Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

9. Current Liabilities

Types of Liabilities

Financial Accounting

9. Current Liabilities

Types of Liabilities

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Multiple Choice

Which of the following is most likely to occur when a firm's debt levels are extremely high?

The firm will pay less interest expense due to lower debt.

The firm will automatically increase its equity without issuing new shares.

The firm faces increased financial risk and may have difficulty meeting its obligations.

The firm's liabilities will be reclassified as assets.

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Verified step by step guidance

Understand the concept of financial risk: Financial risk refers to the possibility that a company may not be able to meet its financial obligations, such as interest payments or principal repayments, due to high levels of debt.

Analyze the relationship between debt and interest expense: When a firm's debt levels are high, it typically incurs higher interest expenses, not lower. This is because interest is calculated as a percentage of the outstanding debt.

Evaluate the impact of high debt on equity: High debt levels do not automatically increase equity. Equity is affected by retained earnings, issuance of new shares, or changes in the company's net income, not by debt levels alone.

Consider the classification of liabilities and assets: Liabilities and assets are distinct categories on the balance sheet. High debt levels do not result in liabilities being reclassified as assets. Liabilities remain obligations the firm owes to others.

Conclude that high debt levels increase financial risk: When a firm's debt levels are extremely high, it faces increased financial risk, which may lead to difficulty in meeting its obligations, such as paying interest or repaying principal. This is the most likely outcome in the given scenario.