Question

Which of the following statements is false?

1) A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
2) Cash dividends should be recorded as a liability when they are declared by the boards of directors.
3) Unearned revenues represent advance payments for goods or services from customers.
4) Stock dividends are reported as a liability until paid.

Answer 1

The false statement is number (4) that stock dividends are reported as a liability until paid, which is incorrect because they are a reallocation of retained earnings to share capital, not a liability.

Step-by-step explanation:

The false statement among the given options is statement (4): Stock dividends are reported as a liability until paid. This statement is false because stock dividends actually represent a reallocation of a company's retained earnings to its share capital; they are not considered a liability. Unlike cash dividends that are declared liabilities when announced, stock dividends are simply an increase in the number of shares outstanding, which dilutes the share value but does not result in a cash outflow or a liability for the company.

To clarify other statements: A short-term obligation can be excluded from current liabilities if the company is going to refinance it on a long-term basis and is able to prove its ability to do so (statement 1). Cash dividends are indeed recorded as a liability when declared by the board of directors (statement 2). Unearned revenues do represent advance payments received from customers for goods or services which are to be provided in the future (statement 3).