ACCTG 101 - Chapter 8 - Smart learning

Ralph charges a fee of $2,180 for services performed for a new client. Assuming that the fee includes 9% of sales tax, Ralph should credit sales tax payable for:

$180 (Reason: $2,180 - ($2,180/1.09))

Under U.S. GAAP, contingent liabilities are recorded if the estimated loss is probable. Under IFRS, contingent liabilities are recorded if the estimated loss is "more likely than not." Which framework will report more contingent liabilities on the balance sheet?

IFRS

FICA tax is paid by

both the employee and employer.

When a company borrows from another company, the note is referred to as

commercial paper.

A(n) ______ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event

contingent

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

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

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

current or short-term

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

Payroll withholdings are

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

The employer's portion of FICA tax remitted to the taxing authority is:

the same as the employee's portion

Which of the following tends to be the source of the most commonly reported contingent liability?

warranties

Identify characteristics of notes payable that are not common to accounts payable.

- Based on promissory note - Interest bearing

Kevin sells $100 of goods to a customer for cash. The sales tax is 8%. The journal entry for this sale will include which of the following entries?

- Credit sales tax payable $8 - Debit cash $108 - Credit revenues $100

Which of the following items are included in the numerators for both the current ratio and the acid-test ratio?

- Current investments - Accounts receivable

Match the classification with the correct description. Current liability: Long-term liability:

- Current liability: Normally payable within one year - Long-term liability: Normally payable more than one year from now

Which of the following measure liquidity?

- Current ratio - Working capital - Acid-test ratio

Which of the following are common characteristics of commercial paper?

- The loan period is between 30 and 270 day - The loan is between two companies

Which of the following is correct regarding gain contingencies?

- They are recorded when the gain is known with certainty. - They are not accrued

Although a company may have a high current ratio and appear successful, the accounts used to calculate the current ratio that may have issues or problems are

- accounts receivable. - inventories.

Under US GAAP, a contingent liability should ______.

- be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated - be reported on the balance sheet if the loss will probably occur and can be reasonably estimated - not be reported if the loss is remote and unable to be estimated

If a company has a current ratio of 1.2, which of the following is true?

The company has $1.20 in current assets for each dollar of current liabilities.

Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income

2.4

Which of the following must employers by law withhold from their employees' pay?

Federal income taxes

West Company pays health insurance for its employees of $2,000 for the pay period. The journal entry to record this fringe benefit includes which of the following?

- Credit accounts payable $2,000 - Debit Salaries Expense $2,000

Tax collected on sales is classified as a(n)

current liability

If a company receives a payment from a customer in advance for work to be done the following year, this should be classified as a(n)

deferred revenue.

On December 1, Milka Inc. borrows $500,000 from the bank. Interest of 6% is due in six months. On December 31, Milka recognizes interest. As a result of this journal entry, Milka's balance sheet reports:

interest payable for one month

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

Creates interest expense on the income statement

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

current

The time it takes to spend cash to provide goods and services to a customer until collection of cash from that customer is referred to as the company's __________ .

operating cycle

A company's "operating cycle" refers to the time required for the company to

spend cash to provide goods and services then collect from customers.

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

warranty

Quick ratio is another commonly used term for the _____.

acid-test ratio

A loss that is judged to be probable and for which the amount is reasonably estimable should be

recorded

Current maturities of long-term debt should be classified as ______ liabilities

current

Liabilities are classified as

current and long term

Mathematically, the current ratio is expressed as current assets divided by

current liabilities

Interest expense is recorded in the period when it is ______

incured

On December 1, Milka Inc. borrows $500,000 from the bank. Interest of 6% is due in six months. On December 31, Milka recognizes interest. As a result of this journal entry, Milka's income statement reports:

interest expense for one month

which of the following are not included in an employer's payroll tax expense

state income taxes

Match the financial statement category with the appropriate characteristic. Asset: Liability:

- Asset: probable future benefit - Liability: future sacrifice

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

Taxes subtracted from employees' pay and remitted to the government on their behalf are called

withholding taxes.

