Accounting Chapter 8: Current Liabilities

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.

___ refers to a company's cash position and overall ability to obtain cash in the normal course of business. (Enter one word per blank)

Liquidity

What are the two classifications for liabilities?

Long-term Current

A contingent liability is recorded if which conditions are met?

The amount of the loss can be reasonably estimated. It is probable that a future loss will occur.

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

The likelihood of future payment or loss

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

recorded

Which of the following tends to be the source of the most commonly reported contingent liability?

warranties

Taxes subtracted from employees' pay and remitted to the government on their behalf are called

withholding taxes.

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) ___. (Enter one word per blank)

warranty

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

contingent

An existing uncertain situation that might result in a loss depending on the outcome of a future event is a ___ liability. (Enter one word per blank)

contingent

The flipside of a contingent gain is a contingent

loss

Which of the following may be classified as contingent liabilities?

Product warranties Future litigation losses Frequent flyer program awards

A(n) ___ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)

account

Additional benefits such as health insurance, retirement benefits, or life insurance that are paid by the employer are called ___ benefits.

fringe

Amounts that are subtracted from an employee's gross pay are referred to as

payroll withholdings.

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

Creates interest expense on the income statement

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.

Current ratio will increase Acid-test ratio will increase

Which of the following must employers by law withhold from their employees' pay?

Federal income taxes

Which of the following are not required to be deducted from an employee's paycheck?

Federal unemployment tax (FUTA) State unemployment tax (SUTA) Charitable contributions Reasons: Federal unemployment tax is paid by the employer, not the employee, and thus are not deducted from employees' gross pay. State unemployment tax is paid by the employer, not the employee, and thus are not deducted from employees' gross pay. Charitable contributions are an optional deduction, not a required deduction.

Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.)

Social Security Medicare Reason: The employer matches the amount that the employee has paid through withholding. Wrong answers reason: Only paid by the employer

By law, an employer is required to pay which of the following amounts as payroll taxes?

Social Security contributions Medicare contributions Federal unemployment tax

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

The ability to estimate the amount of payment The likelihood of payment

A transaction or event in which the outcome is uncertain is referred to as a(n) ___. (Enter one word per blank)

contingency

Payroll withholdings ______. (Select all that apply.)

decrease the amount of cash an employee receives are amounts subtracted from employees' gross earnings to determine their net pay

Obtaining a note payable for cash results in a(n) ______.

increase in assets and an increase in liabilities Reason: The issuance of a note payable is recorded with a debit to Cash and a credit to Notes Payable, a liability.

Common current liabilities include:

Deferred Revenues Sales Tax Payable Current portion of long-term debt Wrong: Notes payable due in two years Reason: a long-term liability Prepaid insurance Reason: an asset, not a liability

Which of these payroll taxes are paid only by the employer? (Check all that apply.)

FUTA SUTA Wrong: Medicare Social Security Reason: The employer matches the amount that the employee has paid through withholding.

True or false: An employer pays federal unemployment tax as a percentage of an employee's total pay for the year.

False Reason: Only a portion of the employee's pay is subject to FUTA, or federal unemployment tax.

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. Wrong: The current ratio will decrease. - Reason: The current ratio will remain the same because one current asset is exchanged for another current asset. The quick ratio will increase. - Reason: The quick ratio will decrease because cash is a quick asset, and cash decreases. Working capital decreases. - Reason: Working capital remains the same because one current asset is exchanged for another current asset.

Which of the following is a guarantee that protects a customer from product defects for a specified period of time?

Warranty

Deferred revenue is classified as

a liability

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(n) ___ gain is an existing uncertainty that might result in a gain.

contingent

A(n) ___ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.

contingent

Which of the following are examples of fringe benefits provided by employers to their employees?

contributions to retirement and other savings accounts payment of insurance premiums on employees behalf reduced or no-cost company-provided services

Liabilities are classified as

current and long term

Deferred revenues and sales tax payable typically are reported as ___ liabilities.

current or short-term

A probable future sacrifice of economic benefits arising from present obligations of an entity to transfer assets or provide services as a result of past transactions or events is a(n)

liability

A(n) ___ is a probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services as a result of past transactions or events. (Enter one word per blank)

liability

Deferred revenue should be classified as a(n) ___ on the balance sheet. (Enter one word per blank)

liability

Payroll withholdings are

the items subtracted from an employee's gross pay to arrive at take-home pay.

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

uncertain or undecided

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

warranties, guarantees, or warranty