Test bank with answers for financial accounting 6e by libby chapter 09

On the company's December 31, 2009 year-end balance sheet, the notes payable account should be reported as a 52?. Disregarding interest, the amount of the $10,000 loan that should be con

True / False Questions

5 A liability, to be reported on the balance sheet, must have a fixed, known amount to be paid

9 A company borrowed $100,000 at 6% interest on September 1, 2009 Assuming no adjusting entries have been made during the year, the entry to record interest accrued on December 31, 2009 would include a debit to interest expense and a credit to interest payable for $3,000

13 Excessive or slow moving inventory could be the reason working capital is low

17 An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the payment amount of the prior year

18 In the recognition of revenues and expenses, temporary and permanent differences

between the financial statements and the tax return will result in deferred taxes

Multiple Choice Questions

21 A liability is measured in terms of its

A amount owed plus interest

B current cash equivalent

22 Which of the following statements is true?

A Use of more debt in the company's capital structure usually reduces the rate of return generated for stockholders

B Use of more debt in the capital structure can lead to positive financial leverage if we can

generate a return on investment in assets greater than the cost of borrowing

C Use of more debt decreases the level of risk assumed by a company

D All statements are false

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 1

23 Which of the following statements is true?

A Liabilities are initially recorded at the amount of their principle plus interest

B Liabilities can decrease the return on stockholders' equity if the interest rate paid is less than the return on assets

C Capital structure is the relative proportion of debt and equity financing

D Liabilities are current if due within 60 days

24 Which of the following is false?

A Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer

B Liquidity is the ability of the company to meet its total obligations

C Current liabilities impact a company's liquidity

D Working capital is equal to current assets minus current liabilities

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 1

25 The current ratio is computed as follows

A current assets divided by total assets

B current assets divided by current liabilities

C current liabilities divided by total assets

D current liabilities divided by current assets

27 The following is a partial list of account balances from the books of Probst Enterprise at the end of 2009:

Based solely upon these balances, the amount of current liabilities appearing on Probst Enterprise's 2009 year-end balance sheet should be

C A decrease in short-term borrowings

D Both an increase in accounts payable and a decrease in inventories could cause the ratio to

29 If a current ratio has been increasing over the past several years, which of the following would cause the ratio to rise?

A An increase in accounts payable

B An increase in inventories

C An increase in short-term borrowings

D A decrease in prepaid rent

A A decrease in cash and equivalents and short-term investments

B An increase in cash and equivalents and short-term investments

C An increase in current assets that exceeded the increase in current liabilities

D Current assets as a percentage of total assets increased while current liabilities as a percentage of total liabilities and stockholders' equity decreased

32 Which of the following would most likely cause an increase in the current ratio?

A A short-term borrowing of $100

B A purchase of $100 of inventory for cash

C A $100 payment to suppliers thereby reducing accounts payable

D A $100 receipt of cash from a customer's accounts receivable

35 Which of the following is true?

A Social Security tax is employer paid only

B The pay period always ends in conjunction with the company's fiscal year end

C Many fringe benefits such as sick and vacation leave benefits should be recognized when

the employee earns the benefit not when they take the leave

D Medical insurance benefits are always paid by the employee and not by the employer

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 3

36 An accrued liability results from an expense that is

A incurred and paid

B incurred but not yet paid

C paid but not yet incurred

D neither incurred nor paid

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 3

37 Which of the following statements is false relating to payroll taxes?

A When recording the payroll entry, the credit to cash is usually more than the debit to

compensation expense

B FICA (social security) tax is a "matching" tax with the employer

C Income taxes withheld from employees' paychecks are liabilities of the employer

D None of the other answers is false

38 Gross wages of $20,000 accrued but not paid to employees at the end of 2010 should be recorded by the employer in a journal entry that includes a

A debit of $20,000 to Compensation payable

40 The federal government requires

A only the employer to pay FICA taxes

B only the employee to pay FICA taxes

C both the employer and the employee to pay FICA taxes

D neither the employer nor the employee to pay FICA taxes

A be recorded on the employer's books as a current liability

B be recorded on the employer's books as an asset

C be recorded on the employer's books as revenue

D not be recorded on the employer's books

43 Landseeker's Restaurants reported cost of goods sold of $322 million and accounts

payable of $83 million for 2008 In 2007, cost of goods sold was $258 million and accounts payable was $72 million What was Landseeker's accounts payable turnover ratio in 2008?

44 In 2008, StarHotels reported an accounts payable turnover ratio of 11.0 and a current ratio

of 1.52 Their statement of cash flows shows good cash flow from operations Which of the following interpretations of these ratios is most likely?

A Since the two ratios are fairly high, it indicates StarHotels has little difficulty paying its

bills in a timely manner

B Since both these ratios are low, it might indicate poor liquidity and inability to pay vendors

45 General Tech and AmericanBio are both in the biotechnology industry In 2009, General Tech reported a payable turnover of 8.2 and in 2009; AmericanBio reported a ratio of 4.2 Which of the following is an incorrect reason for the difference in ratios?

