Ch16 Liabilities – Test Bank | 10e

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Testbank

to accompany

Accounting

10^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2018

Chapter 16: Liabilities

Multiple-choice questions

1. The essential characteristics of a liability under the definition in the Conceptual Framework are:
2. Settlement requiring an outflow of resources embodying economic benefits.
3. A present obligation to an external party.
4. A legal debt.
5. The obligation must have resulted from past events.

a. I and IV

b. I, II and III

c. I, II and IV

d. III and IV

Correct answer: c

Learning objective 16.1 ~ define liabilities.

2. Which of the following would not be defined as a liability under the Conceptual Framework?

a. Salaries owing to managers.

b. A loan from a financial institution.

c. Money owing to a supplier for goods purchased.

d. An arrangement to pay a quarterly bonus commission to salespersons for achieving sales over a certain level.

Correct answer: d

Learning objective 16.1 ~ define liabilities.

3. Which of the following is not an essential characteristic of a liability under the Conceptual Framework?

a. A past transaction or event.

b. A present obligation to an external party.

c. An outflow of resources embodying economic benefits.

d. A legal debt.

Correct answer: d

Learning objective 16.1 ~ define liabilities.

4. Under the Conceptual Framework, the meaning of ‘probable’ in the recognition criteria is:

a. 100% probability.

b. a higher than 50% probability.

c. a higher than 60% probability.

d. a higher than 75% probability.

Correct answer: b

Learning objective 16.2 ~ describe when liabilities are recognised.

5. As specified in the Conceptual Framework, which two criteria must be met before a liability can be recognised in the accounting records?

a. There must have been a past event and there must be a present obligation.

b. The liability must be beyond a reasonable doubt and the amount of the liability must be able to be recognised reliably.

c. It must be probable that any future sacrifices associated with the item will flow from the entity and the liability must have a cost or value that can be measured with reliability.

d. It must be probable that a future sacrifice of economic resources will be required and the liability must be beyond a reasonable doubt.

Correct answer: c

Learning objective 16.2 ~ describe when liabilities are recognised.

6. Which of the following criteria, specified in the Conceptual Framework, must be met before a liability can be recognised in the accounting records?

1. The liability is beyond a reasonable doubt.
2. It is probable that the future sacrifices associated with the item will occur.
3. The liability has a cost or value that can be measured with reliability.

a. I and II

b. II and III

c. I and III

d. I, II and III

Correct answer: b

Learning objective 16.2 ~ describe when liabilities are recognised.

7. Which of the following are contingent liabilities?

I. Borrowings from a financial institution

II. An agreement to act as guarantor for borrowings

III. An unresolved lawsuit brought against a newspaper for defamation

a. II, III

b. I, II, III

c. I, III

d. I, II

Correct answer: a

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

8. Which of the following does not fit the IAS 37/AASB 137 definition of a provision as a liability of uncertain timing or amount?

a. Provision for warranties

b. Provision for depreciation

c. Provision for long-service leave

d. Provision for environmental damage

Correct answer: b

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

9. Where are contingent liabilities required to be disclosed in the financial reports?

a. in the notes to the financial reports.

b. in the financial expense section of the income statement.

c. in the liability section of the balance sheet.

d. as deductions from the asset accounts they relate to.

Correct answer: a

Learning objective 16.3 Contingent liabilities are disclosed in financial reports in footnotes to the reports.

10. Under IAS 37/AASB 137, which of the following provisions is not regarded as a liability?

a. Provision for onerous contracts

b. Provision for warranties

c. Provision for doubtful debts

d. Provision for long-service leave

Correct answer: c

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

11. The key difference between provisions and liabilities is:

a. whether there is an obligation.

b. the party that the obligation is owed to.

c. whether the obligation is current or non-current.

d. the uncertainty regarding the amount or timing of the future sacrifice of economic resources.

Correct answer: d

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

12. The key characteristic of contingent liabilities is:

a. the timing of the future sacrifice of economic benefits is uncertain.

b. the liability will be confirmed only by the occurrence or non-occurrence of a future event not completely within the control of an entity.

c. a legal dispute must exist at balance date.

d. the liability does not exist beyond a reasonable doubt.

Correct answer: b

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

13. Which of the following would be defined as contingent liabilities?

1. A bank overdraft
2. A loan from a financial institution
3. An agreement to act as guarantor for another firm’s borrowings
4. An unresolved lawsuit brought against the entity for breach of health and safety regulations

a. I and IV

b. II, III

c. III and IV

d. I and III

Correct answer: c

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

14. A contingent liability is reported:

a. on the balance sheet.

b. in the income statement.

c. in the statement of changes in equity.

d. in the notes to the financial statements.

