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Accounting Study Guide: current liabilities, current assets, debt, balance sheet, liquidity, accrued liability, and more...

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51. The relationship between current liabilities and current assets is
a. useful in determining income.
b. useful in evaluating a company's liquidity.
c. called the matching principle.
d. useful in determining the amount of a company's long-term debt.

52. Most companies pay current liabilities
a. out of current assets.
b. by issuing interest-bearing notes payable.
c. by issuing stock.
d. by creating long-term liabilities.

53. A current liability is a debt that can reasonably expected to be paid
a. within one year.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.

54. Liabilities are classified on the balance sheet as current or
a. deferred.
b. unearned.
c. long-term.
d. accrued.

55. From a liquidity standpoint, it is most desirable for a company to have current
a. assets equal current liabilities.
b. liabilities exceed current assets.
c. assets exceed current liabilities.
d. liabilities exceed long-term liabilities.

56. The relationship of current assets to current liabilities is used in evaluating a company's
a. operating cycle.
b. revenue-producing ability.
c. short-term debt paying ability.
d. long-range solvency.

57. Which of the following is usually not an accrued liability?
a. Interest payable
b. Wages payable
c. Taxes payable
d. Notes payable

58. With an interest-bearing note, the amount of assets received upon issuance of the note is generally
a. equal to the note's face value.
b. greater than the note's face value.
c. less than the note's face value.
d. equal to the note's maturity value.

Use the following information for questions 59 - 61.
Chase County Bank agrees to lend Agler Brick Company $300,000 on January 1. Agler Brick Company signs a $300,000, 8%, 9-month note.

59. The entry made by Agler Brick Company on January 1 to record the proceeds and issuance of the note is
a. Interest Expense 18,000
Cash. 282,000
Notes Payable 300,000
b. Cash 300,000
Notes Payable 300,000
c. Cash 300,000
Interest Expense 18,000
Notes Payable 318,000
d. Cash 300,000
Interest Expense 18,000
Notes Payable 300,000
Interest Payable 18,000

60. What is the adjusting entry required if Agler Brick Company prepares financial statements on June 30?
a. Interest Expense 12,000
Interest Payable 12,000
b. Interest Expense 12,000
Cash 12,000
c. Interest Payable 12,000
Cash 12,000
d. Interest Payable 12,000
Interest Expense 12,000

61. What entry will Agler Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?
a. Notes Payable 318,000
Cash 318,000
b. Notes Payable 300,000
Interest Payable 18,000
Cash 318,000
c. Interest Expense 18,000
Notes Payable 300,000
Cash 318,000
d. Interest Payable 12,000
Notes Payable 300,000
Interest Expense 6,000
Cash 318,000

62. As interest is recorded on an interest-bearing note, the Interest Expense account is
a. increased; the Notes Payable account is increased.
b. increased; the Notes Payable account is decreased.
c. increased; the Interest Payable account is increased.
d. decreased; the Interest Payable account is increased.

Use the following information for questions 63 - 64.
On October 1, Steve's Carpet Service borrows $50,000 from National Bank on a 3-month, $50,000, 8% note.

63. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?
a. Interest Payable 1,000
Interest Expense 1,000
b. Interest Expense 4,000
Interest Payable 4,000
c. Interest Expense 1,000
Interest Payable 1,000
d. Interest Expense 1,000
Notes Payable 1,000

64. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is
a. Notes Payable 51,000
Cash 51,000
b. Notes Payable 50,000
Interest Payable 1,000
Cash 51,000
c. Notes Payable 50,000
Interest Payable 4,000
Cash 54,000
d. Notes Payable 50,000
Interest Expense 1,000
Cash 51,000

65. Interest expense on an interest-bearing note is
a. always equal to zero.
b. accrued over the life of the note.
c. only recorded at the time the note is issued.
d. only recorded at maturity when the note is paid.

66. The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is
a. Notes Payable
Interest Payable
Cash
b. Notes Payable
Interest Expense
Cash
c. Notes Payable
Cash
d. Notes Payable
Cash
Interest Payable

67. Sales taxes collected by a retailer are recorded by
a. crediting Sales Taxes Revenue.
b. debiting Sales Taxes Expense.
c. crediting Sales Taxes Payable.
d. debiting Sales Taxes Payable.

68. Unearned Rental Revenue
a. is a contra account to Rental Revenue.
b. is a revenue account.
c. is reported as a current liability.
d. is debited when rent is received in advance.

