13 acct. concept

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13 acct. concept
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  1. Liabilities are

    a. any accounts having
    credit balances after closing entries are made.

    b. deferred credits that
    are recognized and measured in conformity with generally accepted accounting
    principles.

    c. obligations to
    transfer ownership shares to other entities in the future.

    d. obligations arising from past transactions and
    payable in assets or services in the future
  2. Which
    of the following is a current liability?

    a. A long-term debt
    maturing currently, which is to be paid with cash in a sinking fund

    b. A long-term debt
    maturing currently, which is to be retired with proceeds from a new debt issue

    c. A long-term debt
    maturing currently, which is to be converted into common stock

    d. None of these
  3. Which
    of the following is true about accounts payable?

    1. Accounts payable should not be
    reported at their present value.

    2. When accounts payable are
    recorded at the net amount, a Purchase Discounts account will be used.

    3. When accounts payable are
    recorded at the gross amount, a Purchase Discounts Lost account will be used.

    a. 1

    b. 2

    c. 3

    d. Both 2 and 3 are
    true.
  4. Among
    the short-term obligations of Lance Company as of December 31, the balance
    sheet date, are notes payable totaling $250,000 with the Madison National
    Bank. These are 90-day notes,
    renewable for another 90-day period.
    These notes should be classified on the balance sheet of Lance Company
    as

    a. current liabilities.

    b. deferred charges.

    c. long-term
    liabilities.

    d. intermediate debt.
  5. Which
    of the following is not true about
    the discount on short-term notes payable?

    a. The Discount on Notes
    Payable account has a debit balance.

    b. The Discount on Notes
    Payable account should be reported as an asset on the balance sheet.

    c. When there is a
    discount on a note payable, the effective interest rate is higher than the
    stated discount rate.

    d. All of these are
    true.
  6. Which of the following may be a current
    liability?

    a. Withheld Income Taxes

    b. Deposits Received
    from Customers

    c. Deferred Revenue

    d. All of these
  7. Which of the following items is a current
    liability?

    a. Bonds
    (for which there is an adequate sinking fund properly classified as a long-term
    investment) due in three months.

    b. Bonds due
    in three years.

    c. Bonds
    (for which there is an adequate appropriation of retained earnings) due in
    eleven months.

    d. Bonds to
    be refunded when due in eight months, there being no doubt about the marketability
    of the refunding issue.
  8. Which
    of the following should not be
    included in the current liabilities section of the balance sheet?

    a. Trade notes payable

    b. Short-term
    zero-interest-bearing notes payable

    c. The discount on
    short-term notes payable

    d. All of these are
    included
  9. Which
    of the following is a current liability?

    a. Preferred dividends
    in arrears

    b. A dividend payable in
    the form of additional shares of stock

    c. A cash dividend
    payable to preferred stockholders

    d. All of these
  10. Stock
    dividends distributable should be classified on the

    a. income statement as
    an expense.

    b. balance sheet as an
    asset.

    c. balance sheet as a
    liability.

    d. balance sheet as an
    item of stockholders' equity.
  11. Of
    the following items, the only one which should not be classified as a current
    liability is

    a. current maturities of
    long-term debt.

    b. sales taxes payable.

    c. short-term
    obligations expected to be refinanced.

    d. unearned revenues.
  12. An
    account which would be classified as a current liability is

    a. dividends payable in
    the company's stock.

    b. accounts
    payable—debit balances.

    c. losses expected to be
    incurred within the next twelve months in excess of the company's insurance
    coverage.

    d. none of these.
  13. Which
    of the following is a characteristic of a current liability but not a long-term
    liability?

    a. Unavoidable
    obligation.

    b. Present obligation
    that entails settlement by probable future transfer or use of cash, goods, or
    services.

    c. Liquidation is
    reasonably expected to require use of existing resources classified as current
    assets or create other current liabilities.

    d. Transaction or other
    event creating the liability has already occurred.
  14. Which
    of the following is not considered a part of the definition of a liability?

    a. Unavoidable
    obligation.

    b. Transaction or other
    event creating the liability has already occurred.

    c. Present obligation
    that entails settlement by probable future transfer or use of cash, goods, or
    services.

    d. Liquidation is
    reasonably expected to require use of existing resources classified as current
    assets or create other current liabilities.
  15. Why
    is the liability section of the balance sheet of primary importance to bankers?

