Chapter 13 Questions

1. What is the difference between a current liability and a noncurrent liability?

Current liabilities are obligations due within one year or the normal operating cycle of the business,
whichever is longer. Non-current liabilities are long-term debts of the business that are due beyond one
year or the normal operating cycle of the business.

2. Give an example of a current liability and a noncurrent liability.

Current Liability: accounts payable & employee benefits

Noncurrent Liability: mortgage & Bonds

3. Why is it important that a company be able to pay its liabilities as they come due?

Paying debts on time give the company a current ratio that will tell investors and decision makers that
the company is safe to do business with.

4. Why are financial statement users particularly concerned about the amount of current liabilities a

company has?

5. How is a company’s current ratio calculated?

6. What are the three characteristics of liabilities according to FASB?

7. What are “accrued liabilities”?

8. How do companies account for gift cards it has sold?

9. Define “commitments.”

10. What two criteria must be met for a company to record a contingency?

11. Give three examples of possible contingencies that a company would report.

12. How would a company report a contingency that is “reasonably possible”?

13. How would a company report a contingency where the chance of loss is “remote”?

14. How are contingent gains reported?

15. How should a company go about estimating liabilities like product warranties?

16. How is the age of accounts payable calculated?