ACCT 2110 Chapter 8

(cash+marketable securities)/current liabilities

cash ratio

1. pay cash or another current asset 2. create a new current liability 3. or provide goods or services

current liabilities are obligations owed within one year that require the company to...

1. expected to be retired with existing current assets or creation of new current liabilities 2. due within 1 year or one operating cycle, whichever is longer.

current liabilities are those obligations that:

current assets/current liabilities

current ratio

contingent liability

depends on a future event, such as the outcome of a law suit

taxes

liabilities until they are paid to the taxing authority

unearned revenue

liability created when customers pay for goods or services in advance.

interest bearing notes

notes payable from borrowing from a bank are called _______ because they explicitly state the interest rate

3 to 12 months

notes payable typically mature anywhere from ________

notes payable

often created when a borrower is unable to pay an account payable in a timely manner. the borrower is typically granted a payment extension, but the creditor requires that a formal note be signed to impose interest

cash flows from operating activities/current liabilities

operating cash flow ratio

income statement

payments or other asset outflows associated with the satisfaction of warranty claims do not affect the...

liabilities

probable future sacrifices of economic benefits

debit - inventory credit - accounts payable

purchase inventory on account (journal entry)

(cash+marketable securities+accounts receivable)/current liabilites

quick ratio

1. how likely the occurrence of the event is 2. whether a good estimate of the payment amount can be made

recognition of a contingent liability depends on two things:

debit - xx expense credit - xx payable

record accrual of wages expense (adjusting journal entry)`

debit - accounts payable credit - notes payable

record issuance of note payable (journal entry)

debit-warranty liability credit-cash credit-parts inventory

record payment for warranty repairs (journal entry)

debit - accounts payable credit - cash

record payment to a supplier (journal entry)

debit - accounts receivable credit - sales revenue credit - sales taxes payable

record sale with taxes (journal entry)

debit-warranty expense credit-warranty liability

record warranty expense (journal entry)

interest that has not yet occurred

the amount of the liability reported on the balance sheet should not include any...

within the next year

the current portion of long-term debt is the amount of long-term debt principle that is due...

turned into cash

the logic is that current liabilities need to be paid over approximately the same time frame that current assets are...

can adjustment at the end of the accounting period

the recognition of warranty expense and estimated warranty liability is normally recorded by...

accrued liabilites

unlike accounts payable, which are recognized when goods or services change heads, ______, are recognized by adjusting entries. They usually represent the completed portion of activities that are in process at the end of the period

warranty

usually guarantees the repair or replacement of defective goods during a period following a sale

account payable

when a business purchases goods or service on credit. generally due within 30 to 60 days and seldom require the payment of interest

notes payable

arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract

liability is reduced

as warranty claims are paid to customers or related expenditures are made, the...

contingency

a _______ is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss

1. the event on which it is contingent is probable 2. a reasonable estimate of the loss can be made

a contingent liability is not recognized in the accounts unless both of the following are true

customer deposits

a long-term liability, called _____, is record when customers make advanced payments or security deposits that are not expected to be earned or returned soon enough to qualify as current liabilities

liquidity

ability to meet short term obligations

liquidity

both investors and creditors are interested in a company's ______

long term liability

if a notes payable does not mature for over 12 months, it will be classified as a long term liability)

no journal entry is made: disclose information in footnote to the financial statement

if an event on which a liability is contingent is probable but no reasonable estimate can be made, then...

no journal entry is made: disclose information in footnote to the financial statement

if an event on which a liability is contingent is reasonable possible but no reasonable estimate can be made, then...

no journal entry is made: disclose information in footnote to the financial statement

if an event on which a liability is contingent is reasonably possible and a reasonable estimate can be made, then....

neither record as a liability nor disclose in a footnote

if an event on which a liability is contingent is remote, then...