    a. To evaluate the
    entity's credit quality.

    b. To assist in
    understanding the entity's liquidity.

    c. To better understand
    sources of repayment.

    d. To evaluate operating
    efficiency.
  16. What
    is the relationship between current liabilities and a company's operating
    cycle?

    a. Liquidation of
    current liabilities is reasonably expected within the company's operating cycle
    (or one year if less).

    b. Current liabilities
    are the result of operating transactions.

    c. Current liabilities
    can't exceed the amount incurred in one operating cycle.

    d. There is no
    relationship between the two.
  17. What
    is the relationship between present value and the concept of a liability?

    a. Present values are
    used to measure certain liabilities.

    b. Present values are
    not used to measure liabilities.

    c. Present values are
    used to measure all liabilities.

    d. Present values are
    only used to measure long-term liabilities.
  18. What
    is a discount as it relates to zero-interest-bearing notes payable?

    a. The discount
    represents the lender's costs to underwrite the note.

    b. The discount
    represents the credit quality of the borrower.

    c. The discount
    represents the cost of borrowing.

    d. The discount
    represents the allowance for uncollectible amounts.
  19. Where
    is debt callable by the creditor reported on the debtor's financial statements?

    a. Long-term liability.

    b. Current liability if
    the creditor intends to call the debt within the year, otherwise a long-term
    liability.

    c. Current liability if
    it is probable that creditor will call the debt within the year, otherwise a long-term
    liability.

    d. Current liability.
  20. Which
    of the following is not a condition necessary to exclude a short-term
    obligation from current liabilities?

    a. Intend to refinance
    the obligation on a long-term basis.

    b. Obligation must be
    due with one year.

    c. Demonstrate the
    ability to complete the refinancing.

    d. Subsequently
    refinance the obligation on a long-term basis.
  21. Which
    of the following does not demonstrate evidence regarding the ability to
    consummate a refinancing of short-term debt?

    a. Management indicated
    that they are going to refinance the obligation.

    b. Actually refinance
    the obligation.

    c. Have capacity under
    existing financing agreements that can be used to refinance the obligation.

    d. Enter into a
    financing agreement that clearly permits the entity to refinance the obligation.
  22. A
    company has not declared a dividend on its cumulative preferred stock for the
    past three years. What is the required accounting treatment or disclosure in
    this situation?

    a. Record a liability
    for cumulative amount of preferred stock dividends not declared.

    b. Disclose the amount
    of the dividends in arrears.

    c. Record a liability
    for the current year's dividends only.

    d. No disclosure or
    recognition is required.
  23. Which
    of the following situations may give rise to unearned revenue?

    a. Providing trade
    credit to customers.

    b. Selling inventory.

    c. Selling magazine
    subscriptions.

    d. Providing
    manufacturer warranties.
  24. Which
    of the following statements is correct?

    a. A company may exclude
    a short-term obligation from current liabilities if the firm intends to
    refinance the obligation on a long-term basis.

    b. A company may exclude
    a short-term obligation from current liabilities if the firm can demonstrate an
    ability to consummate a refinancing.

    c. A company may exclude
    a short-term obligation from current liabilities if it is paid off after the
    balance sheet date and subsequently replaced by long-term debt before the
    balance sheet is issued.

    d. None of these.
  25. The ability to consummate the
    refinancing of a short-term obligation may be demon- strated by

    a. actually refinancing
    the obligation by issuing a long-term obligation after the date of the balance
    sheet but before it is issued.

    b. entering into a
    financing agreement that permits the enterprise to refinance the debt on a
    long-term basis.

    c. actually refinancing
    the obligation by issuing equity securities after the date of the balance sheet
    but before it is issued.

    d. all of these.
  26. Which of the following statements is false?

    a. A company
    may exclude a short-term obligation from current liabilities if the firm
    intends to refinance the obligation on a long-term basis and demonstrates an
    ability to complete the refinancing.

    b. Cash
    dividends should be recorded as a liability when they are declared by the board
    of directors.

    c. Under the cash basis method, warranty costs are
    charged to expense as they are paid.

    d. FICA
    taxes withheld from employees' payroll checks should never be recorded as a
    liability since the employer will eventually remit the amounts withheld to the
    appropriate taxing authority.
  27. Which of the following is not a correct statement about sales taxes?

