Q1. Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?
Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less.
Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.
Characteristic #1 Characteristic #2
A) No No
B) Yes No
C) No Yes
Q2. Firebird Company reported the following financial information at the end of 2007:
| in millions |
Merchandise inventory | $240 |
Minority interest | 70 |
Cash and equivalents | 275 |
Accounts receivable | 1,150 |
Accounts payable | 225 |
Property & equipment | 2,160 |
Accrued expenses | 830 |
Current portion of long-term debt | 120 |
Long-term debt | 1,570 |
Retained earnings | 4,230 |
Calculate Firebird’s current assets and working capital.
Current assets Working capital
A) $1,665 million $420 million
B) $1,665 million $490 million
C) $1,735 million $490 million
Q3. Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:
Performed services on credit | $150,000 |
Purchased office equipment for cash | 10,000 |
Recognized salaries expense | 54,000 |
Purchased paint supplies on on credit | 25,000 |
Consumed paint supplies | 20,000 |
Paid salaries | 50,000 |
Collected accounts receivable | 157,000 |
Recognized straight-line depreciation expense | 2,000 |
Paid accounts payable | 15,000 |
Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.
Working capital Change in cash
A) $414,000 $82,000
B) $416,000 $82,000
C) $416,000 $80,000
答案和详解如下：
Q1. Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?
Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less.
Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.
Characteristic #1 Characteristic #2
A) No No
B) Yes No
C) No Yes
Correct answer is A)
A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services.
Q2. Firebird Company reported the following financial information at the end of 2007:
| in millions |
Merchandise inventory | $240 |
Minority interest | 70 |
Cash and equivalents | 275 |
Accounts receivable | 1,150 |
Accounts payable | 225 |
Property & equipment | 2,160 |
Accrued expenses | 830 |
Current portion of long-term debt | 120 |
Long-term debt | 1,570 |
Retained earnings | 4,230 |
Calculate Firebird’s current assets and working capital.
Current assets Working capital
A) $1,665 million $420 million
B) $1,665 million $490 million
C) $1,735 million $490 million
Correct answer is B)
Current assets are equal to $1,665 ($275 cash and equivalents + $1,150 accounts receivable + $240 inventory). Working capital (current assets minus current liabilities) is equal to $490 ($1,665 current assets – $225 accounts payable – $830 accrued expenses – $120 current portion of long-term debt).
Q3. Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:
Performed services on credit | $150,000 |
Purchased office equipment for cash | 10,000 |
Recognized salaries expense | 54,000 |
Purchased paint supplies on on credit | 25,000 |
Consumed paint supplies | 20,000 |
Paid salaries | 50,000 |
Collected accounts receivable | 157,000 |
Recognized straight-line depreciation expense | 2,000 |
Paid accounts payable | 15,000 |
Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.
Working capital Change in cash
A) $414,000 $82,000
B) $416,000 $82,000
C) $416,000 $80,000
Correct answer is B)
Transaction | Amount | Working capital | Cash |
Performed services on credit | $150,000 | Increase A/R | < >> |
Purchased PP&E for cash | 10,000 | Decrease cash | -$10,000 |
Recognized salaries expense | 54,000 | Increase A/P | |
Purchased paint supplies on on credit | 25,000 | Increase inventories, increase A/P | |
Consumed paint supplies | 20,000 | Decrease inventories | < >> |
Paid salaries | 50,000 | Decrease cash, decrease A/P | -$50,000 |
Collected accounts receivable | 157,000 | Increase cash, decrease A/R | +$157,000 |
Recognized straight-line depreciation expense | 2,000 | < >> | < >> |
Paid accounts payable | 15,000 | Decrease cash, decrease A/P | -$15,000 |
The change in cash was $82,000 ($157,000 collections – $10,000 from equipment purchase – $50,000 salaries paid – $15,000 for payables).
Working capital at the end of 20X7 is $416,000 ($350,000 beginning working capital + $150,000 increase in accounts receivable from services – $10,000 office equipment purchase – $54,000 salaries expense accrual – $20,000 consumed supplies).
§ Purchasing $25,000 of paint supplies on credit has no net effect on working capital (current assets and current liabilities increase). Consuming $20,000 of these supplies reduces working capital (current assets decrease).
§ Salary expense reduces working capital by $54,000 when recognized (current liabilities increase). Paying $50,000 of these salaries has no net effect on working capital (current assets and current liabilities decrease).
§ Collecting accounts receivable has no net effect on working capital (one current asset increases and another decreases).
§ Recognizing depreciation does not affect working capital.
§ Paying accounts payable has no net effect on working capital (current assets and current liabilities decrease).
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