Financial Accounting Chapter 8

Identify a primary reason why financial statement users assess a company's liquidity. -Lack of liquidity leads to low asset turnover ratios. -Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful. -Liquidity represents the most important indicator of profitability.

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

Deferred revenue is classified as -an expense -a revenue -a liability -an asset

a liability

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

probable

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

warranties

Which of the following tends to be the source of the most commonly reported contingent liability? -warranties -natural disasters -lawsuits

warranties

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

warrenties

The portion of a long-term liability that will be paid within the next year is referred to and reported as the: -total current liability -long-term debt -current portion of long-term debt -current debt

current portion of long-term debt

The flipside of a contingent gain is a contingent -reserve. -loss. -asset.

loss

Which of these payroll taxes are paid only by the employer? (Check all that apply.) -FUTA -Medicare -SUTA -Social Security

FUTA SUTA

True or false: Current liabilities are always payable within one year.

False

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) -asset. -liability. -loss. -expense.

liability

The mathematical formula for working capital is current assets ______ current liabilities. -minus -divided by -plus -multiplied by

minus

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 Note Payable $100,000 -Credit to Note Payable $106,000 -Debit to Interest Expense $6,000 -Debit to Cash $100,000

Credit to Note Payable $100,000 Debit to Cash $100,000

By law, an employer is required to pay which of the following amounts as payroll taxes? -Medicare contributions -Federal unemployment tax -Health insurance premiums -Life insurance premiums -Social Security contributions

Medicare contributions Federal unemployment tax Social Security contributions

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) -notes payable. -accounts payable. -notes receivable. -accounts receivable.

accounts payable.

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 expense $5,000. -debit notes receivable $5,000. -credit notes payable $5,000. -debit notes payable $5,000.

credit notes payable $5,000.

Obtaining a note payable for cash results in a(n) ______. -decrease in assets and a decrease liabilities -increase in liabilities and a decrease in stockholders' equity -increase in assets and an increase in liabilities -decrease in assets and an increase in liabilities

increase in assets and an increase in liabilities

Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay? -Employer contribution for social security taxes -Employee contributions to retirement plans -Health insurance paid by the employee -Federal income taxes -Federal and state unemployment taxes

Employee contributions to retirement plans Health insurance paid by the employee Federal income taxes

A contingent liability is recorded if which conditions are met? -It is probable that a future loss will occur. -The amount of the loss can be reasonably estimated. -There is a remote chance that a future loss will occur.

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

What are the two criteria used to determine whether a contingent liability is reported in the financial statements? -The payment date -The ability to estimate the amount of payment -The likelihood of payment -The percentage of the payment to total income

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

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 quick ratio will increase. -The current ratio will decrease. -Working capital decreases. -The current ratio will remain the same.

The current ratio will remain the same.

Payroll withholdings ______. (Select all that apply.) -are amounts subtracted from employees' gross earnings to determine their net pay -decrease the amount of cash an employee receives -are amounts added to employees' gross earnings to determine their net pay -are voluntary -increase the amount of cash an employee receives

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

Amounts that are subtracted from an employee's gross pay are referred to as -payroll withholdings. -payroll taxes. -net pay. -employee costs.

payroll withholdings.

True or false: Your employer is allowed to keep the amounts withheld from your gross pay.

False

Which of the following payroll-related taxes must the employer pay by law? -Federal Insurance Contributions Act amounts -Unemployment taxes -Contributions toward retirement funds -Union dues

Federal Insurance Contributions Act amounts Unemployment taxes

Taxes subtracted from employees' pay and remitted to the government on their behalf are called -remittance payment taxes. -withholding taxes. -employer payroll taxes. -retirement contribution taxes.

withholding taxes.

Which of the following must employers by law withhold from their employees' pay? -unemployment taxes -contributions toward retirement funds -Health insurance contributions -Federal income taxes

Federal income taxes

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

contingency

Payroll withholdings are -the payments submitted for both the employee and employer to the government for taxes. -the items subtracted from an employee's gross pay to arrive at take-home pay. -the employer's portion of taxes paid for social security and Medicare.