Correct answer: d

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

15. Which of the following are a possible basis for classifying liabilities?

1. Source
2. Liquidity
3. Timing of settlement
4. Whether secured or unsecured

a. I and II only

b. II and IV only

c. II, III and IV only

d. I, II, III and IV

Correct answer: d

Learning objective 16.4 ~ discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

16. A bank loan for $50 000, taken out on 1 July 2018, is repayable in equal instalments, plus interest, over 5 years. The annual repayments are due on the second last day of the financial year. How would the loan be classified in a balance sheet prepared at 30 June 2019, the end of the entity’s financial year?

a. Non-current liability $50 000

b. Current liability $5 000; non-current liability $45 000

c. Current liability $10 000; non-current liability $40 000

d. Current liability $10 000; non-current liability $50 000

Correct answer: c

Learning objective 16.4 ~ discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

17. Which of the following would not typically be classified as a non-current liability?

a. Accounts payable

b. Mortgage payable

c. Unsecured notes payable

d. Provision for long service leave

Correct answer: a

Learning objective 16.4 ~ discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

18. The classification of liabilities into current and non-current, is useful as it helps decision-makers assess the firm's ability to meet all of the following except:

a. commitments which are part of the operating cycle.

b. dividends.

c. profitability.

d. capital repayments.

Correct answer: c

Learning objective 16.4 ~ discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

19. Which of the following is not normally regarded as a current liability?

a. Accounts payable

b. Mortgage

c. GST collected

d. Bank overdraft

Correct answer: b

Learning objective 16.4 ~ discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

20. A current liability is:

a. expected to be paid within one year of the reporting date.

b. expected to be paid within six months of the reporting date.

c. expected to be paid beyond one year of the reporting date.

d. arising from past events that will be confirmed by the occurrence of future events.

Correct answer: a

Learning objective 16.4 ~ discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

21. On 1 June 2018 McIntyre Ltd issued a three-month, $30 000 bill payable to Northgate Savings in order to borrow $28 000. If the bill payable is still outstanding at 30 June 2018, the end of the financial year, which of the following will be reported on McIntyre Ltd's financial statements concerning the bill?

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

22. Which of the following statements relating to employee benefits is incorrect?

a. Long-term employee benefits are recorded at their recoverable amount.

b. Employee benefits are defined as all forms of consideration given by an entity in exchange for services rendered by employees.

c. If an employee benefit meets the Conceptual Framework’s definition of a liability, then it is recognised as a liability; if it meets the definition of an expense, then it is recognised as an expense.

d. Wages and salaries, annual leave and sick leave are recorded at their nominal amounts.

Correct answer: a

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

23. Which statement in relation to payroll ancillary costs is incorrect?

a. Payroll ancillary costs are employee benefits set down in various awards and contracts in addition to benefits relating directly to hours worked.

b. Examples of payroll ancillary costs are annual leave, sick leave and long-service leave.

c. Workers compensation insurance is a payroll ancillary cost not actually paid to employees but paid on their behalf.

d. Payroll ancillary costs equal gross wages less deductions.

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

24. Which of the following is not deducted from an employees’ gross pay by the employer?

a. Union fees

b. Payroll tax

c. Superannuation contributions

d. Income tax instalments owing to the taxation office

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

25. Which statement relating to sick leave is correct?

a. Upon termination of employment, employees are generally entitled to be paid pro-rata for sick leave not taken.

b. When sick leave is actually taken by employees an entry is made to debit sick leave expense and credit the Australian Tax Office.

c. Accounting for sick leave is determined by the conditions attached to the employment contract.

d. Sick leave is to be paid at the lowest award rate rather than the normal salary rate.

Correct answer: c

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

26. Uncle Bob’s Car Sales provides a one-year labour and parts warranty with every car sold. It is expected that 1500 cars will be sold during the year. Past records show that about 6% of cars require warranty repairs at an average cost of $300 per car. What is the accounting entry to record the expected warranty expense for the year?

a. DR Provision for warranties $27 000; CR Bank $27 000

b. DR Warranty expense $27 000; CR Provision for warranties $27 000

c. DR Provision for warranties $27 000; CR Warranty expense $27 000

d. No entry is required

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

27. Hanson Co. had previously purchased inventory from Jones Ltd for $18 000. On 1 October, Hanson gave Jones a 120-day bill of exchange to cover the amount of the account payable plus interest at 8% p.a. The correct accounting entry in Hanson Co.’s books to record the issue of the bill is:

a. DR Accounts payable $18 000; CR Bills payable $18 000

b. DR Bills payable $18 473; CR Accounts payable $18 473

c. DR Bills payable $18 000; DR Unexpired interest $473; CR Accounts payable $18 473

d. DR Accounts payable $18 000; DR Unexpired interest $473; CR Bills payable $18 473

