ba 211 chapter 8

- refers to a company's cash position and overall ability to obtain cash in the normal course of business.

liquidity

Management most likely prefers to classify debt obligations as

long-term liabilities.

On September 1, 2018, Great Lakes Equipment receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Great Lakes Equipment should recognize on the income statement for the year ending December 2018?

$4,000 ($24,000/24 months = $1,000 per month x 4 months = $4,000 revenue recognized.)

On June 1, 2018, Oxian Corp. receives $24,000 from a customer for work to be performed evenly over the next 2 years. What is the amount of revenue that Oxian should recognize on the income statement for 2018?

$7,000 ($24,000/24 months = $1,000 per month x 7 months = $7,000 revenue.)

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

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?

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

Common current liabilities include:

- Deferred Revenues - Sales Tax Payable - Current portion of long-term debt

Which of the following are common examples of long-term liabilities that require reporting of a current portion of the liability?

- mortgage requiring monthly payments of principal and interest - long-term notes payable with quarterly payments of principal and interest

1. current liability 2. long-term liability

1. normally payable within one year 2. normally payable more than one year from now

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.

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?

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?

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

accounts

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

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)

annual, 12 month rate.

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

contingency, contingencies, or contingent

An existing uncertain situation that might result in a loss depending on the outcome of a future event is a - liability

contingent

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

creates interest expense on the income statement

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 payable $5,000.

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

current

At the end of the current year, Maximilliam Inc. signs a 10 year mortgage note, which requires monthly payments of principal and interest. On its current year balance sheet, Maximilliam reports the mortgage as:

current liability (1 year) and long-term liability (9 years)

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

current portion of long-term debt

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

false

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

increase in assets and an increase in liabilities

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

An end-of-period adjusting entry that debits Deferred Revenue most likely will credit a(n) ______ account.

revenue

Management typically prefers reporting liabilities as long-term rather than current because financial statement users perceive current liabilities as:

riskier than long-term liabilities

Current assets minus current liabilities equals

working capital