Chapter 9

Question 1

Amounts owed for inventory, goods, or services acquired in the normal course of business.

Answer 1

Accounts payable

Question 2

A liability that has been incurred but has not yet been paid.

Answer 2

Accrued liability

Question 3

A series of payments of equal amounts.

Answer 3

Annuity

Question 4

Interest calculated on the principal plus previous amounts of interest.

Answer 4

Compound interest

Question 5

An existing condition for which the outcome is not known but by which the company stands to gain.

Answer 5

Contingent asset

Question 6

An existing condition for which the outcome is not known but depends on some future event.

Answer 6

Contingent liability

Question 7

Accounts that will be satisfied within one year or the current operating cycle.

Answer 7

Current liability

Question 8

The portion of a long-term liability that will be paid within one year.

Answer 8

Current maturities of long-term debt

Question 9

A contra liability that represents interest deducted from a loan in advance.

Answer 9

Discount on notes payable

Question 10

A contingent liability that is accrued and reflected on the balance sheet.

Answer 10

Estimated liability

Question 11

Amount accumulated at a future time from a single payment or investment.

Answer 11

Future value of a single amount

Question 12

The amount accumulated in the future when a series of payments is invested and accrues interest.

Answer 12

Future value of an annuity

Question 13

Amounts owed that are represented by a formal contract.

Answer 13

Notes payable

Question 14

The amount at a present time that is equivalent to a payment or an investment at a future time.

Answer 14

Present value of a single amount

Question 15

The amount at a present time that is equivalent to a series of payments and interest in the future.

Answer 15

Present value of an annuity

Question 16

Interest is calculated on the principal amount only.

Answer 16

Simple interest

Question 17

An immediate amount should be preferred over an amount in the future.

Answer 17

Time value of money

Question 18

1. Omega Company is involved in two unrelated lawsuits, one as the plaintiff and one as the defendant. As a result of the two lawsuits, the company has a contingent asset and a contingent liability. How should Omega record these on its balance sheet?a. Omega should record the contingent liability and the contingent asset on the balance sheet by offsetting the liability against the asset. b. Omega must not record the contingent asset, but Omega must record the contingent liability on the balance sheet if the liability is probable and the amount can be reasonably estimated. c. Omega must record the contingent asset if the realization of the asset is probable and the amount can be reasonably estimated, but Omega must not record the contingent liability on the balance sheet. d. Omega should record the contingent liability and the contingent asset separately on the balance sheet.

Answer 18

not d

Question 19

2. You want to buy a car costing $20,000 and make loan payments over five years at 10% interest per year. To solve for the amount of the payments, the $20,000 represents:a. a future value. b. a present value. c. the payment amount. d. an annuity.

Answer 19

a present value

Question 20

3. If you invest money for five years, which will be larger?a. the investments will be the same. b. it depends on how frequently compounding occurs. c. an investment that earns compound interest. d. an investment that earns simple interest.

Answer 20

an investment that earns compound interest.

Question 21

4. You plan to invest $1,000 and want to determine how much will be accumulated in five years if you earn interest at 8% per year. This is an example of:a. future value of a single amount. b. future value of an annuity. c. present value of an annuity. d. present value of a single amount.

Answer 21

not b

Question 22

5. For users of financial statements, the Current Liabilities classification in the balance sheet is important because it is closely tied to the concept of:a. leverage. b. profitability. c. liquidity. d. materiality

Answer 22

liquidity

Question 23

6. When a liability is accrued, the account debited in the transaction is:a. a stockholders’ equity account. b. another liability account. c. an expense. d. an asset.

Answer 23

not d

Question 24

7. In the statement of cash flows, an increase in a current liability will appear as a(n):a. increase in the Financing Activities category. b. decrease in the Operating Activities category. c. increase in the Operating Activities category. d. decrease in the Financing Activities category.

Answer 24

not b

Question 25

1. An investment has an annual interest rate of 8%. If the interest is compounded quarterly for 2 years, then the interest factor used in the present value calculation is:a. 2% for 8 periods. b. the interest factor for 8% for 2 years divided by 4. c. twice that for 1 period at 8% multiplied by 2. d. 8% for 2 periods.

