CH 8

Question 1

Define liquidity

Answer 1

a. Ability to pay currently maturing debt

b. Having sufficient cash( convert assets to cash in a relatively short time) to pay debts

Question 2

Define contingent liability

Answer 2

a. Payment is contingent upon another event.

Question 3

What is essential characteristic of liabilities

Answer 3

a. Economic sacrifices from

i. Increase current obligations

Question 4

Define current liabilities

Answer 4

a. Debts ,in most cases, are due within one year. However, when a company has an operating cycle of longer than a year, its current liabilities are defined by length of the operating cycle rather than by the length of one year.

Question 5

What are firms’ obligations that are frequently report as current liabilities?

Answer 5

a. Notes payable, accounts payable, and payroll liabilities are three main categories.

Question 6

Is this a true statement: notes receivable is an asset that creates interest revenue

Answer 6

true

Question 7

Is this forsooth statement: notes payable is an asset that creates interest revenue

Answer 7

False: notes payable is an liability that creates interests expense.

Question 8

When do you record interest expense

Answer 8

a. In the period in which we incur it rather pay.

Question 9

Define line of credit

Answer 9

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

Question 10

Define commercial paper

Answer 10

a. Borrowing from another company rather than from a bank

Question 11

What are maturity ranges for commercial paper

Answer 11

a. 30 to 270

b. If maturity goes beyond ranges, a firm must register with SEC

Question 12

What are payroll cost for employees

Answer 12

a. Federal and state income taxes
b. Employee portion of social security and medicare
c. Employee contributions for health , dental, disability, and life insurance
d. Employee investments in retirement or savings plans

Question 13

What are payroll cost for employers

Answer 13

a. Federal and state unemployment taxes
b. Employer matching portion of social security and medicare
c. Employer contributions for health, dental, disability, and life insurance
d. Employer contributions to retirement or savings plans.

Question 14

Define Federal insurance contribution act( FICA)

Answer 14

a. Based on the federal insurance contribution act, tax withheld from employees’ paychecks and matched by employers for social security and medicare

Question 15

Define unemployment taxes

Answer 15

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

Question 16

Define Fringe benefits

Answer 16

a. Additional employee benefits paid for by the employer

Question 17

Define sales tax payable

Answer 17

a. Sales tax collected from customers by the seller, representing current liabilities payable to the government.
b. (DR) Cash
c. (CR) Sales tax payable
d. ( record sales and sales tax)

Question 18

Define current portion of long term debt

Answer 18

a. Debt that will be paid within the next year

Question 19

Define contingent liability

Answer 19

a. An existing uncertain situation that might result in a loss

Question 20

How do you report a contingent liabilty

Answer 20

a. Likelihood of payment
i. Probable
ii. Reasonably possible
iii. Remote
b. Ability to estimate the payment amount is either
i. Known or reasonably estimable
ii. Not reasonably estimable

Question 21

How do you journalize contingent liability

Answer 21

a. (DR) Loss
b. (CR) Contingent liability
c. ( record a contingent liability)

Question 22

is this statement true: warranties are not contingent liabilities

Answer 22

false

Question 23

How do you journalize a warranty liability?

Answer 23

DR) warranty expense

b. (CR) warranty liability
c. (record liability for warranties)

Question 24

How do you journalize a warranty expenditures

Answer 24

a. (DR) Warranty liability
b. (CR) cash
c. [record actual warranty expenditure(s)]

Question 25

Define contingent gain

Answer 25

An existing uncertain situation that might result in a gain

Question 26

IS this a true statement: we do not record contingent gains until the gain is certain

Answer 26

true

Question 27

What are the three measures of liquidity

Answer 27

a. Working capital
b. Current ratio
c. Acid test ratio

Question 28

Define working capital

Answer 28

a. the difference between current assets and liabilities

b. Working capital = current assets – current liabilities

Question 29

Define current ratio

Answer 29

a. current assets divided by current liabilities; measures the availability of current assets to pay current liabilities
b. current ratio = current assets/current liabilities
c. the higher the current ratio, the greater the company’s liquidity

Question 30

Define acid test ratio

Answer 30

a. Cash, current investments, and accounts receivable divided by current liabilities; measure the availability of liquid current assets to pay current liabilities
b. Acid test radio= cash+current investments+ accounts receivable/ current liabilities
c. Similar to current ratio except that current assets are known and convertible to cash quickly.

Question 31

Define quick assets

Answer 31

current investments and accounts that are easily convertible to cash

Question 32

How can management influence ratios that measure liquidity

Answer 32

change delivery schedules

Question 33

Define debt covenant

Answer 33

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

Question 34

Define Renegotiate

Answer 34

a. negotiate (something) again in order to change the original agreed terms