Chapter 11 (Liabilities)

Question 1

Characteristics of Liabilities
- Probable ________ sacrifices of economic benefits
- Arise from ________ obligations to other entities
- Result from ____ transactions or events

Answer 1

economic
present
past

Question 2

• Liabilities recorded at the cash amount a creditor would accept to settle the liability immediately (in other words, recorded at the ____-_____)
  - Maturity < 1 year = ________ liability
  - Maturity > 1 year = Long term liabilities

Examples of _______ liabilities
- Purchase inventory –> __
- Use of electricity (or any utility) –> _______ liabilities
- Employees perform work –> Accrued _____
- Customers pay in advance for future purchases –> ________ (unearned) revenue

Answer 2

fair-value
current (x2)
AP (accounts payable)
accrued
wages
deferred

Question 3

Notes Payable
- Formal written ________ that specifies the amount borrowed, repayment date, and interest rate
- To the lender (e.g. a bank), interest is a _______
- To the borrower, interest is an _______
- _____ have similar cash flow streams but are publicly-traded and involve many parties

Answer 3

contract
revenue
expense
Bonds

Question 4

Interest
- Payment for the use of money
- Formula: _________ amount * rate * time
- _______ interest calculates interest on only the principal amount owed without considering any interest already earned
- ________ interest calculates interest on both the principal and any previously earned interest that has not been paid
- Almost all business applications use the latter

Answer 4

principal
Simple
Compound

Question 5

Installment Loans
- A note in which the payment amount is _____, progressively more paid to the _________ with each successive payment
- Most consumer loans work this way (e.g. car loan, student loan, mortgages)

Answer 5

fixed, principle

Question 6

Contingent Liabilities
- Non-contingent liabilities are known obligations resulting from past events
- Contingent liabilities are ________ obligations resulting from past events
- Ex. warranties, lawsuits, environmental cleanup costs
- The accounting for contingent liabilities depends on i) the ___________ of the future event ii) the ability to ________ the obligation
- Answer to both = ___ –> record the amount in the financial statements (no to one question –> disclosed in the _____ in financial statements)
- Exceptions: ______ guarantees are always disclosed even if the likelihood is remote, material purchase commitments should also be disclosed

Answer 6

potential
probability, measure
yes, notes
credit

Question 7

Liquidity
- Working capital is defined as the difference between current ______ and current __________
- In general, the ____ working capital is preferable and viewed as a sign of a stronger financial position
- Assessed using the _______ ratio and the ______ ratio

Answer 7

assets, liabilities
more
current ratio and quick ratio

Question 8

Solvency
- The _____-________-______ ratio provides an indication of a company’s ability to make periodic interest payments to its creditors
- A ratio between at least the . - _ range is considered acceptable

Answer 8

times-interest-earned
2.5-3