chapter 8 Acct 200

10. Assuming a current ratio of 1.00 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio? (LO8-6) 1. Increase the current ratio and increase the acid-test ratio. 2. No change to the current ratio and decrease the acid-test ratio. 3. Decrease the current ratio and decrease the acid-test ratio. 4. Increase the current ratio and decrease the acid-test ratio.

2. No change to the current ratio and decrease the acid-test ratio.

Defered Revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

fringe benefits

Additional employee benefits paid for by the employer

debt covenant

An agreement between a borrower and a lender that requires that certain minimum financial measures be met or the lender can recall the debt

FICA taxes

Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

Acid Test Ratio

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities

Acid Test Ratio

Current Assets - Stock / Current Liabilities

Current Ratio

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities

Liquidity

Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts

Sales Tax Payable

Sales tax collected from customers by the seller, representing current liabilities payable to the government

Contingencies

Uncertain situations that can result in a gain or a loss for a company

liability

a present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past

unemployment taxes

a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees

8. Smith Co. filed suit against Western, Inc., seeking damages for patent infringement. Western's legal counsel believes it is probable that Western will settle the lawsuit for an estimated amount in the range of $75,000 to $175,000, with all amounts in the range considered equally likely. How should Western report this litigation? (LO8-5) a. As a liability for $75,000 with disclosure of the range. b. As a liability for $125,000 with disclosure of the range. c. As a liability for $175,000 with disclosure of the range. d. As a disclosure only. No liability is reported.

a. As a liability for $75,000 with disclosure of the range.

7. Management can estimate the amount of loss that will occur due to litigation against the company. If the likelihood of loss is reasonably possible, a contingent liability should be: (LO8-5) a. Disclosed but not reported as a liability. b. Disclosed and reported as a liability. c. Neither disclosed nor reported as a liability. d. Reported as a liability but not disclosed

a. Disclosed but not reported as a liability.

.Current liabilities: (LO8-1) a.May include contingent liabilities. b.Include obligations payable within one year or one operating cycle, whichever is shorter. c.Can be satisfied only with the payment of cash. d.Are preferred by most companies over long-term liabilities.

a.May include contingent liabilities.

contingent gain

an existing uncertain situation that might result in a gain

Contingent Liability

an existing uncertain situation that might result in a loss

line of credit

an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

5. Which of the following is not deducted from an employee's salary? (LO8-3) a. FICA taxes. b. Unemployment taxes. c. Income taxes. d. Employee portion of insurance and retirement payments

b. Unemployment taxes.

4. We record interest expense on a note payable in the period in which: (LO8-2) a. We pay cash for interest. b. We incur interest. c. We pay cash and incur interest. d. We pay cash or incur interest.

b. We incur interest.

commercial paper

borrowing from another company rather than from a bank

9. The acid-test ratio is: (LO8-6) a. Current assets divided by current liabilities. b. Cash and current investments divided by current liabilities. c. Cash, current investments, and accounts receivable divided by current liabilities. d. Cash, current investments, accounts receivable, and inventory divided by current liabilities.

c. Cash, current investments, and accounts receivable divided by current liabilities.

Which of the following statements regarding liabilities is not true? (LO8-1) a. liabilities can be for services rather than cash. b. Liabilities are reported in the balance sheet for almost every business. d. Liabilities represent probable future sacrifices of benefits.

c. result from future transactions.

3. If Express Jet borrows $100 million on October 1, 2018, for one year at 6% interest, how much interest expense does it record for the year ended December 31, 2018? (LO8-2) a.$0. b.$1 million. c.$1.5 million. d.$6 million.

c.$1.5 million.

6. The seller collects sales taxes from the customer at the time of sale and reports the sales taxes as: (LO8-4) a. Sales tax expense. b. Sales tax revenue. c. Sales tax receivable. d. Sales tax payable.

d. Sales tax payable

current portion of long-term debt

debt that will be paid within the next year

quick assets

includes only cash, current investments, and accounts receivable

Current Liabilities

liabilities due within a short time, usually within a year

Working Capital

the difference between current assets and current liabilities

Notes Payable

written promises to repay amounts borrowed plus interest