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

28. McTavish’s regular and overtime gross pay combined, for the week ending 30 November, was $1250. Amounts were deducted for income tax $243.70, union fees $12 and donations to charity $25. McTavish contributes 5% of his gross pay to a superannuation fund as a personal contribution. His net pay for the week is:

a. $844.30

b. $969.30

c. $906.80

d. $1006.30

Correct answer: c

Feedback: $906.80 = $1250 – $243.70 – $12 – $25 – $62.50

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

29. Which statement relating to annual leave under Australian awards is incorrect?

a. Employees are normally entitled to four weeks paid annual leave per annum.

b. The entitlement to annual leave accrues to an employee on a day-to-day basis throughout the year.

c. Employees are entitled to be paid pro-rata for annual leave not taken on termination of employment.

d. The entry to recognise annual leave each month is a debit to annual leave expense and a credit to bank.

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

30. Hastings Star Company estimates that the amount of monthly salaries on which four weeks annual leave is payable is $83 200. What is the correct accounting entry to accrue annual leave at the end of the month?

a. DR Annual leave payable $6 400; CR Bank $6 400

b. DR Annual leave expense $6 400; CR Annual leave payable $6 400

c. DR Annual leave payable $6 400; CR Annual leave expense $6 400

d. No accounting entry is required

Correct answer: b

Feedback: Annual leave expense = $6400 ($83 200 x 4/52).

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

31. What type of accounts are:

• 1. Warranty expense; and
  2. Provision for warranties

a. I. Expense; II. Equity

b. I. Expense; II Asset

c. I. Expense; II. Liability

d. I. Liability; II. Expense

Correct answer: c

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

32. Which of the following is not part of the net pay calculation?

a. Bonus

b. Uniform/clothing allowance

c. Overtime pay

d. Workers compensation insurance

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

33. The correct entry for the payment of net wages is:

a. DR Gross pay; CR Net pay.

b. DR Bank; CR Wages and salaries payable.

c. DR Wages and salaries payable; CR Bank.

d. DR Wages and salaries; CR Provision for wages and salaries.

Correct answer: c

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

34. Which statement relating to workers' compensation insurance is incorrect?

a. The percentage rate of premium is the same rate for all employers.

b. It is compulsory for all employers to take out workers’ compensation insurance.

c. The premium is based on a percentage of the wages and salaries bill for the coming year.

d. When workers’ compensation insurance is paid in advance, the journal entry is: DR Prepaid workers’ compensation insurance; CR Bank .

Correct answer: a

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

35. The following are employee benefits except for:

a. Wages and salaries

b. Non-monetary fringe benefits

c. GST paid

d. Employer’s contribution to superannuation

Correct answer: c

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

36. Which of the following statements in relation to IAS 19/AASB 119 Employee Benefits is not true?

a. Employee benefits include wages and salaries, non-monetary fringe benefits, annual leave and superannuation.

b. The controls that need to be provided when operating a payroll system are outlined.

c. The principles for recognition of employee benefits as expenses or liabilities are consistent with those in the Conceptual Framework.

d. Wages and salaries, annual leave and sick leave are to be reported at their nominal amounts.

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

37. T. Bailey's regular and overtime pay for the week ending 25 February was $850. Amounts were deducted for: income tax $113.70, union fees $5 and loan repayments of $50. T. Bailey’s employer contributes 9.5% of his gross pay to a superannuation fund on his behalf. What is T. Bailey’s net take home pay for the week?

a. $600.55

b. $736.30

c. $850.00

d. $681.30

Correct answer: d

Feedback: $850 – $113.70 – $5 – $50

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

38. Colllins Pty Ltd made this journal entry to accrue payroll for the week ended 28 February 2018:

Dr Cr

$ $

Office salaries expense 35 000

Sales salaries expense 62 000

Taxation Office 23 500

Superannuation fund 9 200

Clerks union 500

Salaries payable 63 800

The cash payable to Collins Pty Ltd's employees for the week is:

a. $63 800

b. $64 300

c. $73 500

d. $97 000

Correct answer: a

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

39. Cross Stitch Pty Ltd made the following journal entry to accrue payroll for the week ended 14 February.

DR CR

$ $

Salaries expense 280 000

Australian Taxation Office 99 000

Superannuation fund 26 000

Salaries payable 155 000

(I) What was the amount of gross salaries earned by the employees of Cross Stitch Pty Ltd for the week; and (II) how much cash will be paid to them for salaries for the week?

