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
