MUHASEBE II - Deneme Sınavı - 3

Depending on their maturities, liabilities can be split into two main categories as “current liabilities (short term liabilities)” and “non-current liabilities (long term liabilities)”. 

The current liabilities are obligations that will be paid out of current assets and are due within a short time, usually within one year. Current liabilities represent the nature and amounts of outflow of economic benefits from the company in order to fulfill existing obligations in the following fiscal year (one year or operating cycle). Current liabilities include short-term bank loans, current portions of long-term bank loans, accounts payable, notes payable, accruals etc. Current liabilities are listed on the balance sheet in the order in which they are due. The correct answer is C.

In cases of purchases on credit or borrowings, companies may issue promissory notes as an arrangement to formalize the repayment of a certain amount of cash at a certain date to a third party. If it is expected to be paid in the following fiscal year, these promissory notes are recorded as notes payable in current liabilities section of balance sheet. The correct answer is C.

Matching principle requires the recognition of expenses in the period in which they incur to generate revenues. Therefore, as of the end of period, all expenses should be recorded independent from whether they are paid or not. When an expense incurs but is not paid yet, it should be recorded as accrued expense. In other words, accruals can be defined as liabilities for unpaid expenses. The most common examples of accrued expenses are interest payable, salaries payable, income taxes payable etc. The correct answer is D.

Customers may make advanced payments for the goods or services they will receive in the future. When the company receives an advanced payment, an obligation occurs for delivering the goods or rendering the service for which the customer has made payment. Therefore, company must record a liability in its financial statements and this liability is named unearned revenue. The correct answer is D.

A contingent liability is a potential liability because it depends on a future event. If a possible obligation arises from past events but its existence can only be confirmed depending on the occurrence of one or more future events, the obligation under question is a contingent liability. Alternatively, if a present obligation exists but it is not probable that an outflow of economic benefits will be required or even if it is probable, the amount to settle the obligation cannot be measured reliably, the obligation is disclosed as contingent liability. The correct answer is A

Contingent liabilities are reported just in footnotes because of the uncertainty included in its measurement or existence. The correct answer is A.

Contingent liabilities are similar to estimated liabilities in nature, as both of them represent possible future liabilities arising from past events. However, they differ in terms of the level of uncertainty included. The estimated liabilities can be reported in financial statements to the extent they are reliably measured, whereas the contingent liabilities are reported just in footnotes because of the high level of uncertainty included in their measurement or existence. The correct answer is E.

Customers may make advanced payments for the goods or services they will receive in the future. When the company receives an advanced payment, an obligation occurs for delivering the goods or rendering the service for which the customer has made payment. Therefore, company must record a liability in its financial statements and this liability is named unearned revenue. In this context, unearned revenues can be defined as the payments received in advance for the products or services being provided. Unearned revenue should be converted into earned revenue as consistent with the matching principle. The correct answer is E.

Liability is defined as the present obligation of a company arising from past events and fulfillment of which causes the outflow of economic benefits in terms of payments of cash, transfer of assets or rendering of services.The correct answer is A.

Liabilities have three main characteristics: • They occur because of a past transaction or event. • They create a present obligation for future payment of cash or services. • They are an unavoidable obligation.

The correct answer is C.

Accounts Payable are typically short term as credit terms are usually between 30 and 90 days. The correct answer is C.

funds to borrow. In case of borrowings with high amounts, companies prefer longer maturities, so that it is expected to be easier to pay the loan back and protect the liquidity of company at the same time. Companies pay these loans in installments, which include some part of principal and accrued interest together. Therefore, even long-term borrowings have repayment obligations in short term. In other words, some part of the long-term loan matures within one year (or operating cycle length) as of balance sheet date. This part to be paid in the next financial statement term is classified as Current Portion of Long Term Loan. The correct answer is B.