    a. Sales
    taxes are an expense of the seller.

    b. Many
    companies record sales taxes in the sales account.

    c. If sales
    taxes are included in the sales account, the first step to find the amount of
    sales taxes is to divide sales by 1 plus the sales tax rate.

    d. All of
    these are true.
  28. Which of these is not included in an employer's payroll tax expense?

    a. F.I.C.A. (social
    security) taxes

    b. Federal unemployment
    taxes

    c. State unemployment
    taxes

    d. Federal income taxes
  29. Which
    of the following is a condition for accruing a liability for the cost of
    compensation for future absences?

    a. The obligation
    relates to the rights that vest or accumulate.

    b. Payment of the
    compensation is probable.

    c. The obligation is
    attributable to employee services already performed.

    d. All of these are
    conditions for the accrual.
  30. A
    liability for compensated absences such as vacations, for which it is expected
    that employees will be paid, should

    a. be accrued during the
    period when the compensated time is expected to be used by employees.

    b. be accrued during the
    period following vesting.

    c. be accrued during the
    period when earned.

    d. not be accrued unless
    a written contractual obligation exists.
  31. The
    amount of the liability for compensated absences should be based on

    1. the current rates of pay in
    effect when employees earn the right to compensated absences.

    2. the future rates of pay expected
    to be paid when employees use compensated time.

    3. the present value of the amount
    expected to be paid in future periods.

    a. 1.

    b. 2.

    c. 3.

    d. Either 1 or 2 is
    acceptable.
  32. What
    are compensated absences?

    a. Unpaid time off.

    b. A form of healthcare.

    c. Payroll deductions.

    d. Paid time off.
  33. Which gives rise to the requirement to accrue a
    liability for the cost of compensated absences?

    a. Payment is probable.

    b. Employee rights vest
    or accumulate.

    c. Amount can be
    reasonably estimated.

    d. All of the above.
  34. Under what conditions is an employer required
    to accrue a liability for sick pay?

    a. Sick pay benefits can
    be reasonably estimated.

    b. Sick pay benefits
    vest.

    c. Sick pay benefits
    equal 100% of the pay.

    d. Sick pay benefits
    accumulate.
  35. Which of the following taxes does not represent
    a payroll deduction a company may incur?

    a. Federal income taxes.

    b. FICA taxes.

    c. State unemployment
    taxes.

    d. State income taxes.
  36. What is a contingency?

    a. An existing situation
    where certainty exists as to a gain or loss that will be resolved when one or
    more future events occur or fail to occur.

    b. An existing situation
    where uncertainty exists as to possible loss that will be resolved when one or
    more future events occur.

    c. An existing situation
    where uncertainty exists as to possible gain or loss that will not be resolved
    in the foreseeable future.

    d. An existing situation
    where uncertainty exists as to possible gain or loss that will be resolved when
    one or more future events occur or fail to occur.
  37. When is a contingent liability recorded?

    a. When the amount can
    be reasonably estimated.

    b. When the future
    events are probable to occur and the amount can be reasonably estimated.

    c. When the future
    events are probable to occur.

    d. When the future
    events will possibly occur and the amount can be reasonably estimated.
  38. Which of the following is an example of a
    contingent liability?

    a. Obligations related
    to product warranties.

    b. Possible receipt from
    a litigation settlement.

    c. Pending court case
    with a probable favorable outcome.

    d. Tax loss
    carryforwards.
  39. Which of the following terms is associated with
    recording a contingent liability?

    a. Possible.

    b. Likely.

    c. Remote.

    d. Probable.
  40. Which of the following is the proper way to
    report a gain contingency?

    a. As an accrued amount.

    b. As deferred revenue.

    c. As an account
    receivable with additional disclosure explaining the nature of the contingency.

    d. As a disclosure only.
  41. Which of the following contingencies need not be disclosed in the financial
    statements or the notes thereto?

    a. Probable losses not
    reasonably estimable

    b. Environmental
    liabilities that cannot be reasonably estimated

    c. Guarantees of
    indebtedness of others

    d. All of these must be
    disclosed.
  42. Which of the following sets of conditions would
    give rise to the accrual of a contingency under current generally accepted
    accounting principles?