The acid-test ratio is based on a more conservative measure than the current ratio of the company's ability to:

pay its current liabilities

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

probable

Munster Company negotiates a line of credit with its bank, under which the Company may borrow up to $500,000 at a 5% annual interest rate. Munster should credit notes payable when Munster

receives cash under the line of credit.

Disclosure related to a contingent event usually is not required if the likelihood of payment is ______

remote, unlikely, minuscule, or low

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

uncertain

Sally Company manufactures large kitchen appliances. For the first year of purchase, the company will repair any manufacturing defect free of charge. Sally apparently sells its appliances with a(n) _______

warranty

which of these is not an employer payroll cost

federal and state income taxes

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?

$ 7000 (Reason: $24,000/24 months = $1,000 per month x 7 months = $7,000 revenue.)

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 (Reason: $20,000 x 0.08 x 6/12 The stated interest rate of 8% is an annual rate and the applicable interest is for 6 months.) 800$

Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. What is the amount of the estimated warranty liability that Supreme should recognize on its 2018 balance sheet?

$40,000 (Reason: $25,000 + $15,000 = $40,000. The warranty liability is reduced by the warranty costs paid during 2018.)

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. What is the net pay to employees?

$70,000 (Reason: Net pay=$70,000=$100,000-6,700-1,450-18,000-3,850)

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20, Medicare $8.70, federal income tax $58, and state income tax $10. Assuming that John gets paid in cash, ABC would record a journal entry that includes a ______.

- debit to Wages Expense of $600 - credit to FICA (Social Security and Medicare) Payable of $45.90 - credit to Cash of $486.10 - credit to State and Federal Income Tax Payable of $68

ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles and back. How does ABC Airlines record the $300 collected in advance?

A debit to Cash of $300 and a credit to Deferred Revenue of $300. (Reason: The credit is to Deferred revenue because the cash has been collected in advance. Later when ABC Airlines provides the service of flying its customers, it can record a decrease to Deferred revenue (debit) and increase Revenue (credit).)

Balance Corporation sells $1,000 of goods to a customer for cash. The sales tax is 5%. The journal entry to record the sale will include which of the following?

Credit sales tax payable $50 (Reason: Sales tax is not an expense. It is an amount collected from the customer and remitted to the state)

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required at December 31, 2018 would include which of the following?

Debit interest expense $4,000 (Reason: The annual rate of interest is 12% so the total interest of $12,000 is multiplied by the faction of the year or 4/12)

Assume that Market Company's current ratio is 1.2. Which of the following management strategies would prevent the company's current ratio from decreasing at the financial statement date?

Delaying a scheduled purchase of inventory on account until the beginning of the next fiscal year.

Taxes collected for taxing authorities are recognized as

current liabilities.

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

account

A(n) ______ payable results from an agreement with a supplier to pay within 30 to 60 days, whereas a(n) ________ payable is a signed contract that promises to pay a specific amount with interest at a specific maturity date.

account; note

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)

annual, 12 month rate.

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.

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 contingent liability for lawsuit $10,000.

On September 1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. Given no previous adjusting entries have been recorded, ABC's adjusting entry at December 31 would include a ______.

debit to Interest Expense of $1,000 (Reason: Interest expense=$50,000 x 0.06 x (4/12)=$1,000.)

Rauch Corporation estimated warranty expense in Year 1 of $10,000. In Year 2, Rauch performed warranty work of $8,000. The journal entry to record the performance of warranty work would include a

debit to warranty liability

True or False: If a state has an unemployment tax program, no FUTA tax must be paid.

false

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

false

Another name for the acid-test ratio is the ______ ratio

quick

Classifying liabilities as current or long term helps creditors and investors assess ________

risk

Current assets minus current liabilities equals _______

working capital

Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700, Medicare $1,450, federal income tax $18,000 and state income tax $3,850. The journal entry to record wages paid includes a ______.

$100,000 debit to Salaries expense (Reason: The credit to Cash is $70,000. Gross pay of $100,000 less $30,000 withholdings (6,700 + 1,450 + 18,000 + 3,850).)

