Week 9 Textbook

Question 1

The issuance of a note payable results in a(n):

Multiple select question.

decrease in Cash
increase in Notes Payable
decrease in Notes Payable
increase in Cash

Answer 1

increase in Notes Payable
increase in Cash

Question 2

An interest rate, unless otherwise specified, is typically a(n)

Multiple choice question.

annual rate
quarterly rate
monthly rate

Answer 2

annual rate

Question 3

On September 1, 20X1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. By recognizing interest owed on December 31, 20X1, ABC’s net income

Multiple choice question.

decreases by $1,000
increases by $1,000
decreases by $3,000
increases by $3,000

Answer 3

decreases by $1,000

Question 4

A(n) __________ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash. (Enter only one word.)

Answer 4

account

Question 5

A contingent liability is an existing ________ situation that might result in a loss depending on the outcome of a future event.

Answer 5

uncertain

Question 5

Select all that apply

The two types of financing are

investing financing.
operating financing.
equity financing.
debt financing.

Answer 5

equity financing.
debt financing.

Question 6

Select all that apply

The financial statement effects of the issuance of a note payable include a(n):

increase in net income
decrease in net income
increase in liabilities
decrease in assets
decrease in liabilities
increase in assets

Answer 6

increase in liabilities
increase in assets

Question 6

Select all that apply

What are the two criteria used to determine whether a contingent liability is reported in the financial statements?

The ability to estimate the amount of payment
The likelihood of payment
The percentage of the payment to total income
The payment date

Answer 6

The ability to estimate the amount of payment
The likelihood of payment

Question 7

A(n) __________ liability is an existing uncertain situation that might result in a loss depending on the outcome of a future event.

Answer 7

contingent

Question 7

Which of the following is an important criteria used to determine the reporting of a contingent liability?

Multiple choice question.

The classification of the related expense or loss
The likelihood of future payment or loss
The effect on key balance sheet ratios
The potential effect on financial statement users

Answer 7

The likelihood of future payment or loss

Question 8

A loss that is judged to be probable and for which the amount is reasonably estimable should be

Multiple choice question.

disclosed only in the notes.
reported as a liability.
ignored.
deferred until the related uncertainly is resolved.

Answer 8

reported as a liability.

Question 9

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)

Multiple choice question.

a 3 month rate.
annual, 12 month rate.
6 month rate.

Answer 9

annual, 12 month rate.

Question 10

On September 1, 20X1, Kale Corporation signed a 6-month, 12% interest-bearing promissory note for $100,000. For Kale, recognizing interest owed on December 31, 20X1, results in a(n):

Multiple select question.

increase in Interest Payable of $12,000
increase in Interest Payable of $4,000
increase in Interest Expense of $4,000
increase in Interest Expense of $12,000

Answer 10

increase in Interest Payable of $4,000
increase in Interest Expense of $4,000

Question 11

On September 1, 20X1, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. By recognizing interest owed on December 31, 20X1, ABC’s net income

Multiple choice question.

decreases by $3,000
decreases by $1,000
increases by $3,000
increases by $1,000

Answer 11

decreases by $1,000

Question 11

A company purchases inventory or supplies and promises to pay within 30 to 45 days. No formal agreement is signed. This transaction is recorded as a(n)

Multiple choice question.

accounts receivable.
notes receivable.
notes payable.
accounts payable.

Answer 11

accounts payable.

Question 11

Which of the following is a guarantee that protects a customer from product defects for a specified period of time?

Multiple choice question.

Contingency
Warranty
Promissory note
Sales allowance

Answer 11

Warranty

Question 11

For a manufacturer, the most commonly reported contingent liabilities relate to product __________.

Answer 11

warranties

Question 12

Select all that apply

Langlee Hardware provides a two-year warranty against defects on all major appliances sold. New appliance sales in December 20X1 are $150,000. Langlee expects future warranty costs to be 2% of sales. For Langlee, the recognition of expected future warranty costs in December 20X1 results in a(n):

increase in Warranty Liability
increase in Warranty Expense
decrease in Cash
decrease in Warranty Liability
decrease in Warranty Expense

Answer 12

increase in Warranty Liability
increase in Warranty Expense

Question 12

Bonds and leases are normally classified as Blank______ liabilities.