    a. Amount of loss is
    reasonably estimable and event occurs infrequently.

    b. Amount of loss is
    reasonably estimable and occurrence of event is probable.

    c. Event is unusual in
    nature and occurrence of event is probable.

    d. Event is unusual in
    nature and event occurs infrequently.
  43. Jeff Beck is a farmer who owns land which
    borders on the right-of-way of the Northern Railroad. On August 10, 2010, due
    to the admitted negligence of the Railroad, hay on the farm was set on fire and
    burned. Beck had had a dispute with the Railroad for several years concerning
    the ownership of a small parcel of land. The representative of the Railroad has
    offered to assign any rights which the Railroad may have in the land to Beck in
    exchange for a release of his right to reimbursement for the loss he has
    sustained from the fire. Beck appears inclined to accept the Railroad's offer.
    The Railroad's 2010 financial statements should include the following related
    to the incident:

    a. recognition of a loss
    and creation of a liability for the value of the land.

    b. recognition of a loss
    only.

    c. creation of a
    liability only.

    d. disclosure in note
    form only.
  44. A contingency can be accrued when

    a. it is certain that
    funds are available to settle the disputed amount.

    b. an asset may have
    been impaired.

    c. the amount of the
    loss can be reasonably estimated and it is probable that an asset has been
    impaired or a liability incurred.

    d. it is probable that
    an asset has been impaired or a liability incurred even though the amount of
    the loss cannot be reasonably estimated.
  45. A contingent liability

    a. definitely exists as
    a liability but its amount and due date are indeterminable.

    b. is accrued even
    though not reasonably estimated.

    c. is not disclosed in
    the financial statements.

    d. is the result of a
    loss contingency.
  46. To record an asset retirement obligation (ARO),
    the cost associated with the ARO is

    a. expensed.

    b. included in the
    carrying amount of the related long-lived asset.

    c. included in a
    separate account.

    d. none of these.
  47. A company is legally obligated for the costs
    associated with the retirement of a long-lived asset

    a. only when it hires
    another party to perform the retirement activities.

    b. only if it performs
    the activities with its own workforce and equipment.

    c. whether it hires
    another party to perform the retirement activities or performs the activities
    itself.

    d. when it is probable
    the asset will be retired.
  48. Assume
    that a manufacturing corporation has (1) good quality control, (2) a one-year
    operating cycle, (3) a relatively stable pattern of annual sales, and (4) a
    continuing policy of guaranteeing new products against defects for three years
    that has resulted in material but rather stable warranty repair and replacement
    costs. Any liability for the
    warranty

    a. should be reported as
    long-term.

    b. should be reported as
    current.

    c. should be reported as
    part current and part long-term.

    d. need not be
    disclosed.
  49. Ortiz Corporation, a manufacturer of household
    paints, is preparing annual financial statements at December 31, 2010. Because
    of a recently proven health hazard in one of its paints, the government has
    clearly indicated its intention of having Ortiz recall all cans of this paint
    sold in the last six months. The management of Ortiz estimates that this recall
    would cost $800,000. What accounting recognition, if any, should be accorded
    this situation?

    a. No recognition

    b. Note disclosure only

    c. Operating expense of
    $800,000 and liability of $800,000

    d. Appropriation of
    retained earnings of $800,000
  50. Information
    available prior to the issuance of the financial statements indicates that it
    is probable that, at the date of the financial statements, a liability has been
    incurred for obligations related to product warranties. The amount of the loss
    involved can be reasonably estimated.
    Based on the above facts, an estimated loss contingency should be

    a. accrued.

    b. disclosed but not accrued.

    c. neither accrued nor
    disclosed.

    d. classified as an
    appropriation of retained earnings.
  51. Espinosa Co. has
    a loss contingency to accrue. The loss amount can only be reasonably estimated
    within a range of outcomes. No single amount within the range is a better
    estimate than any other amount. The amount of loss accrual should be

    a. zero.

    b. the minimum of the
    range.

    c. the mean of the
    range.

    d. the maximum of the
    range.
  52. Dean Company
    becomes aware of a lawsuit after the date of the financial statements, but
    before they are issued. A loss and related liability should be reported in the
    financial statements if the amount can be reasonably estimated, an unfavorable
    outcome is highly probable, and

    a. the Dean Company
    admits guilt.

