FAR THEORY 11-18-24

The most common type of liability is

• One that comes into existence due to a loss contingency

• One that must be estimated

• One that comes into existence due to a gain contingency

• One to be paid in cash and for which the amount and timing are known

Which is not a characteristic of a liability?

• It represents a transfer of an economic resource

• It must be payable in cash

• It arises from present obligation to other entity

• It results from past event

Classifying liabilities as either current or noncurrent helps creditors assess

• Profitability

• The relative risk of an entity’s liabilities

• The degree of an entity’s liabilities

• The amount of an entity’s liabilities

Short-term obligations are reported as noncurrent if

• The entity has a long-term line of credit

• The entity has tentative plan to issue long-term bonds payable

• The entity has the right at the end of the reporting period to defer settlement of liability for at least twelve months after the end of the reporting period.

• The entity has the ability to refinance on a long-term basis

Which situation would not require a noncurrent liability to be reported as current?

• The long-term debt is callable by the creditor

• The creditor has the right to demand payment due to a contractual violation

• The long-term debt matures within the upcoming year

• All of these require the current classification

Which is the correct definition of a provision?

• A possible obligation arising from past event

• A liability of uncertain timing or amount

• A liability which cannot be easily measured

• An obligation to transfer funds to an entity

A provision shall be recognized as liability when

• An entity has a present obligation as a result of a past event

• It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

• The amount of obligation can be measured reliably

• All of these are required for the recognition of a provision as liability

A legal obligation is an obligation that is derived from all of the following, except

• Legislation

• A contract

• Other operation of law

• An established pattern of past practice

An entity has an established pattern of practice or stated policy has created valid expectation that it will accept certain financial responsibility

• Constructive obligation

• Legal obligation

• Onerous obligation

• Present obligation

It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.

• Obligating event

• Past event

• Subsequent event

• Current event