SB 7 Liabilities

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 ______.

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

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

contingent

Warranties normally ______.

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

Recognizing accrued interest expense ______.

decreases net income is a claims exchange transaction

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

installment notes

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

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

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

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

variable

Jack Company issued a $12,000 note payable on September 1, Year 1 for a one year term at 5% interest. The company prepares financial statements on December 31 of each years. In Year 2, Jack will recognize ______.

$400 of interest expense a cash outflow from financing activities of $12,000 a cash outflow from operating activities of $600

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? (Select all that apply.)

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.

Which of the following statements are true?

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

Current liabilities include ______.

accounts payable 10 years bonds due in 5 months wages payable

Current assets include ______.

accounts receivable inventory supplies cash

Recognizing accrued interest expense affects the ______.

balance sheet income statement

Issuing a note to borrow money 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

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

fixed

Warranty obligations ______.

have uncertain timing and amounts are reported in financial statements

Payments on installment loans ______.

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