Anastasia Company recognizes payroll for the month of May. Gross employee income is $200,000; federal taxes withheld are $40,000; state taxes withheld are $6,000; Social Security and Medicare taxes are $15,000. Employees contribute $10,000 to a 401(k) retirement plan. Anastasia will pay which net amount to its employees?

$129,000 (Reason: $200,000 - $40,000 - $6,000 - $15,000 - $10,000)

Anastasia Company recognizes payroll for the month of May. Gross employee income is $200,000; federal taxes withheld are $40,000; state taxes withheld are $6,000; Social security and Medicare taxes are $30,000 total for employer and employees. Employees contribute $10,000 to a 401(k) retirement plan. Federal and state unemployment taxes are $12,000. Anastasia's payroll tax expense will be

$27,000. (Reason: Employer's portion of Social security and Medicare taxes of $15,000 plus federal and state unemployment taxes of $12,000)

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

Which of the following are included in FICA taxes?

- A 1.45% Medicare tax - A 6.2% social security tax

Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year?

- A current liability of $36,000. - A noncurrent liability of $504,000. (Reason: Total mortgage is $540,000 ($3,000 x 15 years x 12 months). Current portion is $36,000 ($3,000 x 12 months). Noncurrent portion is $504,000 ($540,000 - $36,000))

Lambert Corporation has employee salary expense of $100,000 on May 31. FICA contributions are 7.65%, and FUTA contributions are 6.2%. The journal entry for payroll tax expense will include which of the following entries?

- Debit payroll tax expense $13,850 - Credit FUTA payable $6,200 - Credit FICA payable $7,650

Which of the following are essential characteristics of a liability?

- The future sacrifice arises from a present obligation. - The obligation results from a past event. - A future sacrifice of an economic benefit is probable.

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

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

Which of the following may be a proper income statement classification of contingent events?

- operating expense, - non operating expense

Which of the following are examples of fringe benefits provided by employers to their employees?

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

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 taxes payable of $100.

Which of the following describes the requirement to pay FUTA.

An employer must pay FUTA taxes even if the employer pays SUTA taxes

Which of the following is the formula for the current ratio?

Current assets divided by current liabilities.

Norton's current ratio is 2.5 and its quick ratio is .9. What is the most likely cause for this difference in the current and quick ratio?

Norton has a high inventory balance.

Which of the following obligations is NOT commonly classified as a current liability?

Note payable due in 3 years

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

contingencies

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

contingency

A(n) ______ gain is an existing uncertainty that might result in a gain

contingent

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

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

revenue (Reason: The credit is to revenue and represents the amount of Deferred revenue (a liability) that has been earned and no longer owed.)

Supreme Inc. sells its products with a 3-year warranty. The company estimates that warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. The journal entry to recognize the warranty work performed in 2018 includes a debit to:

warranty liability for $10,000

Assets represent probable future economic __________ , whereas liabilities represent probable future economic _________ .

benefits; sacrifices

The formula for the acid-test or quick ratio is quick assets divided by ______.

current liabilities

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

decrease

The journal entry to record employer payroll taxes affects ______.

liabilities and stockholders' equity

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.

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet?

$0 (Reason: No liability should be recorded because the loss is "not likely" to occur (and, therefore, is not probable).)

Cannery Company pays health insurance for its employees of $1,000 for the pay period. The journal entry to record this fringe benefit includes which of the following?

- Debit Salaries Expense $1,000 - Credit accounts payable $1,000

Anastasia Company recognizes payroll for the month of May. Gross employee income is $200,000, federal taxes withheld are $40,000, state taxes withheld are $6,000, and Social Security and Medicare taxes are $15,000. Employees contribute $10,000 to a 401(k) retirement plan. Anastasia should recognize salaries and wages expense of (ignoring employer taxes)

$200,000. (Reason: The full amount of gross employee income is recorded as expense. Social Security and Medicare taxes are recorded as payroll tax expense, not salaries and wage expense.)

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

$400,000 - debit to loss - credit to contingent liability

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

Which of the following are current liabilities?

