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financial accounting 11th edition
Questions and Answers of
Financial Accounting 11th Edition
Show that you understand how changes in current liabilities affect the statement of cash flows.
Determine when contingent liabilities should be presented on the balance sheet or disclosed in notes and how to calculate their amounts.
Calculate amounts using the future value and present value concepts.
Apply the compound interest concepts to some common accounting situations.
How are changes in the current liability accounts related to the amount of cash available to the company?
What is the proper recording and disclosure of liabilities that are contingent on future events?
Refer to Starbucks’October 1, 2006, balance sheet in the chapter opener. What accounts are listed as current liabilities? How much did Accounts Payable change from 2005 to 2006?
For users of financial statements, the current liability classification in the balance sheet is important because it is closely tied to the concept ofa. materiality.b. liquidity.c. profitability.d.
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. $10,000b.
An invoice received from a supplier for$5,000 on January 1 with terms 3/15, net 30 means that the company should paya. $5,000 between January 4 and January 16.b. $4,850 before the end of January.c.
When a liability is accrued, the account debited in the transaction isa. an asset.b. an expense.c. another liability account.d. a stockholders’ equity account.
In the statement of cash flows, a decrease in accounts payable would be shown as a(n)a. increase in the Operating Activities category.b. decrease in the Operating Activities category.c. increase in
In the statement of cash flows, an increase in a current liability will appear as a(n)a. increase in the Operating Activities category.b. decrease in the Operating Activities category.c. increase in
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
A contingent liability that is probable and where the amount can reasonably be estimated shoulda. be recorded as a liability.b. not be recorded as a liability but disclosed in the notes.c. be neither
If you invest money for five years, which will be larger?a. an investment that earns simple interestb. an investment that earns compound interestc. The investments will be the same.d. It depends on
If you invest money for five years, which will be larger?a. an investment where interest is compounded annuallyb. an investment where interest is compounded semiannuallyc. an investment where
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 ofa. future value of a single amount.b. future value
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 ofa. future value of a
You want to buy a car costing $20,000 and make loan payments over five years at 10%interest per year. You must solve for the amount of the payments. In doing so, the amount of $20,000 representsa. an
You want to accumulate $20,000 by your 25th birthday and will invest money in the bank each year where it will earn interest at 10% compounded annually. You must solve for the amount to invest each
What is the definition of current liabilities? Why is it important to distinguish between current and long-term liabilities? LO 8
Most firms attempt to pay their accounts payable within the discount period to take advantage of the discount. Why is that normally a sound financial move? LO 8
Is the account Discount on Notes Payable an income statement or balance sheet account? Does it have a debit or credit balance? LO 8
A firm’s year ends on December 31. Its tax is computed and submitted to the U.S. Treasury on March 15 of the following year. When should the taxes be reported as a liability? LO 8
What is a contingent liability? Why are contingent liabilities accounted for differently than contingent assets? LO 8
What is the difference between simple interest and compound interest? Is the amount of interest higher or lower when the interest is simple rather than compound? LO 8
What is the effect when interest is compounded quarterly versus annually? LO 8
What is the meaning of the terms present value and future value? How can you determine whether to calculate the present value or the future value of an amount? LO 8
What is the meaning of the word annuity? Can the present value of an annuity be calculated as a series of single amounts? If so, how? LO 8
Assume that you know the total dollar amount of a loan and the amount of the monthly payments. How can you determine the interest rate as a percentage of the loan? LO 8
The present value and future value concepts are applied to measure the amount of several accounts common in accounting. What are some accounts that are valued in this manner? LO 8
Accounts that will be satisfied within one year or the next operating cycle. True/false
The amount needed at the present time to be equivalent to a series of payments and interest in the future. True/false
Amounts owed for the purchase of inventory, goods, or services acquired in the normal course of business. True/false
A contra-liability account that represents interest deducted from a loan or note in advance. True/false
A series of payments of equal amount. True/false
The portion of a long-term liability that will be paid within one year of the balance sheet date. True/false
A liability that has been incurred but has not been paid as of the balance sheet date. True/false
Amounts owed that are represented by a formal contractual agreement. These amounts usually require the payment of interest. True/false
A liability that involves an existing condition for which the outcome is not known with certainty and depends on some future event. True/false
Interest that is earned or paid on the principal amount only. True/false
A contingent liability that is accrued and is reflected on the balance sheet. Common examples are warranties, guarantees, and premium offers. True/false
An amount that involves an existing condition dependent upon some future event by which the company stands to gain. These amounts are not normally reported. True/false
Interest calculated on the principal plus previous amounts of interest accumulated. True/false
The concept that indicates that people should prefer to receive an immediate amount at the present time over an equal amount in the future. True/false
The amount that will be accumulated in the future when one amount is invested at the present time and accrues interest until the future time. True/false
The amount that will be accumulated in the future when a series of payments is invested and accrues interest until the future time. True/false
The present amount that is equivalent to an amount at a future time. True/false
Liquidity Beta Company has current assets of $80,000 and current liabilities of $60,000. How much of its short-term notes payable could it pay in cash and achieve its minimum desired current ratio of
Credit Terms You receive an invoice from a supplier for $5,000 on January 1 with terms 3/15, net 30. If you pay between January 1 and January 16, how much must you pay? If you pay after January 16,
Solving for an Interest Rate You are required to pay $5,000 for college fees for each of the next four years, and a not-quite-asgenerous uncle offers to give you $14,275 toward your college fees.