a. (I) $280 000, (II) $280 000

b. (I) $155 000, (II) $280 000

c. (I) $280 000, (II) $155 000

d. (I) $155 000, (II) $155 000

Correct answer: c

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

40. Which of the following items is not normally a payroll ancillary cost for an employer in Australia?

a. Annual leave

b. Long-service leave

c. Workers' compensation insurance

d. Medical and hospital insurance

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

41. Under Australian awards, which statement relating to annual leave is correct?

a. Annual leave is only recognised in the financial statements when it is actually paid to an employee.

b. Employees are entitled to be paid pro-rata for annual leave not taken if their employment terminates.

c. An employee is not entitled to annual leave until he/she has worked with the same employer for a minimum of twelve months.

d. Employees are generally entitled to five weeks paid annual leave a year.

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

42. Which statement relating to workers' compensation insurance is incorrect?

a. The premium is deducted from employees' salaries and wages.

b. It is mandatory for all employers to obtain this cover.

c. The premium is based on a percentage of the total wages and salaries bill for the coming year.,

d. It relates to an insurance scheme, imposed by law, whereby the employer purchases insurance which may be used to compensate employees for job related injuries and loss of wages.

Correct answer: a

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

43. In relation to long-service leave, which of the following statements are correct?

1. The entry to accrue long-service leave is:

DR Long-service leave expense; CR Provision for long-service leave.

1. The leave is paid at the rate of pay applicable when the leave is taken.
2. Employees only starts to accrue long service leave after being employed for a predetermined length of time (often 10 years).

a. II and III only

b. I and II only

c. I, II and III

d. None of the above

Correct answer: b

Feedback: Employees accrue long service leave from the beginning of employment.

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

44. True Blue Retailers provides a one year labour and parts warranty with every appliance sold. At the beginning of 2019, the provision to cover warranty claims had a balance of $9 000. On 30 April 2019, $1300 was paid out for repairs on appliances under warranty. The correct accounting entry to record the payment of the claims is:

a. DR Warranty expense $1300; CR Bank $1300

b. DR Provision for warranties $1300; CR Bank $1300

c. DR Warranty expense $1300; CR Provision for warranties $1300

d. DR Provision for warranties $1300; CR Warranty expense $1300

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

45. Claire had previously purchased inventory from Jamie for $20 000. On 1 August Claire gave Jamie a 60-day bill of exchange to cover the amount of the account payable plus interest at 10% p.a. The correct accounting entry in Claire’s books to record the settlement of the bill at maturity is:

a. DR Bills payable $20 329; CR Interest expense $329; CR Bank $20 000.

b. DR Bills payable $20 000; CR Bank $20 000

c. DR Bills payable $19 671; DR Interest expense $329; CR Bank $20 000

d. DR Bills payable $20 329; DR Interest expense $329; CR Bank $20 329; CR Unexpired interest $329

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

46. What types of accounts are:

1. GST payable; and
2. GST receivable.

a. I. Liability; II. Asset

b. I. Asset; II. Liability

c. I. Negative liability; II. Liability,

d. I. Liability; II. Negative liability

Correct answer: d

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

47. Which of the following statements concerning long-service leave is correct?

a. Long-service leave is paid at the employees’ average rate of pay over the period for which the leave has accrued.

b. Long-service leave does not have to be paid to an employee until the required period of employment has been completed, e.g. 10 years, 15 years.

c. Long-service leave relates to an insurance scheme whereby employees are compensated for injuries, loss of limbs and loss of life while at work.

d. Long-service leave entitlements were recently abolished by the Australian government.

Correct answer: b

Learning objective 16.5 ~ explain the nature of the major categories of current liabilities, and how to account for them.

48. Which of the following is a disadvantage to shareholders of using long-term debt rather than equity?

a. Interest is tax deductible.

b. Lenders do not have voting rights.

c. Lenders do not share in excess profits.

d. Interest payments must be made on time regardless of a reduction in profitability.