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

Jingle Company signs a 6-month, $20,000 note. Stated interest rate is 8% payable at the maturity date. Interest incurred on the note is calculated as -$20,000 x 0.08 x 6/12 -$20,000 x 0.08 -$20,000 x 0.08 x 6

$20,000 x 0.08 x 6/12

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 decrease -Acid-test ratio will remain unchanged -Acid-test ratio will decrease -Current ratio will remain unchanged -Current ratio will increase -Acid-test ratio will increase

Current ratio will increase Acid-test ratio will increase

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

False

Which of these payroll taxes are paid by the employer and the employee? (Check all that apply.) -Medicare -Social Security -SUTA -FUTA

Medicare Social Security

Which of the following may be classified as contingent liabilities? -Deferred revenues -Product warranties -Frequent flyer program awards -Future litigation losses -Deposits from customers

Product warranties Frequent flyer program awards Future litigation losses

Which of the following terms are used to categorize the likelihood of the occurrence of a future loss? -Uncertain -Certain -Reasonably possible -Probable -Remote

Reasonably possible Probable Remote

Which of the following transactions will increase a company's working capital? -Receipt of cash on a long-term notes receivable -Collection of an accounts receivable balance -Receipt of cash on a short-term notes receivable -Payment of an accounts payable -Purchase of inventory on account

Receipt of cash on a long-term notes receivable

Which of the following are examples of fringe benefits provided by employers to their employees? -FICA matching contributions -reduced or no-cost company-provided services -payment of insurance premiums on employees behalf -contributions to retirement and other savings accounts -payment for services provided by employee to employer

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

Common current liabilities include: -Prepaid insurance -Sales tax payable -Deferred revenues -The current portion of long-term debt -Notes payable due in two years

Sales tax payable Deferred revenues The current portion of long-term debt

Which of the following are not required to be deducted from an employee's paycheck? -State unemployment tax (SUTA) -Medicare taxes -Social Security -Federal income tax -Charitable contributions -Federal unemployment tax (FUTA)

State unemployment tax (SUTA) Charitable contributions Federal unemployment tax (FUTA)

Which of the following is an important criteria used to determine the reporting of a contingent liability? -The effect on key balance sheet ratios -The potential effect on financial statement users -The classification of the related expense or loss -The likelihood of future payment or loss

The likelihood of future payment or loss

Which of the following is a guarantee that protects a customer from product defects for a specified period of time? -Promissory note -Warranty -Sales allowance -Contingency

Warranty

An interest rate, unless otherwise specified, is typically a(n) ___ rate.

annual

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) -a 3 month rate. -annual, 12 month rate. -6 month rate.

annual, 12 month rate.

The feature that distinguishes loss ____ from other liabilities is the uncertain outcome.

contingencies

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

contingent

Lark Corporation believes it is probable the company will lose a lawsuit for $10,000. The journal entry to record the contingent loss will include a -credit to lawsuit expense $10,000. -debit to contingent liability for $10,000. -credit to contingent liability for lawsuit $10,000. -credit to retained earnings $10,000.

credit to contingent liability for lawsuit $10,000.

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

current

The ____ portion of long-term debt is the amount that will be paid within the next year.

current

Taxes collected for taxing authorities are recognized as -operating expenses. -current liabilities. -long-term liabilities. -prepaid expenses. -revenue.

current liabilities.

Abbott Corp.'s attorney estimates that the company will ultimately have to pay $400,000 related to current litigation. Abbot's journal entry should include a: -debit to loss -debit to contingent liability -credit to contingent liability -credit to retained earning -debit to asset

debit to loss credit to contingent liability

If a liability is classified as current, rather than noncurrent, the company's working capital will ______. -decrease -stay the same -increase

decrease

Which of the following payroll-related costs are incurred by employees? -contributions to state unemployment taxes -employee investments in retirement plans -federal and state income tax -contributions to federal unemployment taxes

employee investments in retirement plans federal and state income tax

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

fringe

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.

liability

The term referring to a company having a sufficient amount of cash to pay its current debts is -solvency. -security. -liquidity. -consistency.

liquidity

A loss that is judged to be probable and for which the amount is reasonably estimable should be -disclosed only in the notes. -recorded. -deferred until the related uncertainly is resolved. -ignored.

recorded

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 revenue of $1,000. -sales revenue of $1,100. -sales taxes payable of $100.

sales revenue of $1,000. sales taxes payable of $100.

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

uncertain