Question : 151.Commitments, such as contracts for future transactions: A.Are classified as liabilities. B.Are : 1237433

 

 

151.Commitments, such as contracts for future transactions:   

A.Are classified as liabilities.

 

B.Are classified as assets.

 

C.Are footnoted in financial statements, if material.

 

D.Are only disclosed if negative due to the principle of conservatism.

 

 

 

 

152.Which of the following is an example of a contingent liability?   

A.A lawsuit pending against a restaurant chain for improper storage of perishable food items.

 

B.The liability for future warranty repairs on computers sold during the current period.

 

C.A corporation’s long-term employment contract with its chief executive officer.

 

D.A liability for notes payable with interest included in the face amount.

 

 

 

 

153.Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company’s ultimate financial responsibility. This situation is an example of:   

A.Off-balance-sheet financing.

 

B.A loss contingency which should be disclosed in notes to Ultimate Company’s financial statements.

 

C.An estimated liability which must appear in Ultimate Company’s balance sheet.

 

D.A loss in purchasing power caused by inflation.

 

 

 

 

154.The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of:   

A.A contingent liability which should be recorded in the accounting records.

 

B.A contingent liability requiring footnote disclosure.

 

C.An estimated liability, since the number of albums to be produced is not yet determined.

 

D.A commitment which, if material, may be disclosed in a footnote.

 

 

 

 

155.The interest coverage ratio:   

A.Is computed by dividing total liabilities by annual interest expense.

 

B.Is computed by dividing liquid assets by annual required interest payment.

 

C.Indicates the percentage of total assets that are financed with borrowed money.

 

D.Measures the number of times the annual interest expense could be covered by annual income from operations.

 

 

 

 

156.The interest coverage ratio is computed by dividing:   

A.Net income by interest expense.

 

B.Operating income by interest expense.

 

C.Interest expense by net income.

 

D.Interest expense by operating income.

 

 

 

 

157.Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor?   

A.Interest coverage ratio.

 

B.Receivables turnover rate.

 

C.Working capital.

 

D.Quick ratio.

 

 

 

 

158.The basic measure of the amount of leverage being applied within the capital structure of an organization is the:   

A.Interest coverage ratio.

 

B.Debt ratio.

 

C.Return on assets.

 

D.Return on equity.

 

 

 

 

159.Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company?   

A.Quick ratio.

 

B.Inventory turnover.

 

C.Current ratio.

 

D.Debt ratio.

 

 

 

 

The current balance sheet of Apex reports total assets of $20 million, total liabilities of $2 million, and owners’ equity of $18 million. Apex is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.

 

160.Refer to the information above. What will be the effect on Apex’s debt ratio if Apex’s owner invests an additional $2 million to finance its expansion?   

A.The debt ratio will decrease from .1 (2/20) to .0909 (2/22) after the additional investment.

 

B.The debt ratio will decrease from 2/9 before to 2/11 after the additional investment.

 

C.The debt ratio will increase from 20 before to 22 after the additional investment.

 

D.Additional investment by owner will have no effect on the debt ratio.