BA 215 CH 7

Balance sheets that distinguish between current and noncurrent items are called ______ balance sheets.

classified

A potential obligation arising from a past event is called a(n) _______ liability.

contingent

Warranties normally ______.

cover a specific time period are based on estimates guarantee repair or replacement

General uncertainties include potential ______.

decline in earnings due to competition storm damage

Recognizing accrued interest expense ______.

decreases net income is a claims exchange transaction

Remitting sales tax (paying cash to the tax authorities), ______.

does not affect the income statement affects the statement of cash flows

Loans that require payments of principal and interest at regular intervals are called ______.

installment notes

A line of credit ______.

is normally renewable on a one year term normally has fluctuating interest rates.

When a company increases the amount borrowed on a line of credit, net income ______ and net cash flow from ______ activities increases.

is not affected, financing

The maker of a promissory note is sometimes called the ______.

issuer

Loans that provide flexible borrowing and repayment options are called ______.

lines of credit

A business has a debt that is due in May, Year 2. At December 31, Year 1 the company does not plan to use any of its current assets to repay this debt. This debt should be classified as ______ on the December 31, Year 1 balance sheet.

long-term

In a note containing the terms of a lending transaction, the party borrowing the money may be called the ______.

maker issuer

When a company recognizes a cash revenue event that is subject to state sales tax, the balance in the Cash account increases by ______ the amount of revenue.

more than

If the likelihood of a future obligation arising is remote, ______.

no liability is shown in the financial statements or related notes

The average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash is commonly called the ______ cycle.

operating

A company experienced an event that caused total assets and liabilities to decrease and a cash outflow to appear on the statement of cash flows. This event could have been ______.

paying off an accrued interest payable paying off the principal balance of a loan

Simms Accountants charged a client $2,000 cash plus tax for services provided in a state where the service sales tax rate is 6%. As a result of this event, the ______.

sales tax liability account increases by $120 cash account increases by $2,120

Issuing a note to borrow money affects the ______.

statement of cash flows balance sheet

Paying off a sales tax liability affects the ______.

statement of cash flows balance sheet

What type of interest rate fluctuates up or down during the loan period?

variable

Borrowing funds through a line of credit is a(n) ______ transaction.

asset source

A payment on an installment loan ______.

affects the income statement. affects the balance sheet.

Warranty obligations ______.

are reported in financial statements have uncertain timing and amounts

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the principal balance of the loan on January 1, Year 2 was ______.

$166,581 Reason: $51,419 annual payment - $18,000 interest expense for Year 1 ($200,000 ×.09) = $33,419 principal payment. $200,000 - $33,419 = $166,581.

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the portion of the principal balance repaid during Year 1 was ______.

$33,419 Reason: $51,419 annual payment - $18,000 interest expense ($200,000 ×.09) = $33,419 principal payment.

James Company borrowed $40,000 on a one-year notes payable at 8%. Interest and principal are to be repaid at the end of the note term. If the note was issued on October 1 of Year 1, the amount of accrued interest on the December 31, Year 1 financial statements is ______.

$800 Reason: $40,000 × 8% × (3 ÷ 12)

Which of the following statements regarding contingent liabilities is true?

A contingent liability is a potential obligation arising from a past event. The amount or existence of a contingent liability depends on some future event. For reporting purposes, contingent liabilities are sorted into three categories depending on the likelihood of their becoming actual liabilities.

True or false: Classified balance sheets report current assets only.

False Reason: Classified balance sheets distinguish between current and noncurrent items.

True or false: A company sold merchandise under warranty in Year 1. The merchandise was returned for a warranty repair in Year 2. The company recognized warranty expense for this item in both years.

False Reason: The warranty expense was recognized in Year 1 at the time of sale. In Year 2, the cash is paid for repair but no expense is recorded.

Which of the following statements are true?

Most businesses provide information about their bill-paying ability by classifying their assets and liabilities according to liquidity. The more quickly an asset is converted to cash or consumed, the more liquid it is considered.

What distinguishes contingent liabilities from general uncertainties?

Whether the event stems from a past event.

If the likelihood of a future obligation arising is probable (likely) and its amount can be reasonably estimated, ______.

a liability must be recognized in the financial statements

Current liabilities include ______.

accounts payable 10 years bonds due in 5 months wages payable

Current assets include ______.

accounts receivable inventory supplies cash

Paying a warranty claim affects the ______.

balance sheet statement of cash flows

Paying off the principal balance of a note payable affects the ______.

balance sheet statement of cash flows

A company recorded an event that caused assets, liabilities and cash flow from financing activities to increase, but had no affect on net income. This event could have been due to ______.

borrowing money with a two year term to maturity

When a company sells merchandise with a warranty, ______.

financial statement users must be informed of the obligation

A payment on an installment loan will be shown in the ______ activities sections of the statement of cash flows.

financing operating

What type of interest rate remains constant during the term of the loan?

fixed

Payments on installment loans ______.

include a payment for interest include a repayment of a portion of the principal balance

Recognizing a warranty expense affects the ______.

income statement balance sheet