A AmericanBio has a higher average accounts payable in comparison to their cost of goods sold

B AmericanBio is taking longer to pay vendors

C AmericanBio has a lower average accounts payable in comparison to their cost of goods

48 Failure to make a necessary adjusting entry for accrued interest on a note payable would cause

A an understatement of liabilities and stockholders' equity

B net income to be overstated and assets to be understated

C net income to be understated and liabilities to be understated

D an overstatement of net income, an understatement of liabilities, and an overstatement of

A credit to notes payable for $30,000

B credit to notes payable for $33,000

C debit to cash for $27,000

D debit to interest expense for $3,500

31, 2009, would include a

A debit to Interest Expense for $1,500

B credit to Interest Expense for $1,500

C credit to Cash for $1,500

D debit to Notes Payable for $1,500

51 On July 1, 2009, Prism, Inc borrowed $30,000 from First Bank on a one year, 10% note payable Interest is payable on June 30, 2010, the due date of the note Prism's accounting year ends December 31, 2009 On the company's December 31, 2009 year-end balance sheet, the notes payable account should be reported as a

52 On January 2, 2009, Hill Company borrowed $10,000 from Bank Three The loan was to

be repaid in equal principal installments of $2,000, payable on December 31 of each year, beginning on December 31, 2009 Disregarding interest, the amount of the $10,000 loan that should be considered a current liability on the company's balance sheet for the year ended December 31, 2009 would be

53 Which of the following statements is false?

A The currently maturing portion of long-term debt must be classified as a current liability

B The non-current portion of long-term debt will remain disclosed as a long-term liability

C When a company plans to refinance the currently maturing debt, it must still disclose the

currently maturing portion as a current liability

D Only current liabilities affect liquidity

54 Purdum Farms borrowed $10 million by signing a five year note on January 1, 2009 and repayments of the principle are payable annually in $2 million dollar installments Purdum Farms makes the first payment December 31, 2009 and then prepares its balance sheet What amount will be reported as current and long-term liabilities respectively in connection with the note at December 31, 2009?

A $2 million in current liabilities and $8 million in long-term liabilities

B $2 million in current liabilities and $6 million in long-term liabilities

C Zero in current liabilities and $8 million in long-term liabilities

D Zero in current liabilities and $10 million in long-term liabilities

C Accrued post-retirement benefits

D FICA taxes payable

57 A contingent liability that is "reasonably possible" but "cannot reasonably be estimated"

A must be recorded and reported as a liability

B does not need to be recorded or reported as a liability

C must only be disclosed as a note to the financial statements

D must be reported as a liability, but not recorded

as a result of the lawsuit is

A remote and the amount can be reasonably estimated

B probable and the amount can be reasonably estimated

C reasonably possible and the amount can be reasonably estimated

D probable and the amount cannot be reasonably estimated

A reasonably possible and the amount cannot be reasonably estimated

B probable and the amount cannot be reasonably estimated

C reasonably possible and the amount can be reasonably estimated

D remote and the amount can be reasonably estimated

60 Ogden Motors, Inc is involved in a lawsuit It is probable that the jury will find in favor

of the plaintiff and Ogden Motors will owe ten million dollars Even though the lawsuit is not yet settled, Ogden Motors should record a liability in the balance sheet and

61 When inventory increases from last year to the current year and accounts payable

decreases during the period, the following are the effects on cash flow from operating

activities:

A Cash is decreased for both the increase in inventory and decrease in accounts payable

B Cash is decreased for the increase in inventory but increased for the decrease in accounts payable

C Cash is increased for both the increase in inventory and the decrease in accounts payable

D Cash is increased for the increase in inventory but decreased for the decrease in accounts payable

A is a decrease in cash caused by paying down our debt to vendors

B is an increase in cash because we have not paid cash for all the inventory and services

purchased on credit during the period

C is a decrease to cash because we will have to pay these liabilities in the future

D is an increase to cash because we have received cash from vendors

63 Which of the following statements is true?

A Long-term liabilities are those not expected to be paid in the next year

B Long-term liabilities affect liquidity

C The income taxes payable account is typically a long-term liability

D The salaries payable is typically a long-term liability

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 7

64 On January 1, 2009, Simko Company acquired a truck that had a purchase price of

$20,000 The seller agreed to allow Simko to pay for the truck over a three-year period at 10% interest with equal payments due at the end of 2009, 2010 and 2011 The amount of each annual payment the company must make is (round to the nearest dollar)

65 If the market rate of interest is 10%, a rational person would just as soon receive $1,100 three years from now as what amount today (round to the nearest dollar)?

66 Present value can be defined as the

A future amount of a sum of money held now

B value today of future cash inflow(s)

C maturity value of a debt

D sum of cash inflows over a future period of time

67 On January 1, 2009, Hopkins Company purchased a machine that had a sticker (list) price

of $22,000 The seller agreed to allow Hopkins Company to pay for the machine over a year period at 10% interest on the unpaid balance and with equal payments of $8,444 due at the end of 2009, 2010, and 2008 The amount that should be debited to the asset account, Machinery, on the day the contract was initiated is (rounded to the nearest dollar)

68 On January 1, 2009, Clem Company purchased a machine The seller agreed that a total of

$9,000 would be paid over a three-year period–$3,000 per year at the end of 2009, 2010, and

2011 At the time the machine was purchased, the market rate of interest was 10% The amount that should be debited to the asset account, Machinery, on the date of purchase is (round to the nearest dollar)

A present value of a single amount

B present value of an annuity

C future value of a single amount

D future value of an annuity

70 Straight Industries purchased a large piece of equipment from Curvy Company on January

2, 2009 Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2011 The market rate of interest for similar notes was 8% The present value of $400,000 discounted at 8% for three years is $317,520 On January 2, 2009, Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit

to notes payable for $317,520 On December 31, 2009, Straight recorded an adjusting entry to account for interest that had accrued on the note Assuming no adjusting entries have been made during the year, the approximate amount of interest expense that would have accrued at December 31, 2009, would be

71 Straight Industries purchased a large piece of equipment from Curvy Company on January

2, 2009 Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2011 The market rate of interest for similar notes was 8% The present value of $400,000 discounted at 8% for three years is $317,520 On January 2, 2009, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520 On Straight Industries' balance sheet for the year ended December 31,

2009, the book value of the liability for notes payable related to this purchase would equal

A $317,520

B an amount less than $317,520

C an amount more than $317,520

D an amount more or less than $317,520 depending upon Straight's income for the year