    b. the court will decide
    the case within one year.

    c. the damages appear to
    be material.

    d. the cause for action
    occurred during the accounting period covered by the financial statements.
  53. Use of the
    accrual method in accounting for product warranty costs

    a. is required for
    federal income tax purposes.

    b. is frequently
    justified on the basis of expediency when warranty costs are immaterial.

    c. finds the expense
    account being charged when the seller performs in compliance with the warranty.

    d. represents accepted
    practice and should be used whenever the warranty is an integral and
    inseparable part of the sale.
  54. Which of the following best describes the
    accrual method of accounting for warranty costs?

    a. Expensed when paid.

    b. Expensed when
    warranty claims are certain.

    c. Expensed based on
    estimate in year of sale.

    d. Expensed when
    incurred.
  55. Which of the following best describes the
    cash-basis method of accounting for warranty costs?

    a. Expensed based on
    estimate in year of sale.

    b. Expensed when liability
    is accrued.

    c. Expensed when
    warranty claims are certain.

    d. Expensed when
    incurred.
  56. Which of the following is a characteristic of
    the expense warranty approach, but not the sales warranty approach?

    a. Estimated liability
    under warranties.

    b. Warranty expense.

    c. Unearned warranty
    revenue.

    d. Warranty revenue.
  57. An electronics store is running a promotion
    where for every video game purchased, the customer receives a coupon upon
    checkout to purchase a second game at a 50% discount. The coupons expire in one
    year. The store normally recognized a gross profit margin of 40% of the selling
    price on video games. How would the store account for a purchase using the
    discount coupon?

    a. The reduction in
    sales price attributed to the coupon is recognized as premium expense.

    b. The difference
    between the cost of the video game and the cash received is recognized as
    premium expense.

    c. Premium expense is
    not recognized.

    d. The difference
    between the cost of the video game and the selling price prior to the coupon is
    recognized as premium expense.
  58. What condition is necessary to recognize an
    asset retirement obligation?

    a. Company has an
    existing legal obligation and can reasonably estimate the amount of the
    liability.

    b. Company can
    reasonably estimate the amount of the liability.

    c. Company has an
    existing legal obligation.

    d. Obligation event has
    occurred.
  59. Which of the following are not factors that are
    considered when evaluating whether or not to record a liability for pending
    litigation?

    a. Time period in which
    the underlying cause of action occurred.

    b. The type of
    litigation involved.

    c. The probability of an
    unfavorable outcome.

    d. The ability to make a
    reasonable estimate of the amount of the loss.
  60. How do you determine the acid-test ratio?

    a. The sum of cash and short-term
    investments divided by short-term debt.

    b. Current assets
    divided by current liabilities.

    c. Current assets
    divided by short-term debt.

    d. The sum of cash,
    short-term investments and net receivables divided by current liabilities.
  61. What does the current ratio inform you about a
    company?

    a. The extent of
    slow-moving inventories.

    b. The efficient use of
    assets.

    c. The company's liquidity.

    d. The company's
    profitability.
  62. Which of the
    following is not acceptable treatment for the presentation of current
    liabilities?

    a. Listing current
    liabilities in order of maturity

    b. Listing current
    liabilities according to amount

    c. Offsetting current
    liabilities against assets that are to be applied to their liquidation

    d. Showing current
    liabilities immediately below current assets to obtain a presentation of
    working capital
  63. The ratio of current
    assets to current liabilities is called the

    a. current ratio.

    b. acid-test ratio.

    c. current asset
    turnover ratio.

    d. current liability
    turnover ratio.
  64. Accrued liabilities are disclosed in financial
    statements by

    a. a footnote to the
    statements.

    b. showing the amount
    among the liabilities but not extending it to the liability total.

    c. an appropriation of
    retained earnings.

    d. appropriately
    classifying them as regular liabilities in the balance sheet.
  65. The
    numerator of the acid-test ratio consists of

    a. total current assets.

    b. cash and marketable
    securities.

    c. cash and net
    receivables.

    d. cash, marketable
    securities, and net receivables.
  66. Each of the following are included in both
    the current ratio and the acid-test ratio except

    a. cash.

    b. short-term
    investments.

    c. net receivables.

    d. inventory.

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