AACSB

Chapter 08
1. The production budget is typically prepared prior to the sales budget.
FALSE
2. One benefit of budgeting is that it coordinates the activities of the entire organization.
TRUE
3. Both planning and control are needed for an effective budgeting system.
TRUE
4. One difficulty with self-imposed budgets is that they are not subject to any type of review.
FALSE
5. The master budget is a network consisting of many separate budgets that are interdependent.
TRUE
6. Planning and control are essentially the same thing.
FALSE
7. Sales forecasts are drawn up after the cash budget has been completed because only then are the funds
available for marketing known.
FALSE
8. A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed
in both dollars and units of
product.
TRUE
9. Both variable and fixed manufacturing overhead costs are included in the manufacturing overhead budget.
TRUE
10. In the selling and administrative budget, the non-cash charges (such as depreciation) are added to the total
budgeted selling and
administrative expenses to determine the expected cash disbursements for selling and administrative expenses.

When a liability is initially recorded, it is recorded at the future amount of all payments.
FALSE
Liabilities are initially recorded in terms of their current cash equivalent.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #1
Topic Area: Liabilities Defined And Classified

2. A current liability is always a short-term obligation expected to be paid within one year of the
balance
sheet date.
FALSE

A current liability is due within one year or the operating cycle, whichever is longer.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #2
Topic Area: Liabilities Defined And Classified

3. A quick ratio that is high according to an industry average might mean the company may have
excessive inventory levels or slow moving inventory items.
FALSE
Inventory is not a quick asset.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Libby - Chapter 09 #3
Topic Area: Liabilities Defined And Classified

4. The quick ratio can be manipulated by management through paying off current liabilities
before the end
of the accounting period.
TRUE
The quick ratio can be manipulated through transactions involving quick assets and current
liabilities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Libby - Chapter 09 #4
Topic Area: Liabilities Defined And Classified

5. Many strong companies intentionally create low quick ratios.

TRUE
Many strong companies use sophisticated management techniques to minimize their current asset
investment, and as a result, have low quick ratios.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Libby - Chapter 09 #5
Topic Area: Liabilities Defined And Classified

6. Quick assets include cash, accounts receivable, and inventory.

FALSE
Quick assets include cash, marketable securities, and accounts receivable.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Libby - Chapter 09 #6
Topic Area: Liabilities Defined And Classified

7. Selling inventory on account increases the quick ratio.

TRUE

Quick assets include cash, marketable securities, and accounts receivable. Selling inventory on
account
increases accounts receivable and therefore increases the numerator of the quick ratio.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Libby - Chapter 09 #7
Topic Area: Liabilities Defined And Classified

8. Purchasing inventory on account decreases the quick ratio.

FALSE
Purchasing inventory on account increases current liabilities (the denominator) and therefore
decreases
the quick ratio.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Libby - Chapter 09 #8
Topic Area: Liabilities Defined And Classified

9. A current liability is created when a customer pays cash for services to be provided in the
future.
TRUE
Current liabilities include unearned (deferred) revenues.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #9
Topic Area: Liabilities Defined And Classified

10. Purchasing inventory on account increases the accounts payable turnover ratio.
FALSE
Purchasing inventory on account increases accounts payable, the accounts payable turnover ratio
denominator, which therefore decreases the ratio.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-03 Analyze the accounts payable turnover ratio.
Libby - Chapter 09 #10
Topic Area: Liabilities Defined And Classified

11. The choice of inventory method has an impact on the accounts payable turnover ratio.
FALSE
The accounts payable turnover numerator ratio is cost of goods sold, which is impacted by the
choice of
inventory method.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-03 Analyze the accounts payable turnover ratio.

Libby - Chapter 09 #11

Topic Area: Liabilities Defined And Classified

12. The accounts payable turnover ratio is calculated by dividing accounts payable by cash
payments to
suppliers.
FALSE
The accounts payable turnover ratio is cost of goods sold divided by average accounts payable.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-03 Analyze the accounts payable turnover ratio.
Libby - Chapter 09 #12
Topic Area: Liabilities Defined And Classified

13. Income taxes payable is an example of an accrued liability.

TRUE
An accrued liability is created by an expense that has been incurred, but has yet to be paid.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #13
Topic Area: Liabilities Defined And Classified

14. The accounts payable turnover ratio is difficult to manipulate.

FALSE
The accounts payable turnover ratio can be manipulated by paying accounts payable at year-end
and can
also be manipulated by the choice of inventory method.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-03 Analyze the accounts payable turnover ratio.
Libby - Chapter 09 #14
Topic Area: Liabilities Defined And Classified