A company has the following current assets: Cash, $10,000; Accounts Receivable, $70,000; and Inventory, $20,000. The company also has current liabilities of $40,000. Calculate the company’s current
A company has the following current liabilities at the beginning of the period: Accounts Payable,$30,000; Taxes Payable $10,000. At the end of the period, the balances of the account are as
You invest $1,000 at the beginning of the year. How much will be accumulated in five years if you earn 10% interest compounded annually?
You invest $1,000 per year at the end of each year for five years. How much will be accumulated in five years if you earn 10% interest compounded annually?
You will receive $1,000 in five years. What is the present value of that amount if you earn 10%interest compounded annually?
You will receive $1,000 per year at the end of each year for five years. What is the present value of that amount if you earn 10% interest compounded annually?
Current Liabilities The following items are accounts on Smith’s balance sheet of December 31, 2007:Taxes Payable Accounts Receivable Notes Payable, 9%, due in 90 days Investment in Bonds Capital
Current Liabilities Section Jackie Company had the following accounts and balances on December 31, 2008:Required Prepare the Current Liabilities section of Jackie Company’s balance sheet as of
Transaction Analysis Polly’s Cards & Gifts Shop had the following transactions during the year:a. Polly’s purchased inventory on account from a supplier for $8,000. Assume that Polly’s uses a
Discounts Each of the following situations involves the use of discounts.1. How much discount may Seals Inc. take in each of the following transactions? What was the annualized interest rate?a. Seals
Notes Payable and Interest On July 1, 2008, Jo’s Flower Shop borrowed $25,000 from the bank. Jo signed a ten-month, 8%promissory note for the entire amount. Jo’s uses a calendar year-end.Required
Non-Interest-Bearing Notes Payable On October 1, 2008, Ratkowski Inc. borrowed $18,000 from Second National Bank by issuing a 12-month note. The bank discounted the note at 9%.Required 1. Prepare the
Impact of Transactions Involving Current Liabilities on Statement of Cash Flows From the following list, identify whether the change in the account balance during the year would be reported as an
Warranties Clean Corporation manufactures and sells dishwashers. Clean provides all customers with a twoyear warranty guaranteeing to repair, free of charge, any defects reported during this time
Effect of Compounding Period Kern Company deposited $1,000 in the bank on January 1, 2008, earning 8% interest. Kern Company withdraws the deposit plus accumulated interest on January 1, 2010.
