Question 4

Question

Where in the three basic accounting documents are you likely to find your
firm’s unpaid gas bill?

(a) On the balance sheet in the current liabilities section.
(b) On the income statement under EBIT.
(c) On the cash-flow statement in the finance section as a negative
number.
(d) On the balance sheet in the other liabilities section.
(e) None of the above.

Answer

The unpaid gas bill would be under accounts payable in the current liabilities section of the balance sheet, therefore (a) is the answer. Note that (?paid?) bills also appear on the income statement as expenses.

Option B lists Earnings Before Interest and Taxes (EBIT). EBIT does not include bills other than taxes. It is a summary of revenue less some costs.
Options C is incorrect because a negative number in the finance section of the cash flow statement indicates cash outflow due to capital financing (i.e. money borrowed or lent). An unpaid bill is not considered a loan.
Option D is incorrect because of the length of the term of the liability. The "other liabilities" category on the balance sheet includes only long-term liabilities. Bills are usually due upon receipt or shortly thereafter (e.g. within 30-90 days) and therefore require cash on hand for payment. Therefore, bills are current liabilities.

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