- Deferred revenues - Accounts payable - Taxes payable - Note payable due in 3 months - Wages payable

Which of the following are payroll withholdings that are subtracted from gross pay to arrive at take-home pay?

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

Correctly match the salary-related costs with the payee. Employee: Employer:

- Employee: State and federal income tax - Employer: State and federal unemployment tax

Which of the following are employer payroll costs?

- Employer portion of Medicare tax - Federal and state unemployment taxes

Which of the following taxes is NOT withheld from the employee's paycheck

- Federal and State - Unemployment taxes

Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio?

- Inventory - Prepaid assets

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.

Which of the following terms are used to categorize the likelihood of the occurrence of a future loss?

- Probable - Reasonably possible - Remote

Which of the following may be classified as contingent liabilities?

- Product warranties - Future litigation losses - Frequent flyer program awards

True or false: Sales tax is recorded on the income statement because it is a cost of making a sale.

false (Reason: Sales tax should be recorded as a liability because it is an amount collected from the customer and must be remitted to the state.)

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

riskier than long-term liabilities

Which of the following is a guarantee that protects a customer from product defects for a specified period of time?

warranty

Volker Company signs a 3-month, $10,000 note. Stated interest rate is 12% payable at the maturity date. Interest incurred on the note is:

$300 (Reason: $10,000 x 0.12 x 3/12)

Which of these payroll taxes are paid only by the employer?

- SUTA - FUTA

By law, an employer is required to pay which of the following amounts as payroll taxes?

- Social Security contributions - Medicare contributions - Federal unemployment tax

Under GAAP, we do not record contingent ______ until the gain is known with certainty.

gains

We record interest expense in the period in which we

incur it.

Deferred revenue is classified as a(n)

liability

Gladys Company signs an agreement under which Gladys may borrow up to $100,000 at a 6% annual interest rate whenever the company needs cash. This agreement is commonly referred to as a

line of credit

Liabilities that are payable within one year commonly are classified as ________ liabilities, while those payable more than one year from now commonly are classified as ________ liabilities.

current; long-term

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

false

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

fringe

Amounts that are subtracted from an employee's gross pay are referred to as

payroll withholdings.

True or false: Companies prefer to report liabilities as long-term versus current.

true

Deductions from employee pay for contributions toward retirement savings plans and contributions for charitable organizations are examples of:

voluntary employee deductions

Which of the following are not required to be deducted from an employee's paycheck?

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

Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should record a contingent liability and loss of

$250,000 (Reason: When no amount within the range appears more likely than others, we record the minimum amount.)

John Smith works 40 hours for ABC Corp. for $15 per hour. Required payroll deductions are: Social Security $37.20, Medicare $8.70, federal Income tax $58, and state income tax $10. What is John's net pay?

$486.10 (Reason: This is gross pay. You should subtract all of the payroll deductions from gross pay to calculate net pay.)

Supreme Inc. sells its products with a 3-year warranty. The company estimates that estimated warranty costs relating to sales during 2018 are as follows: 2018: $10,000; 2019: $25,000; 2020: $15,000. Assume that actual warranty costs during 2018 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2018 income statement?

$50,000 (Reason: $10,000 + $25,000 + $15,000)

On October 1, 2018, Perry Corporation signed a 12-month, 8% interest-bearing promissory note for $10,000. Assume that all appropriate adjusting journal entries were made at 12/31. The journal entry required when the note matures on October 1, 2019 would include a debit to interest expense for

$600 (Reason: The annual rate of interest is 8% so the total interest of $800 is multiplied by the faction of the year or 9/12 (for 2019))

Melvin charges a fee of $1,080 for merchandise purchased by a customer. Assuming that the amount includes 8% of sales tax, Melvin should credit sales tax payable for:

$80 (Reason: $1,080 - (1,080/1.08))

Which of the following are long-term liabilities?

- 20-year mortgage payable - Note payable due in 3 years

Which of the following represent the correct accounting treatment for loss contingencies that do not meet the criteria for recording a liability but are at least reasonably possible?