Multiple choice question.

current
long-term

Answer 12

long term

Question 13

Periodic payments on installment notes typically include

Multiple select question.

installment fees.
an increase in stockholders’ equity
a portion that reduces the outstanding loan balance.
a portion that reflects interest.

Answer 13

a portion that reduces the outstanding loan balance.
a portion that reflects interest.

Question 14

Langlee Hardware provides a two-year warranty against defects on all major appliances sold. New appliance sales in December 20X1 are $150,000. Langlee expects future warranty costs to be 2% of sales. For Langlee, the recognition of expected future warranty costs in December 20X1 causes net income to

Multiple choice question.

decrease by $3,000
increase by $150,000
decrease by $150,000
increase by $3,000

Answer 14

decrease by $3,000

Question 14

Which of the following are methods of long-term financing with debt?

Multiple select question.

Leases
Common stock
Notes payable
Bonds
Accounts payable

Answer 14

Leases
Notes payable
Bonds

Question 15

A corporation that wishes to borrow from the general public rather than a bank will issue

Multiple choice question.

preferred stock.
notes payable.
bonds.
common stock.

Answer 15

bonds

Question 16

Langlee Hardware provides a two-year warranty against defects on all major appliances sold. New appliance sales in December 20X1 are $150,000. Langlee expects future warranty costs to be 2% of sales. For Langlee, the balance sheet effects of recognizing expected future warranty costs in December 20X1 include a(n):

Multiple choice question.

decrease in liabilities; increase in stockholders’ equity
increase in assets; increase in liabilities
increase in liabilities; decrease in stockholders’ equity
decrease in assets; decrease in liabilities

Answer 16

increase in liabilities; decrease in stockholders’ equity

Question 17

________ bonds allow the borrower the repay the bond before maturity date

Answer 17

Blank 1: Callable or Redeemable

Question 17

A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)

Multiple choice question.

maturable asset.
common stock.
obligation payment.
bond.

Answer 17

bond.

Question 18

Select all that apply

Periodic payments on installment notes typically include

an increase in stockholders’ equity
a portion that reflects interest.
a portion that reduces the outstanding loan balance.
installment fees.

Answer 18

a portion that reflects interest.

a portion that reduces the outstanding loan balance.

Question 19

__________ bonds are retired when the bondholder exchanges them for the issuing company’s stock.

Answer 19

Blank 1: Convertible

Question 19

A common reason for redeeming a bond prior to its maturity date is that

Multiple choice question.

market interest rates increased.
market interest rates decreased.
the market price of bonds decreased.

Answer 19

market interest rates decreased.

Question 20

___________ bonds are supported by a specific asset the issuer pledges as collateral.

Answer 20

secured

Question 20

The most common interest payment frequency of corporate bonds is every
__________
months.

Answer 20

Six

Question 21

Most corporate bonds pay interest

Multiple choice question.

monthly.
quarterly
annually
semiannually.

Answer 21

Semiannually

Question 21

Convertible bonds allow the lender to convert each bond into:

Multiple choice question.

common stock
treasury stock
secured bonds

Answer 21

common stock

Question 22

Identify a primary reason why financial statement users assess a company’s liquidity.

Multiple choice question.

Lack of liquidity leads to low asset turnover ratios.
Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.
Liquidity represents the most important indicator of profitability.

Answer 22

Lack of liquidity can lead to the bankruptcy of a company that otherwise may have been successful.

Question 23

Current assets minus current liabilities equals ________

Answer 23

Working Capital

Question 24

_______ refers to a company’s cash position and overall ability to obtain cash in the normal course of business. (Enter one word per blank)

Answer 24

Blank 1: Liquidity

Question 24

The mathematical formula for working capital is current assets ______ current liabilities.

Multiple choice question.

multiplied by
divided by
minus
plus

Answer 24

minus

Question 24

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance’s existing:

Multiple choice question.

current assets
other comprehensive income
long-term liabilities
net income

Answer 24

long-term liabilities

Question 25

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The 6% interest rate is a(n)

a 3-month rate.
6 month rate.
annual, 12 month rate.

Answer 25

annual, 12 month rate.

Question 25

In order to assess a company’s financial risk, investors and creditors frequently consider and analyze the company’s:

Multiple choice question.

total assets
net income
long-term debt
other comprehensive income

Answer 25

long-term debt