69. The amount of sales tax collected by a retail store when making sales is
a. a miscellaneous revenue for the store.
b. a current liability.
c. not recorded because it is a tax paid by the customer.
d. recorded as an operating expense.

70. A retail store credited the Sales account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales account amounted to $168,000, what is the amount of the sales taxes owed to the taxing agency?
a. $160,000.
b. $168,000.
c. $8,400.
d. $8,000.

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51. The relationship between current liabilities and current assets is
Answer: b. useful in evaluating a company's liquidity.
Liquidity is usually measured by the relationship between current liabilities and current assets. Especially important in the analysis of liquidity is a firm's management of cash, near-cash investments and those assets most easily turned into cash such as accounts receivable and inventory. The analysis of liquidity refers to a company's ability to access cash to meet its current obligations, which include trade creditors, day-to-day operating costs and, of chief importance to the fund, payments on its long-term debt.

52. Most companies pay current liabilities
Answer: a. out of current assets.

53. A current liability is a debt that can reasonably expected to be paid
Answer: a. within one year.
A current liability is a liability which is expected to have been paid within one year form the date of the balance sheet. It includes the current principal payment and accrued interest on intermediate and long term debts. Current assets may be used as collateral for current liabilities
54. Liabilities are classified on the balance sheet as current or
Answer: c. long-term.

55. From a liquidity standpoint, it is most desirable for a company to have current
Answer: c. assets exceed current liabilities.
If current assets exceed current ...

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Balance Sheets with LIFO consideration

Your company is considering the possible acquisition of ABC Company. Financial statements of ABC Company follow.

Balance Sheet.
2004 2003
Assets
Current assets:
Cash $64,346 $11,964
Accounts receivable less allowance
of $750 for doubtful accounts $99,021 $83,575
Inventories, FIFO $63,414 $74,890
Prepaid expenses $834 $1,170
Total Current Assets $227,615 $171,599
Investments and other assets $379 $175
Property, plant, and equipment:
Land and land improvements $6990 $6400
Buildings $63,280 $59,259
Machinery and Equipment $182,000 $156,000
$252,270 $221,659
Less: accumulated depreciation $110,000 $98,000
Net property, plant, and equip $142,270 $123,659
Total Assets $370,264 $295,433

Liabilities and Stockholders' Equity
Currentl liabilities:
Accounts payable $32,730 $26,850
Federal income taxes $5,300 $4,800
Accured liabilities $30,200 $24,500
Current portion of long term debt $5,500 $5,500
Total current liabilities $73,730 $61,650
Long term debt $76,750 $41,900
Other long term liabilities $5,700 $4,300
Deferred federal income taxes $16,000 $12,000
Total liabilities $172,180 $119,850
Stockholders' equity:
Capital stock $44,000 $43,500
Retained earnings $154,084 $132,083
Total Stockholders equity $198,084 $175,583
Total liabilities and stockholders equity $370,264 $295,433

Statement of income.
2004 2003 2002
Revenues $578,530 $523,249 $556,549
Cost and Expenses:
Cost of products sold $495,651 $457,527 $482,358
Selling, general, and admininstrative $35,433 $30,619 $29,582
Interest and debt expense $4,308 $3,951 $2,630
$535,392 $492,097 $514,570
Income before income taxes $43,138 $31,152 $41,979
Provision for income taxes $20,120 $12,680 $17,400
Net income $23,018 $18,472 $24,579
Net income per share $2.27 $1.85 $2.43

Partial footnotes: Under the LIFO method, inventores have been reduced by approximately $35,300 and $41,100 at December 31, 2004 and 2003, respectively, from current cost, whichwold be reported under the first in, first out method.
The effective tax rates were 36.6%, 30.7%, and 31.4%, respectively, for the years ended December 31, 2004, 2003, and 2002.

a. Compute the following for 2004, without considering the LIFO reserve:
1. Days' sales in inventory
2. Merchandise inventory turnover
3. Inventory turnover in days
4. Operating cycle
5. Working capital
6. Current ratio
7. Acid test ratio
8. Cash ratio
9. Debt ratio
10. Debt/equity ratio
11. Times interest earned
12. Net profit margin
13. Total asset turnover
14. Return on assets
15. Return on total equity
b. Compute teh ratios above considering the LIFO reserve.
c. Comment on the apparent liquidigy, debt, and profitability, considering both sets of ratios.

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