A firm's tax rate is 30%. If the beginning inventory was overstated by 50, the purchases understated by 30 and the ending inventory overstated by 10, the income is ________.
Answer(s): D
Ending inventory = beginning inventory + Purchases - COGS Hence, in this case, COGS is overstated by 50 + (-30) - 10 = 10. Therefore, income is understated by 10*(1-tax rate) = 7. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.
Oils Galore is a large firm that prefers to use the Successful Efforts method of accounting. A similar firm, Rival Oil & Gas, Inc., uses the Full Cost method. An inspection of their financial statements would reveal that:
The Successful-efforts method requires expensing of all dry-hole costs while Full Cost method allows these to be capitalized. Therefore, Rival shows higher assets, higher income and hence, higher taxes. It also shows higher equity. Since Rival pays higher taxes, it has lower cash flows.
A firm currently has a negative working capital. Which of the following is true?
Answer(s): C
Working capital = Current assets - Current liabilities. If working capital is negative, then current liabilities exceed current assets, implying a current ratio of less than 1.
Companies reporting consolidated cash flows using the direct method must report all of the following cash receipts except for:
Subsidiaries are part of the same company. Since the cash flows are consolidated there is no effect on the statement for repayments of funds from foreign subsidiaries.
When reporting contingencies
Answer(s): E
Contingent losses should be accrued if both probable and reasonably estimable. In this case, the contingent loss is not estimable and, therefore should only be disclosed in the notes since it is probable.
Post your Comments and Discuss CFA CFA I exam prep with other Community members:
Our website is free, but we have to fight against AI bots and content theft. We're sorry for the inconvenience caused by these security measures. You can access the rest of the CFA I content, but please register or login to continue.