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

Assume a firm employs debt in its capital structure. Which of the following statements is accurate?

Debt is always classified as a current liability, regardless of its maturity date.

Debt is considered an equity instrument since it provides ownership rights to creditors.

Debt does not affect the firm's liabilities, as it is only recorded in the income statement.

Debt is classified as a liability on the balance sheet because it represents an obligation to repay borrowed funds.

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Verified step by step guidance

Step 1: Understand the concept of debt in financial accounting. Debt refers to borrowed funds that a firm is obligated to repay, typically with interest. It is classified as a liability because it represents an obligation to external parties.

Step 2: Review the classification of liabilities on the balance sheet. Liabilities are divided into current liabilities (due within one year) and non-current liabilities (due after one year). Debt can fall into either category depending on its maturity date.

Step 3: Clarify why debt is not classified as an equity instrument. Equity represents ownership rights in the firm, while debt represents a financial obligation to creditors. Creditors do not gain ownership rights through debt.

Step 4: Address the misconception that debt does not affect the firm's liabilities. Debt is recorded on the balance sheet as a liability, not on the income statement. The income statement reflects interest expense related to the debt, but the principal amount is recorded as a liability.

Step 5: Conclude that the correct statement is: 'Debt is classified as a liability on the balance sheet because it represents an obligation to repay borrowed funds.' This aligns with the principles of financial accounting and the structure of the balance sheet.