Chapter 10 (Week 5)

Question 1

Current liability

Answer 1

Is a debt that a company expects to pay within one year or the operating cycle, whichever is longer. Debts that do not meet this criterion are non-current liabilities.

A company that has more current liabilities than current assets often lacks liquidity, or short-term debt-paying ability

Question 2

Non current liability

Answer 2

Expected to be settled after 1 year or the operating cycle

Question 3

Accounts Payable

Answer 3

obligations to pay suppliers for the delivery of goods and services

Question 4

Notes payable

Answer 4

written promise to pay a specified amount of money, typically with interest, on a predetermined future date

Companies frequently issue notes payable to meet short-term financing needs

Question 5

VAT

Answer 5

a consumption tax, a cost to the end user - collected every time a business purchases products from another business in the product’s supply chain

Question 6

Sales tax

Answer 6

collected once at the consumer’s point of purchase

Debits sales tax, and credits cash

Question 7

Current maturities of a longterm debt

Answer 7

Companies often have a portion of long term debt that comes due in the current year, which is considered a current liability
They are identified on the balance sheet as long term debt due within one year

Question 8

Reporting Uncertainty

Answer 8

With current liabilities, an obligation to make payment exists

Provision (or estimated liability): a liability of uncertain timing or amount
A provision has greater uncertainty about the timing or the amount of the future expenditure required to settle the obligation

Question 9

Recognition of a Provision

Answer 9

Company accrue an expense and related liability for a provision only if the following three conditions are met:

A company has a present obligation as a result of a past event

It is probable (more likely than not to occur) that an outflow of resources will be required to settle the obligation

A reliable estimate can be made of the amount of the obligation

Question 10

Reporting of current liabilities

Answer 10

They are reported after non-current liabilities on the balance sheet

Question 11

Liquidity

Answer 11

the ability to pay maturing obligations and meet unexpected needs for cash

Question 12

Working capital formula

Answer 12

Current Assets - Current Liabilities

Question 13

Current ratio formula

Answer 13

Current assets / Current liabilities