Whenever a good or service is delivered, Value Added Tax (VAT) occurs. VAT is a kind of sales tax. The tax amount is calculated from the revenue (not income as in income tax) by using VAT rates on the delivered product or service. In a sales transaction, the seller receives an amount including both the sales price and VAT. VAT is not included in revenue because the seller collects the value added tax from customers on behalf of the government. On the other hand, the seller also pays VAT to the suppliers while purchasing goods. When the goods and services are delivered, the amount of tax is recorded as VAT received, and in cases of purchases, it is VAT paid account that the amount is recorded in. At the end of each fiscal year, these two accounts on VAT are considered. If VAT received exceeds the VAT paid, this means the seller company has collected more than what it has already paid to government as VAT. Then at year-end, a liability account should be recorded: VAT Payable. Company has to pay this amount to tax office. In opposite case, where VAT paid is more than VAT received, this means that the company has paid more tax. Then, it collected from customers on behalf of government. The excess amount is recorded in an asset account; VAT Deductible. This amount represents a tax receivable from government and is carried forward to the next year in order to be deducted from VAT tax liability.

If a present obligation exists but the amount to settle the obligation cannot be estimated reliably, the obligation is a contingent liability. The correct answer is E.

Liquidity is an indicator of reliability level for a company in terms of either survival or credibility.The correct answer is B.

In order to assess the company from these perspectives, investors and creditors generally imply ratio analysis, as well as other financial statement analysis methods. Ratios, which are calculated by dividing a financial statement item with another, help users with analyzing the company from different perspectives. Ratios (such as current ratio, acid-test ratio, operating cash flows ratio, net working capital ratio, interest coverage ratio) represent the riskiness and creditworthiness of companies to investors and creditors.Ratios represent the relationships between financial statement items to make it possible to assess the financial position and performance of companies. The correct answer is E.

Liability” is defined as the present obligation of a company arising from past events and fulfillment of which causes outflow of economic benefits in terms of payments of cash, transfer of assets or rendering of services. From another perspective, with a very basic level definition, liability represents the part of financing that a company provides from resources other than claims of its equity owners. Depending on their maturities, liabilities are classified as “current liabilities” and “non-current liabilities”. The term “current” means “in the same period”, which stands for either “the same 12-months period” or “the same operating cycle”, whichever is longer. If it takes more than 12-months after the purchase of raw materials to produce and sell products and collect the receivables in return, this means that the operating cycle is more than 12 months for that company. In other words, the time needed by the company to provide funds from its operations and fulfill its liabilities is more than 12 months; thus, the term “current” proxies for the operating cycle. All expenses should be recorded in the periods they incur; so that the performance of the company can be assessed accurately, as its income statement covers all revenues and expenses for that period. Recognition of expenses do not require a cash outflow. Therefore, expenses are recognized in income statement even if they are not paid yet. When an expense incurs but the payment will be made in other periods, companies should also record a liability to be settled in future periods. That liability is called “accrued expenses”. Completely opposite situation, in which the company collects cash in advance but the goods or service will be delivered in other periods, also required the company to recognize a liability. However, this time the name of liability is “unearned revenue”. In short, the term “accrual” refers to expenses that are incurred but unpaid, while “unearned revenue” refers to future revenues that are collected but not delivered yet.The correct answer is D.

It is vitally important for a company to pay its current liabilities. What is called “current” is either the benefits to be received, or obligations to be met in one-year period. Combining these two definitions, companies care about the ability of current assets to meet current liabilities. If the current assets cannot match current liabilities, companies will have to either convert their non-current assets, which are usually used in providing capacity for operations, into current assets (in most cases cash) or will have to extend the maturities to longer terms with an additional amount of interest. Therefore, companies operating with too much share of current liability in total financing is usually accepted as too much risky to either invest or lend. On the other hand, if the company finances its operations mostly by using long-term financing options, the cost of financing will incur more compared to short-term financing, in terms of either interest or dividends. The correct answer is C.

The correct answer is B. Liabilities reported on the balance sheet.

The correct answer is B. Accounts payable arise from purchasing goods or services for use in a company’s operations. Amounts owed for goods or services purchased on account are accounts payable. Accounts payable are debts
incurred in the normal course of a business, resulting from acquisition of inventories and supplies.