15. The accrual of interest on a short-term note payable decreases both the quick ratio and
current assets.
FALSE
The interest accrual increases current liabilities and therefore decreases the quick ratio. The
interest
accrual does not affect current assets.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting, Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-02 Use the quick ratio.
Learning Objective: 09-04 Report notes payable and explain the time value of money.
Libby - Chapter 09 #15
Topic Area: Liabilities Defined And Classified

16. The FICA (social security) tax is a matching tax with a portion paid by both the employer and
the
employee.
TRUE

The social security tax is equally shared by the employer and employee.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #16
Topic Area: Liabilities Defined And Classified

17. 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 $2,000.
TRUE
Interest expense ($2,000) = Amount borrowed ($100,000) Interest rate (6%) Number of
months
borrowed relative to a year (4 12)
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #17
Topic Area: Liabilities Defined And Classified

18. An estimated liability can't be reported on the balance sheet.

FALSE
Estimated liabilities, such as warranty liabilities, are reported on the balance sheet.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-01 Define; measure; and report current liabilities
Libby - Chapter 09 #18
Topic Area: Liabilities Defined And Classified

19. A contingent liability is reported on the balance sheet if it is probable and can be estimated.
TRUE
Contingent liabilities are reported on the balance sheet when they are both probable and can be
estimated.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-05 Report contingent liabilities
Libby - Chapter 09 #19
Topic Area: Liabilities Defined And Classified

20. A contingent liability is disclosed in a note to the financial statements when the liability is
reasonably
possible and can be estimated.
TRUE
Contingent liabilities are disclosed via a note when they are reasonably possible.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy

Learning Objective: 09-05 Report contingent liabilities

Libby - Chapter 09 #20
Topic Area: Liabilities Defined And Classified

21. The journal entry to record a contingent liability creates an accrued liability on the balance
sheet and a
loss on the income statement.
TRUE
The recording of a contingent liability debits a loss account and credits accrued contingency
liability.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-05 Report contingent liabilities
Libby - Chapter 09 #21
Topic Area: Liabilities Defined And Classified

22. A contingent liability can't be disclosed in a note to the financial statements unless it can be
estimated.
FALSE
Contingent liabilities are disclosed via a note when they are reasonably possible, regardless of
whether
they can be estimated.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-05 Report contingent liabilities
Libby - Chapter 09 #22
Topic Area: Liabilities Defined And Classified

23. Working capital is a measure of short-run liquidity and is measured by dividing current assets
by current
liabilities.
FALSE
Working capital is current assets minus current liabilities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.
Libby - Chapter 09 #23
Topic Area: Focus On Cash Flows

24. Working capital decreases when accrued wages expense is recorded at year-end.
TRUE
Working capital is current assets minus current liabilities. Accruing wages expense at year-end
increases current liabilities and therefore decreases working capital.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.
Libby - Chapter 09 #24
Topic Area: Focus On Cash Flows

25. Working capital decreases when a company pays taxes payable.

FALSE

Working capital is current assets minus current liabilities. Paying taxes payable decreases both
current
assets and current liabilities, therefore working capital remains the same.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.
Libby - Chapter 09 #25
Topic Area: Focus On Cash Flows

26. Working capital increases when a company accrues revenues at year-end.

TRUE
Working capital is current assets minus current liabilities. Accruing revenues increases current
assets,
therefore working capital increases.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.
Libby - Chapter 09 #26
Topic Area: Focus On Cash Flows

27. Long-term liabilities are reported on the balance sheet at an amount equal to the future cash
flows.
FALSE
Long-term liabilities are reported on the balance sheet at the present value of the future cash
flows.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-07 Report long-term liabilities.
Libby - Chapter 09 #27
Topic Area: Long-Term Liabilities

28. Operating leases are reported on the balance sheet at an amount equal to the present value of
the future
cash flows.
FALSE
Operating leases do not meet the criteria to be included on the balance sheet.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 09-07 Report long-term liabilities.
Libby - Chapter 09 #28
Topic Area: Long-Term Liabilities

29. For the present value of a single amount, the compounding period may only be once a year.
FALSE
Compounding can be many times during a year when finding the present value of a single sum.
30. An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount
over the
payment amount of the prior year.

FALSE
An annuity has equal payments over equal time intervals.
31. Which of the following statements is correct?
A. Current liabilities are initially recorded at the amount of their principal plus interest.
B. Current liabilities are those liabilities due within one year.
C. Liquidity refers to the ability to pay all debts within one year.
D. Current liabilities affect both the quick ratio and working capital.
Current liabilities are the denominator in the quick ratio and are deducted from current
assets when