After the initial feasibility studies, all software development costs can be capitalized under US GAAP. Ultrasoft and Littlesoft are rival firms which are similar in size and scope of operations. Ultrasoft has decided not to capitalize but expense software development costs in Year1. Littlesoft, on the other hand, has decided to capitalize a similar amount of development costs, to be amortized over 5 years. Which of the following is/are true over the next 5 years?
Answer(s): D
When Littlesoft capitalizes the expenses, its assets increase, net of depreciation and tax expenses. Hence, it shows higher assets than Ultrasoft (but this difference reduces steadily to zero over the period over which the expense is amortized). This difference also translates into an equal difference between the retained earnings as well as equity (Recall assets = liabilities + equity). Thus, over the next 5 years, Littlesoft will show higher equity than Ultrasoft. The difference will reduce to zero by the end of the period over which the capitalized expense is amortized. Over 5 years, the total tax deductions taken by the two firms are equal to the initial expense. Hence, the taxes paid are equal; the difference is that Ultrasoft delays the payment of taxes by expensing. Lesson: Expensing delays tax payments, capitalizing hastens them.
The Jones company had a net receivable balance at the beginning of 1998 of $350,000 and ended 1998 with a receivable balance of $400,000. During the year the company had credit sales of $1,000,000 and cash sales of $200,000. How much cash did the company collect during 1998?
Answer(s): C
During the year the company sold $1,200,000 of goods or services. However, receivables increased by $50,000, which decreases the change in cash during the year. Therefore the change in cash, or the cash collected during the year was $1,050,000.
Which of the following items that are reported on an income statement will directly affect the retained earnings from one accounting period to another?
Answer(s): B
Only the payment of dividends will directly affect the change in a company's retained earnings from one accounting period to another. The change in retained earnings consists of a company's beginning retained earnings, plus net income, minus cash dividends paid and the repurchase (not sale) of stock.
Which of the following is/are true about Goodwill?
Answer(s): A
When the sum of the fair values of all identifiable assets and liabilities involved in the purchase of another entity is less than the amount paid, the excess is attributed to "intangibles." This excess is referred to as "Goodwill" and is capitalized as an asset. Under US GAAP, only Goodwill generated during acquisitions is capitalized; it does not allow capitalization of internally generated Goodwill
The formula for calculating profit margin is:
Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.
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