GAAP requires that:
Answer(s): D
It is very important to remember the following points about dividends and interests:1. Dividends received from stock investments are considered operating cash flows.2. Dividends paid on equity are considered financing cash flows.3. Interest payments on debt are considered operating cash flows.4. Interest received from debt investments are considered operating cash flows.
A firm has purchased heavy machinery with a useful life of 7 years. It cost $28,000 and its salvage value is estimated at $4,000. If the firm uses double declining method, what's the depreciation expense recognized in Year 1?
Answer(s): B
In Double Declining method, depreciation = (2/n)*book value = (2/7)*28,000.
Employers' income tax expense consists of the following obligations except:
Answer(s): C
Federal income tax is withheld from employee paychecks; it is not an expense to the company.
Which of the following is an essential characteristic of a liability?
A liability has 3 essential characteristics:1. It represents an obligation that requires settlement by probable future transfer or use of assets.2. The firm has little or no discretion to avoid the obligation.3. The transaction or other event, giving rise to the obligation has already occurred.
Quasar, Inc., currently shows assets worth 5,000 and a debt of 1,500. During the year, it capitalized interest expense worth 300, of which 60 was amortized. Quasar's tax rate is 50%. If it had expensed the interest paid, which of the following would be true?
Answer(s): A
If Quasar had expensed the interest, its tax savings would have been 300*50% = 150. By capitalizing, it amortized 60, leading to a tax savings of 60*50%=30. Thus, if it had expensed the interest, the tax expense would have been lower by 150-30=120 (What would the effect on net income be? The net income would be lower by (300 - 60 - 120 = 120). When capitalizing, all the expense gets charged to investing cash flow while expensing charges the entire cash flow to operating cash flow. After tax, this results in an operating cash flow of -300*(1-0.5) = -150. Thus, expensing would have resulted in an operating cash flow lower by 150.
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