Answer 25

2% for 8 periods.

Question 26

2. Accounts payable usually arise from:a. purchases of goods, services, and inventory in the normal course of business. b. purchases of goods or services that require interest payments. c. debts owed employees and government entities. d. long-term discounted liabilities.

Answer 26

purchases of goods, services, and inventory in the normal course of business.

Question 27

3. In the statement of cash flows, a decrease in accounts payable would be shown as a(n):a. increase in the Financing Activities category. b. increase in the Operating Activities category. c. decrease in the Financing Activities category. d. decrease in the Operating Activities category.

Answer 27

decrease in the Operating Activities category.

Question 28

4. You plan to invest $1,000 per year and want to determine how much will be accumulated in five years if you earn interest at 8% per year compounded annually. This is an example of:a. present value of a single amount. b. future value of a single amount. c. present value of an annuity. d. future value of an annuity.

Answer 28

future value of an annuity.

Question 29

5. Alpha Company has current assets of $100,000 and current liabilities of $40,000. How much inventory could it purchase on account and achieve its minimum desired current ratio of 2 to 1?a. $40,000 b. $10,000 c. It cannot purchase any inventory on account and achieve its minimum desired current ratio. d. $20,000

Answer 29

$20,000

Question 30

6. You are purchasing a car for $10,000 and will finance the purchase over the next 5 years with a loan at 8% interest. The yearly payment would be approximately:a. $6,810 b. $2,504 c. $800 d. $2,000

Answer 30

$2,504

Question 31

7. Which of the following accounts would not be classified as a current liability?a. Salaries Payable b. Accounts Payable c. Note Payable, due in 3 years d. Taxes Payable

Answer 31

Note Payable, due in 3 years

Question 32

8. An example of a current liability that must be accrued is:a. current maturity of long-term debt. b. income taxes payable. c. revenue received in advance. d. accounts payable

Answer 32

income taxes payable

Question 33

9. A contingent liability that is probable and where the amount can reasonably be estimated should:a. be recorded as a liability. b. not be recorded as a liability but disclosed in the notes. c. be recorded in the same. d. be neither recorded as a liability nor disclosed in the notes.

Answer 33

be recorded as a liability.

Question 34

10. Assume a firm has signed a $2,000 note payable for which interest and principal are due in three years with interest compounded annually at 15% per year. What would be the total amount of interest due at the end of the third year?a. $300 b. $1,041.75 c. $645 d. $628.75

Answer 34

$1,041.75

Question 35

11. An individual has $5,000 to invest and wants it to become $10,000 at the end of 9 years. Referring to Table 9-1, what interest rate, compounded annually, must be earned on the initial investment?a. 7% b. 6% c. 8% d. 5%

Answer 35

8%

Question 36

12. Which of the following statements regarding contingencies is correct?a. Contingencies that are remote but estimable are disclosed in the notes to the financial statements. b. Contingencies that are probable and not estimable appear on the balance sheet. c. Contingent assets are recorded on the balance sheet, but not in the notes to the financial statements. d. Contingencies that are probable and not estimable are disclosed in the notes to the financial statements.

Answer 36

Contingencies that are probable and not estimable are disclosed in the notes to the financial statements.

Question 37

13. If you are trying to determine the amount of money you will accumulate if you invest in a CD (certificate of deposit), you would use which of the following tables to make this decision?a. future value of a single amount b. present value of a single amount c. present value of an annuity d. future value of an annuity

Answer 37

future value of a single amount

Question 38

14. An invoice received from a supplier for $5,000 on January 1 with terms 3/15, net 30 means that the company should pay:a. either $4,850 before January 16 or $5,000 before the end of the month. b. $4,250 before January 4. c. $4,850 before the end of January. d. $5,000 between January 4 and January 16.

Answer 38

either $4,850 before January 16 or $5,000 before the end of the month.