Current Liabilities and Contingencies s2
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
Read Chapter 13; answer the following questions and review Brief Exercises 1-6 and 8-15. Exercises to be worked in class EX 1-5, 10-11, 13-14, and 16.
1. What are the three essential characteristics of a liability?
2. What is the definition of a current asset? How are current assets related to current liabilities?
3. What is meant by the operating cycle? Give two examples of companies with operating cycles less than one year and two with operating cycles longer than one year.
4. What is the difference between an account payable and a note payable?
5. When companies issue zero-interest-bearing notes, does this mean they don’t pay any interest on the note? If not, what does it mean?
6. What type of account is Discount on Notes Payable? What does its balance represent? How is it reported on the balance sheet?
7. The portion of bonds, mortgage notes, and other long-term debt that matures within the next fiscal year is generally reported as a current liability. In what situations is this not true?
8. What two conditions are required for a company to be allowed to exclude a short-term obligation from its current liabilities on the balance sheet? What must the company do to show that these conditions have been met?
9. Are dividends in arrears on preferred stock a current liability?
10. Give three examples of unearned revenues. In each case, what does the company owe to its customers?
11. Give three examples of items that may be deducted from an employee’s pay and remitted to the proper agency.
12. What are examples of compensated absences? When should a liability be accrued for the cost of compensation for future absences?
13. What is the difference between vested rights and accumulated rights?
14. What is the definition of a contingency?
15. When are gain contingencies recorded?
16. When are loss contingencies recorded?
17. Give three examples of loss contingencies.
18. Guarantee and warranty costs may be recorded using the cash basis or the accrual basis. When is each appropriate?
19. Explain the differences between the expense warranty approach and the sales warranty approach. When is each appropriate?
20. What are premiums? How are they accounted for?
21. The current ratio and the acid-test (quick) ratio are used to evaluate a company’s liquidity. Compute these ratios for Intel for 1998 and 1997 (see page 222 in the text for the Intel Balance Sheets). For each ratio, indicate whether Intel’s liquidity is improving from 1997 to 1998.