1. The major accounting difference between interest paid to creditors
and dividens paid to owners is interest paid______________?
2. Why are liabilities seperated into current and long-term?
3. If a company decreases its cash discount offer from 3/10,n/30 to
2/10,n/60, then it would expect its accounts receivable collection
period to_____________?
4. If a firm with a current ratio of 2.0 pays $1,000 of its accounts
payable, then its current ration will_________________?
5. Sing company uses the direct write-off method of accounting for bad
debts. During december, 2001, Bill Clintons account was written off as
uncollectible. The write-off of clintons account_________________?

Hi ranjlene-ga

Here are the answers to your questions.

1)

2) 

Current Liability--A category of debt that must be repaid within one
year.
Long-Term Liability--Debt financing that need not be repaid until one
year or more in the future

www.swcollege.com/finance/lewellen/Chapter02.ppt 

		
current liabilities
A balance sheet item which equals the sum of all money owed by a
company and due within one year. also called payables or current debt.

http://www.investorwords.com/cgi-bin/getword.cgi?1254

noncurrent liabilities
Debt not due to be paid within the next year. opposite of current
liabilities.
http://www.investorwords.com/cgi-bin/getword.cgi?3314



So basically its separated into 2 categories because Current means
payable in one year and long term means payable in more than one year


3)

Cash discount 3/10 n/30 means that it the customer pays within 10 days
of the invoice then they can take 3% off the total of the invoice. If
however they pay after 10 days of the invoice then there is no cash
discount and the full total of the invoice is due within 30 days.  So
when the company decrease its cash discount to paying 2% within 10 day
or paying the full amount within 60 days they have actually increaseed
the Accounts Receivable collection period.

The answer is increase

4)

Current ratio = current assest/current liability

The higher the ratio the more liquid the company or it is easy to
convert into cash.

So when it paid $1,000 of accounts payable it actually increased its
ratio, moving up from 2%

For example 

CA = 1000
CL = 2000

ratio = 1000/4000 =.25

If I pay 2000 to payables then 

CA= 1000
CL = 2000

ratio = 1000/2000 =.5

Here you see that the ratio has increased once payables has been paid

current ratio
Current assets divided by current liabilities. An indication of a
company's ability to meet short-term debt obligations; the higher the
ratio, the more liquid the company is.

http://www.investorwords.com/cgi-bin/getword.cgi?1258
liquid
Easily convertible to cash. opposite of illiquid.
http://www.investorwords.com/cgi-bin/getword.cgi?2832

5) 

Direct write off method
Under the direct write-off method, bad debt losses are not anticipated
and no allowance account is used.
No entries are made for bad debts until an account is determined to be
uncollectible at which time the loss is charged to Bad Debts Expense.
No attempt is made to match bad debts to sales revenues or to show
cash realizable value of accounts receivable on the balance sheet.
Consequently, unless bad debt losses are insignificant, this method is
not acceptable for financial reporting purposes.


The Direct Write-Off Method
·        Under the direct write-off method of accounting for
uncollectible receivables
o       The company waits until it decides that a customer’s account
receivable is uncollectible
o       The accountant records Uncollectible-Account Expense and
writes off the customer’s Account Receivable with a credit
Problems with Use of Direct Write-Off
·        This method is defective for two reasons:
o       Since no Allowance for Uncollectibles is established, assets
are overstated on the balance sheet
o       The direct write-off may not match the uncollectible-account
expense of each period against the revenue of the period in which the
sale was made
http://www.nd.edu/~lewis/study/acct231ch4.htm


So the write off of Clinton's account may not match the
uncollectible-account expense of each period against the revenue of
the period in which the sale was made.
 
Hope this helps


jeanwil-ga

---

Clarification of Answer by jeanwil-ga on 02 Mar 2003 13:16 PST

Hi ranjlene-ga,

I missed question 1)b. is on the income statement and dividends paid are not.
Income Statement (‘000s)
Net sales				$710.00
Cost of goods sold			  480.00
Depreciation				    30.00
EBIT					$200.00
Interest					    20.00
Taxable income			  180.00
Taxes					    53.45
Net income				$126.55
Dividends                         	 	    26.55
Addition to retained earnings        	$100.00




Thanks

jeanwil-ga

she did a great job.  i really understood the theory.  2 out of 5
questions were clear but it did not match my multiple choice answers. 
I will re post my two questions. thanks