Question 1

In a deferred payment arrangement, interest is charged only if it is stated.

Accepted Answer

The answer of In a deferred payment arrangement, interest is...

Question 2

Assets purchased under a deferred payment plan should be recorded at the future value of the installment payments.

Accepted Answer

Assets purchased under a deferred payment plan should be recorded at their present value, not the future value of the installment payments.

Question 3

Which of the following is not a component of the operating cycle?

Accepted Answer

The operating cycle is the process by which a company converts its assets into cash. The components of the operating cycle include purchases from suppliers, production or inventory, sales to customers, and collection of accounts receivable. Recognition of depreciation is not a component of the operating cycle as it is a non-cash expense related to the wear and tear of long-term assets.

Question 4

The higher the interest rate, the lower the present value factor.

Accepted Answer

This statement is true. Present value factor is the inverse of the discount factor that determines the value of money today compared to its value in the future. As the interest rate increases, the discount factor decreases, and hence the present value factor decreases as well.

Question 5

Future value refers to an amount received or paid now at a given rate of interest that is equivalent to another amount received or paid sometime in the future.

Accepted Answer

Future value refers to the amount of money that an investment will grow to over a period of time at a specified interest rate, not the present value equivalent of a future amount.

Question 6

The lower the interest rate, the lower the future value factor.

Accepted Answer

The future value factor is calculated based on the interest rate, time period, and compounding frequency. A lower interest rate will result in a lower future value factor, meaning that the future value of an investment will be lower.

Question 7

All factors in a future value table must be greater than or equal to 1.000.

Accepted Answer

This is because the future value factor represents the increase in value over time, and therefore the final value must always be greater than or equal to the initial value (which is represented by the factor of 1.000).

Question 8

Decision makers rely on the future values, rather than on the present values of future cash flows.

Accepted Answer

Decision makers typically rely on the present values of future cash flows rather than their future values because present value calculations discount future cash flows to their value in today's dollars, accounting for the time value of money and providing a more accurate basis for comparison and decision-making.

Question 9

An ordinary annuity is a series of equal payments made at the end of equal intervals of time.

Accepted Answer

This is the definition of an ordinary annuity.

Question 10

A company wishes to make deposits at the end of the next four years to accumulate a fund of $60,000. The annual contributions equal $60,000 multiplied by the appropriate present value of an ordinary annuity factor.

Accepted Answer

The annual contributions should be calculated using the future value of an ordinary annuity factor, not the present value.

Question 11

An asset purchased according to a deferred payment plan should be recorded based on the total cash paid.

Accepted Answer

An asset purchased according to a deferred payment plan should be recorded based on the total cost of the asset, which includes the total amount paid over time plus any interest or finance charges associated with the plan. Therefore, the cost of the asset should be recorded at the time of purchase, not based on the total cash paid so far.

Question 12

The annual interest earned on an amount deposited into a bank account will be the same each year when compound interest is used.

Accepted Answer

With compound interest, the interest earned each year is added to the principal amount, which leads to a higher balance and subsequently, a higher interest earned in the following years. This means that the annual interest earned will vary each year depending on the accumulated interest and the interest rate.

Question 13

The annual interest earned on an amount deposited into a bank account will increase each year when simple interest is used.

Accepted Answer

Simple interest is calculated on the principal amount only, and does not increase each year; it remains the same.

Question 14

Which of the following most likely would be classified as a current liability?

Accepted Answer

Dividends payable are typically paid within a short period of time, usually a few weeks or months, making them a current liability. Mortgage payable, five-year notes payable, and bonds payable are long-term liabilities.

Question 15

When compound interest is used, interest accumulates less quickly than when simple interest is used.

Accepted Answer

Compound interest accumulates more quickly than simple interest because the interest is calculated not only on the original principal but also on the accumulated interest from previous periods.

Question 16

If the net present value of a proposed investment is negative, it means that the investment should not be made.

Accepted Answer

A negative net present value indicates that the expected cash flows from the investment are less than the initial cost of the investment, resulting in a loss. Therefore, it would not be financially wise to make the investment.

Question 17

All factors in a present value of a single sum table are less than 1.000.

Accepted Answer

Present value factors represent the present value of a future cash flow, therefore they discount the future amount to its present value. As time value of money suggests that money has time value and it's worth decreases over time, the present value factor is always less than 1.000.

Question 18

The theoretical value of an asset is the present value of the expected benefits.

Accepted Answer

The theoretical value of an asset is based on the present value of the expected benefits, whether they come in the form of cash flows, dividends, or any other form of returns. This value is determined by analyzing current market conditions, macroeconomic factors, industry trends, and the specific characteristics of the asset itself.

Question 19

All of the following are measures of liquidity except

Accepted Answer

Return on assets is a measure of profitability, not liquidity. Quick ratio, current ratio, and working capital are all measures of liquidity.

Question 20

A liability is recognized when

Accepted Answer

A liability is recognized when there is an obligation or a responsibility that the company has to fulfill in the future. The due date and exact amount of the liability may not be known at the time it is recognized. It is recognized as soon as the obligation arises, regardless of whether it has been paid for or not.

Quiz 10: Current Liabilities and Fair Value Accounting