Liabilities Quiz

QUESTIONS

1. The balance sheet is always shown with one date, and that date is typically:

        A) The most profitable day of the year

        B) The end of a period such as March 31, June 30, or December 31

 

2. A liability is...

        A) A commitment that will require the use of company resources

        B) A reckless Chief Executive Officer

 

3. How do companies get liabilities in the first place?

        A) Something went wrong

        B) They arise during the natural business cycle of a company

 

4. Why might a company purposefully take on debt (borrow cash)?

        A) Buy equipment and invest in research and development

        B) Pay employee bonuses

 

5. Under the cash basis of accounting, a sale is recognized (recorded) when...

        A) It is considered earned

        B) The money is received

 

6. Under the accrual basis of accounting, a sale is recognized (recorded) when...

        A) It is considered earned

        B) The money is received

 

7. Under the cash basis of accounting, an expense is recognized (recorded) when...

        A) The expense has been incurred

        B) The cash has been paid

 

8. Under the accrual basis of accounting, an expense is recognized (recorded) when...

        A) The expense has been incurred

        B) The cash has been paid

 

9. If a company under the accrual basis receives cash before completing the work, it will record a(n)...

        A) Asset - Accounts Receivable

        B) Liability - Unearned Revenue

 

10. If a company under the accrual basis pays out cash before incurring the expense (six months rent due on the first of the year), it will record a(n)...

        A) Asset - Prepaid Expenses

        B) Liability - Accounts Payable

 

ANSWER KEY:

1B, 2A, 3B, 4A, 5B, 6A, 7B, 8A, 9B, 10A

 

PRACTICE PROBLEMS

1.  A company receives $100,000 in equipment. It pays $20,000 immediately and promises to pay the remaining $80,000 within 90 days. What is its accounts payable balance?

2.  A company under the accrual basis receives $120,000 from a customer, but has only completed half of the work. Its balance sheet should show an unearned (deferred) revenue balance of?

3. A company completes a job worth $250,000, but has only received the initial downpayment of 10% from the customer. Its balance sheet should show an unearned (deferred) revenue balance of?

4. A company receives $100,000 from a customer but has only completed half of the work. What will the company's revenue be under the cash basis? What will the company's revenue be under the accrual basis?

5. A company receives $100,000 worth of routine supplies from a customer and plans to pay them back within the usual cycle of a few weeks. What effect will this have on notes payable?

 

 ANSWER KEY:

1: $80,000

 

2: $60,000

 

3: $0

The company would have an accounts receivable balance (asset) of $225,000, since it has completed all of the work and only received the initial $25,000 ($250,000 x 10%).

 

4. Under the cash basis, all of the $100,000 cash received will be considered revenue. Under the accrual basis, only the 50% of the cash that has actually been earned will be considered revenue—$50,000.

 

5. None. Notes payable is used when a company borrows money (takes on debt); accounts payable should be used for routine supply purchases. The company would have an accounts payable balance of $100,000.