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

When a car is financed through a loan, which of the following best describes the classification of the resulting liability on the borrower's balance sheet?

It is not considered a liability since the car is an asset.

It is recorded as a current liability if the loan is to be repaid within one year.

It is recorded as equity because the car increases the owner's net worth.

It is always recorded as a non-current liability, regardless of the repayment period.

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Verified step by step guidance

Understand the concept of liabilities: Liabilities represent obligations that a company or individual owes to others, typically arising from borrowing or financing activities.

Classify liabilities based on repayment period: Liabilities are categorized as current liabilities if they are expected to be settled within one year, and as non-current liabilities if they are expected to be settled after one year.

Analyze the loan repayment period: If the car loan is to be repaid within one year, it should be classified as a current liability. If the repayment period exceeds one year, it should be classified as a non-current liability.

Clarify why the car is not equity: Equity represents the owner's residual interest in the assets after deducting liabilities. The car itself is an asset, not equity, and the loan used to finance it creates a liability.

Determine the correct classification: Based on the repayment period, the liability should be recorded as either a current or non-current liability on the borrower's balance sheet, ensuring proper financial reporting.