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CHAPTER 9 - CHAPTER 9 HOMEWORK SOLUTIONS Questions 5...

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CHAPTER 9 HOMEWORK SOLUTIONS Questions: 5. Working capital is computed as total current assets minus total current liabilities. It is the amount of current assets that would remain if all current liabilities were paid, assuming no loss or gain on liquidation of those assets. 6. The current ratio is the percentage relationship of current assets to current liabilities. It is computed by dividing current assets by current liabilities. For example, assuming current assets of $200,000 and current liabilities of $100,000, the current ratio would be $200,000/$100,000 = 2.0 (for each dollar of current liabilities there are two dollars of current assets). The current ratio is influenced by the amount of current liabilities. Therefore, it is particularly important that liabilities be considered carefully before classifying them as current versus long term. The shifting of a liability from one of these categories to the other often may affect the current ratio significantly. This ratio is used by creditors because it is an important index of ability to meet short-term obligations. Thus, the proper classification of liabilities is particularly significant. 7. An accrued liability is an expense that was incurred before the end of the current period but has not been paid or recorded. Therefore, an accrued liability is recognized when such a transaction is recorded. A typical example is wages incurred during the last few days of the accounting period but not recorded because no payroll was prepared and paid that included these wages. Assuming wages of $2,000 were incurred, the adjusting entry to record the accrued liability and the wage expense would be as follows: December 31: Wage expense (+E, -SE)…………………………………… 2,000 Wages payable (+L) ...... ………………………………….. 2,000
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