The consistency principle
Answer(s): A
The consistency principle requires that an accounting procedure, once adopted by a company, remain in use from one period to the next unless users are informed of the change. It is not limited to inventory valuation methods.
Which of the following is used to calculate the actual adjustment for bad debt expense for the period?
Answer(s): C
The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.
Ratios are best interpreted when compared to which of the following?
Ratios are best interpreted when compared to, the ratios of prior periods, predetermined standards, and the ratios of competitors.
New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, the number of shares used in Diluted EPS equals ________.
Answer(s): B
With dilution, there are 300,000 additional shares from the convertible bonds. Preferred equity does not count.Therefore, the number of shares used in Diluted EPS equals 200,000 + 300,000 = 500,000.
The ROE equals:
ROE = Net income/Equity= (Net income/sales)*(sales/equity)= (profit margin)*(equity turnover).You can also express this as:ROE = Net income/Equity= (Net income/sales)*(sales/total assets)*(total assets/equity) = (profit margin)*(asset turnover)*(financial leverage)
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