a loss is probably AND the amount is reasonably estimable.

true

on November 1, 2018, ABC corp borrowed 100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. the journal entry on November 1, 2018 would include which of the following?

debit to cash 100,000; credit to note payable 100,000.

a warranty (contingent liability) is recorded as...

debit to warranty expense and credit to warranty liability.

current portion of long-term debt

debt that will be paid within one year from the balance sheet date. management needs to know this amount in order to budget the cash flow necessary to pay the current portion as it comes due.

current liabilities

debts that, in most cases, are due within one year from the balance sheet date. however, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year.

a liability that requires the sacrifice of something other than cash.

deferred revenue

payment amount is reasonably possible and is reasonably estimable.

disclosure of a contingent liability.

how to calculate interest on notes

interest = face value x annual interest rate x fraction of the year

A contingent liability is recorded if which conditions are met?

it is probable that a future loss will occur, and the amount of the loss can be reasonably estimated.

Identify a primary reason why financial statement users assess a company's liquidity.

lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.

When a contingent event that may give rise to a future loss is likely to occur, it is said to be

probable

Which of the following may be classified as contingent liabilities?

product warranties, frequent flyer program awards, and future litigation losses.

Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?

reasonably possible, remote, and probable.

A loss that is judged to be probable and for which the amount is reasonably estimable should be

recorded

Poppy Corporation has a current ratio of 2.0 and a quick ratio of 1.6. Poppy purchases additional inventory for cash. Which of the following occurs?

the current ratio will remain the same.

working capital

the difference between current assets and current liabilities. =current assets-current liabilities.

operating cycle

the length of time from spending cash to provide goods and services to a customer until collection of cash from that customer.

Which of the following is an important criteria used to determine the reporting of a contingent liability?

the likelihood of future payment or loss.

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

the likelihood of payment and the ability to estimate the amount of payment.

sales tax=

total cash paid-(total cash paid/1+sales tax rate)

notes payable

liability that creates interest expense. written promises to repay amounts borrowed plus interest.

informal agreement that permits a company to borrow up to a prearranged limit.

line of credit

contingent gain

an existing uncertain situation that might result in a gain.

FICA taxes

based on the federal insurance contributions act; tax withheld from employees' paychecks and matched by employers for social security and medicare.

A transaction or event in which the outcome is uncertain is referred to as a(n)

contingency

The feature that distinguishes loss______from other liabilities is the uncertain outcome

contingency

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should

credit notes payable 5000

On November 1, 2018, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, 2019. The journal entry on November 1, 2018 would include which of the following?

credit to notes payable 100,000 and debit to cash 100,000

current ratio

current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

Taxes collected for taxing authorities are recognized as

current liabilities

deferred revenues and sales tax payable typically are reported as ______ liabilities.

current/short-term

deferred revenue should be classified as a _______ on the balance sheet.

liability

working capital is the difference between current assets and current liabilities. the current ratio is equal to current assets divided by current liabilities. the acid test ratio is equal to quick assets divided by current liabilities. each measures a company's liquidity, its ability to pay currently maturing debts.

true

a contingent liability is an existing _________ situation that might result in a loss depending on the outcome of a future event.

uncertain

contingencies

uncertain situations that can result in a gain or a loss for a company.

IRS publication 25/Circular E

valuable tool for employers, answering important payroll tax withholding questions as well as providing the individual tax tables.

For a manufacturer, the most commonly reported contingent liabilities relate to product

warranty

Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a(n)

warranty