Correct answer: d

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

49. 5000 $100 debentures were redeemed in cash upon maturity at their nominal value. The accounting entry to record the redemption is:

a. DR Bank $500 000; CR Debentures $500 000

b. DR Debentures $500 000; CR Bank $500 000

c. DR Debentures $500 000; CR Debentures redemption reserve $500 000

d. DR Debentures redemption reserve $500 000; CR Debentures $500 000

Correct answer: b

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

50. Debentures may be:

1. unsecured.
2. secured by a floating charge over assets.
3. secured by a specific charge over particular assets.

a. I only

b. II and III only

c. I, II and III

d. None of the above

Correct answer: b

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

51. On 1 May 2019, Bric-A-Brac purchased a building for $400 000, paying $100 000 as a deposit and giving the seller a 10% mortgage for the balance. The monthly repayment was $3000. The entry to record the payment on 1 June 2019 is:

a. DR Interest expense $3000; CR Bank $3000

b. DR Mortgage payable $3000; CR Bank $3000

c. DR Interest expense $2500; DR Mortgage payable $500; CR Bank $3000

d. DR Interest expense $2500; DR Bank $500; CR Mortgage payable $3000

Correct answer: c

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

52. A liability where the borrowings are from many investors, representing a written promise to pay a principal amount at a specific time, as well as interest on the principal at a specific rate per period, is known as:

a. a debenture.

b. defeasance.

c. collateral.

d. a sinking fund.

Correct answer: a

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

53. Which of the following statements concerning debentures is incorrect?

a. A trustee, such as a bank or an insurance company, must be appointed to protect the rights of the debenture holders.

b. An issue of debentures to the public must be accompanied by a prospectus.

c. The market value of debentures is always the same as their face value.

d. The division of debenture borrowings into $100 or $50 units allows many small investors to participate in the issue.

Correct answer: c

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

54. A $100 debenture quoted at 96 is said to:

a. sell at par.

b. sell at a discount.

c. sell at a premium.

d. sell at $4 below its market value.

Correct answer: b

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

55. From the point of view of the business, which of the following is an advantage of using long-term debt rather than equity in financing?

1. Interest is tax deductible.
2. It does not dilute the control of existing owners.
3. Creditors do not share in any excess profits of the entity.
4. Interest payments are a fixed commitment regardless of profits.

a. I, II, III, IV

b. I, IV

c. I, II, III

d. I, III

Correct answer: c

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

56. is an arrangement whereby the terms and conditions of a debt are avoided or defeated.

a. Obligating.

b. Defeasance.

c. Discounting.

d. Collateralising.

Correct answer: b

Learning objective 16.6 ~ explain the nature of the major categories of non-current liabilities and how to account for them.

57. Which of the following ratios are used to evaluate long-term financial stability?

1. Debt ratio
2. Current ratio
3. Equity ratio
4. Profit margin
5. Quick ratio

a. I and III

b. II and V

c. II, III and IV

d. I, II, III, IV and IV

Correct answer: a

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

58. A capitalisation ratio of 4:1 means:

a. debt is one fifth of equity.

b. equity is one fifth of debt.

c. debt is 75% equity is 25%.

d. debt is 25% equity is 75%.

Correct answer: c

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

59. Total liabilities divided by total assets is the formula to calculate an entity’s:

a. Current ratio

b. Capitalisation ratio

c. Equity ratio

d. Debt ratio

Correct answer: d

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

60. A capitalisation ratio of 2:1 compared to 2.5:1 means:

a. a greater dependency on debt.

b. a lesser dependency on debt.

c. a lower level of gearing.

d. a higher level of equity.

Correct answer: a

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

61. If the debt ratio is 20%, the equity ratio is:

a. 20%.

b. 5:1.

c. 80%.

d. unable to be calculated.

Correct answer: c

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

62. Tassel Pty Ltd has a current ratio of 2.5:1 and current liabilities of $10 000. If Tassel has $10 000 of inventory, the quick ratio is:

a. 2.25 to 1

b. 2.00 to 1

c. 2.33 to 1

d. 1.50 to 1

Correct answer: d

Feedback: Current assets are $10 000 × 2.5 = $25 000. Quick assets are $25 000 – $10 000 = $15 000, therefore the quick ratio is $15 000/$10 000 = 1.5:1

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

63. Brass Ltd’s balance sheet at year-end consists of:

Current assets $420 000

Non-current assets 330 000

Current liabilities 70 000

Non-current liabilities 350 000

Share capital 150 000

Retained earnings 210 000

The debt ratio is:

a. 86%.

b. 48%.

c. 56%.

d. 100%.

Correct answer: c

Feedback: ($70 000 + $350 000)/ [$420 000 + $330 000]

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.

64. Which statement concerning liabilities is incorrect?

a. The absolute value of liquidity ratios is usually more important than their trend over time.

b. Borrowing to finance assets provides the potential for greater returns for owners but also means greater risk.

c. A difference between accounts payable and bills payable is that the liability created with bills payable is evidenced by a bills payable or a promissory note.

d. Leverage is the use of borrowed funds in an attempt to earn a return greater than the interest paid on the borrowings.

Correct answer: a

Learning objective 16.7 ~ analyse liabilities for decision-making purposes.