Present Value, Future Value The following situations involve time value of money calculations.1. A deposit of $7,000 is made on January 1, 2008. The deposit will earn interest at a rate of 8%.How
Present Value, Future Value The following situations require the application of the time value of money.1. On January 1, 2008, $16,000 is deposited. Assuming an 8% interest rate, calculate the amount
Compare Alternatives Jane Bauer has won the lottery and has four options for receiving her winnings:1. Receive $100,000 at the beginning of the current year 2. Receive $108,000 at the end of the year
Notes and Interest Glencoe Inc. operates with a June 30 year-end. During 2008, the following transactions occurred:a. January 1: Signed a one-year, 10% loan for $25,000. Interest and principal are to
Effects of Panera Bread’s Current Liabilities on Its Statement of Cash Flows The following items are classified as current liabilities on Panera Bread Company’s consolidated balance sheet at
Effects of Wendy’s International’s Changes in Current Assets and Liabilities on Its Statement of Cash Flows The following items, listed in alphabetical order, are included in the Current Assets
Warranties Clearview Company manufactures and sells high-quality television sets. The most popular line sells for $1,000 each and is accompanied by a three-year warranty to repair, free of charge,
Warranties Bombeck Company sells a product for $1,500. When the customer buys it, Bombeck provides a one-year warranty. Bombeck sold 120 products during 2008. Based on analysis of past warranty
Comparison of Simple and Compound Interest On June 30, 2008, Rolf Inc. borrowed $25,000 from its bank, signing an 8%, two-year note.Required 1. Assuming that the bank charges simple interest on the
Investment with Varying Interest Rate Shari Thompson invested $1,000 in a financial institution on January 1, 2008. She leaves her investment in the institution until December 31, 2012. How much
Comparison of Alternatives On January 1, 2008, Chen Yu’s Office Supply Store plans to remodel the store and install new display cases. Chen has the following options of payment. Chen’s interest
Interest in Advance versus Interest Paid When Loan Is Due On July 1, 2008, Leach Company needs exactly $103,200 in cash to pay an existing obligation.Leach has decided to borrow from State Bank,
Contingent Liabilities Several items are listed for which the outcome of events is unknown at year-end.a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the
Time Value of Money Concepts The following situations involve the application of the time value of money concept.1. Janelle Carter deposited $9,750 in the bank on January 1, 1991, at an interest rate
Notes and Interest McLaughlin Inc. operates with a June 30 year-end. During 2008, the following transactions occurred:a. January 1: Signed a one-year, 10% loan for $35,000. Interest and principal are
Effects of Darden Restaurants’ Changes in Current Assets and Liabilities on Its Statement of Cash Flows The following items, listed in alphabetical order, are included in the Current Liabilities
Warranties Beck Company sells a product for $3,200. When the customer buys it, Beck provides a one-year warranty. Beck sold 120 products during 2008. Based on analysis of past warranty records, Beck
Comparison of Simple and Compound Interest On June 30, 2008, Rolloff Inc. borrowed $25,000 from its bank, signing a 6% note. Principal and interest are due at the end of two years.Required 1.
Investment with Varying Interest Rate Trena Thompson invested $2,000 in a financial institution on January 1, 2008. She leaves her investment in the institution until December 31, 2012. How much
Comparison of Alternatives On January 1, 2008, Chen Yu’s Office Supply Store plans to remodel the store and install new display cases. Chen has the following options of payment. Chen’s interest
Interest in Advance versus Interest Paid When Loan Is Due On July 1, 2008, Moton Company needs exactly $206,400 in cash to pay an existing obligation.Moton has decided to borrow from State Bank,
Contingent Liabilities Several items are listed for which the outcome of events is unknown at year-end.a. A company has been sued by the federal government for price fixing. The company’s legal
Time Value of Money Concepts The following situations involve the application of the time value of money concept.1. Jan Cain deposited $19,500 in the bank on January 1, 1991, at an interest rate of
Comparison of Alternatives Darlene Page’s grandparents want to give her some money when she graduates from high school.They have offered Darlene three choices:a. Receive $16,000 immediately. Assume
Caribou Coffee’s Cash Flow Statement Following is the current asset and current liability portion of the balance sheet for Caribou Coffee as of December 31, 2006 and January 1, 2006:Required 1.
Darden Restaurants’ Contingent Liabilities The following excerpts are from the footnotes of Darden Restaurants’ financial statements of May 29, 2005:In March 2003 and March 2002, two purported
Hewlett-Packard’s Contingent Liability Following is an excerpt from Hewlett-Packard’s notes that accompanied its financial statements for the year ended October 31, 2006:HP is party to, or
Current Ratio Loan Provision Assume that you are the controller of a small, growing sporting goods company. The prospects for your firm in the future are quite good; but like many other firms, it has
Alternative Payment Options Kathy Clark owns a small company that makes ice machines for restaurants and food-service facilities. Kathy knows a great deal about producing ice machines but is less
Property, Plant, and Equipment Classification Which of the following would be in the Property, Plant, and Equipment category on the balance sheet?Land Buildings Accumulated depreciation Patent
Capitalization of Interest A company begins construction of an asset on January 1, 2007, and completes construction on December 1, 2007. The company pays the following amounts related to
Change in Depreciation Estimate A company purchased an asset on January 1, 2006, for $10,000. The asset was expected to have a ten-year life and a $1,000 salvage value. The company uses the
Capital Expenditure A company purchased an asset on January 1, 2006, for $10,000. The asset was expected to have a ten-year life and a $1,000 salvage value. The company uses the straight-line method
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