Chapter 9 Intermediate

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Assume that a company is facing a loss contingency. GAAP requires the company to recognize a liability even if the company cannot determine whether or not the event has occurred.

False

Why are most current liabilities reported at face or maturity value rather than their present value, as prescribed by GAAP?

The difference between maturity and present value is not material because such a short amount of time is involved.

A company recognizes an expense and accrues a liability for an employees' future vacation pay when which of following conditions are met?

The company's obligation is based on the employee's services already rendered. The company's obligation relates to rights that vest. The company's obligation relates to rights that accumulate. *All of these conditions must be met.*

Which of the following statements regarding the gross and net methods for recording trade accounts payable is true?

The net method highlights management inefficiency because purchase discounts lost are recorded whenever an invoice is paid after the cash discount period has expired.

Compensated absences include vacation, holiday, sick, or other activities for which the company pays its employees.

True

Liabilities are defined as probable future sacrifices of economic benefits arising from present obligations of a company to provide services or assets in the future as defined by the FASB.

True

The ability to refinance short-term obligations on a long-term basis can be demonstrated if the company has already refinanced those obligations after the date of the balance sheet but before it is issued.

True

The ability to utilize financial resources and to adapt to changes in the business environment is referred to as a company's financial flexibility.

True

Discount on notes payable is shown on the balance sheet as

a contra liability.

Which of the following is most likely an equitable and constructive liability?

bonuses payable

Under current standards of the FASB, liabilities include

both legal and nonlegal obligations.

Payments received in advance on service contracts

cannot be recorded as revenues until the contracted services are performed. are called unearned revenues. are called deferred revenues. *all of these choices.*

The operating cycle is typically defined as the time it requires to convert

cash to inventory to receivables to cash.

Most companies report current liabilities as the

first classification of the Liabilities and Shareholders' Equity section of the balance sheet.

Undeclared dividends in arrears on preferred stock is reported

in the notes to the financial statements.

"The probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events" describes which of the following?

liabilities

Current liabilities are obligations that must be met within

one year or the normal operating cycle, whichever is longer.

With a non-interest-bearing note

the discount deducted from the proceeds represents the interest expense.

Companies may list current liabilities on the balance sheet in the order of

their preference of any of these choices.


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