- A disclosure must describe the contingency. - An estimate of the potential loss should be made (if possible) and disclosed.

Which of the following are items included in the numerator of the quick ratio?

- Accounts receivable - Cash - Current investments

On September 1, 2018, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. The journal entry required March 1, 2019 at the maturity date includes which of the following entries?

- Debit note payable $100,000 - Credit cash $106,000 - Debit interest payable $4,000 - Debit interest expense $2,000

Common current liabilities include:

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

Which of these payroll taxes are paid by the employer and the employee?

- Medicare - Social Security

Payroll withholdings ______.

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

What are the two classifications for liabilities?

- current - long term

Which of the following voluntary contributions by employees may employers deduct from their employees' pay?

- employee investments in retirement - contributions toward retirement funds

Which of the following payroll-related costs are incurred by employees?

- employee investments in retirement plans - federal and state income tax

Which of the following may be a proper balance sheet classification of contingent events?

- long-term liability - current liability

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

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

Rimland Corporation has employee salary expense of $10,000 on April 30, 2018. FICA contributions are 7.65%, and FUTA contributions are 6.2%. The journal entry for payroll tax expense will include which of the following?

Debit payroll tax expense $1,385

Ming Corporation sells $100,000 goods on account to customers. Ming estimates that warranties will be 3% of sales. At the end of the year, Ming will require which of the following entries for warranties?

Debit warranty expense $3,000; Credit warranty liability $3,000

Wang Corporation sells $200,000 goods on account to customers. Wang estimates that warranties will be 2% of sales. At the end of the year, Wang will require which of the following entries for warranties?

Debit warranty expense $4,000; Credit warranty liability $4,000

Taylor Company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss?

Disclose the contingency and state that an estimate cannot be made. (Reason: It is possible but not probable. The contingent liability is only recorded if it's both probable and can be reasonably estimated)

Which payroll tax is paid equally by the employee and the employer?

FICA

Choose the correct formula for calculating interest.

Face amount x annual interest rate x fraction of the year

Which accounting standards provides a lower threshold for recording contingent liabilities?

IFRS

Identify a primary reason why financial statement users assess a company's liquidity.

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

Which type of contingent liability would most likely be found on a balance sheet prepared under U.S. GAAP?

Probable contingent liability that can be estimated.

Which of the following transactions will increase a company's working capital?

Receipt of cash on a long-term notes receivable

Which of the following statements best describes an entity's liquidity ratios?

Some companies may be motivated to manipulate accounting numbers to improve their liquidity ratios.

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 current ratio will remain the same.

Which of the following is an important criteria used to determine the reporting of a contingent liability?

The likelihood of future payment or loss

The ratio that is a more conservative measure than the current ratio of a company's ability to pay its current liabilities is the:

acid-test ratio

A liability is a present responsibility to sacrifice ________ in the future due to a transaction or other event that happened in the _________

assets; past

Gift card ______ refers to the point in time when gift cards expire or when the likelihood of redemption becomes remote.

breakage

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

contingent

The point in time when gift cards expire or when it becomes unlikely that customers will redeem them is known as:

gift card breakage

A contingent event for which the likelihood of payment is properly judged to be remote:

is not required to be disclosed in the financial statement notes

Deferred revenue should be classified as a(n) _______ on the balance sheet.

liability

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)

liability.

A ______ of ______ is an informal agreement that permits a company to borrow up to a prearranged amount without having to follow formal loan procedures.

line; credit

The current ratio, acid-test ratio, and amount of working capital are common indicators of:

liquidity

The term referring to a company having a sufficient amount of cash to pay its current debts is

liquidity

Given a choice, most companies will prefer classifying liabilities as

long-term

Management most likely prefers to classify debt obligations as

long-term liabilities.

The flipside of a contingent gain is a contingent

loss

The mathematical formula for working capital is current assets ______ current liabilities.

minus

Gladys Company negotiates a line of credit with its bank. The agreement specifies that Gladys may borrow up to $100,000 at a 6% annual interest rate. When Gladys signs the agreement with the bank, Gladys should

not make any journal entry.