The following data are taken from the Ultimate Omega's financial statements ending Dec 31, 1985:Increase in inventories 220Stock's repurchased 135Provision for warranty expenses 15Depreciation 90Interest paid 35Outstanding bonds retired 225After-tax gain on bond retirement 25Net Income 430Tax rate 40%What was Ultimate Omega's operating cash flow in 1985?
Answer(s): D
In this case, OCF = 430 - 220 + 15 + 90 - 25 = 290. Note a few important things: Warranty provision is a non- cash expense and must be added back to net income. Gain on bond retirement is an extraordinary item and is part of financing cash flow. Hence, it must be subtracted from net income to obtain income from continuing operations. Stock repurchase and bond retirement are financing cash flows. Note that tax rate is not relevant in the indirect method since it has already been factored in the net income figure.
According to the hierarchy of accounting qualities, which of the following is considered a pervasive constraint?
Answer(s): B
All accounting information is subject to two quantitative constraints: materiality and cost/benefit. The constraint of benefit/cost states that the benefits of information must exceed the cost of obtaining it.
Which of the following statements about directors of a company is true?
Answer(s): C
The stockholders elect the board of directors, which in turn decide on the major business policies of the corporation.
Which of the following is/are true about marketable securities?
Marketable securities are classified into various categories. Securities that are designated as "held-to- maturity" are reported at historical cost, not fair market value. Other categories prescribe a reporting at fair market value.Thus, (I) is not necessarily true. Despite this, when the classification of a security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement (in the case of trading and held-to-maturity securities) or as a separate component of shareholder equity (in the case of available-for-sale securities). Companies are not required to disclose securities classification on the balance sheet; disclosure can occur in the footnotes.
Which of the following relationship is true about the liquidity ratios?
The cash ratio is the most conservative of the 3 liquidity ratios since it considers only cash and marketable securities relative to the current liabilities. The quick ratio considers receivables in addition to cash and marketable securities. The current ratio takes all current assets into account.
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