A firm currently has a financial leverage ratio of2. After a thorough review, the firm's management has concluded that they have to write-down assets worth 200,000. This will cause the firm's financial leverage to ________.
Answer(s): C
The write-down of assets effectively decreases assets and equity by the same amount, once tax effects are correctly figured. Since A > E, a decrease in both quantities by the same amount increases the financial leverage (A/E) ratio.
According to GAAP classification of cash flows, all of the following are investing cash flows except:
Dividends received from stock investments are considered operating cash flows while dividends paid on equity are considered financing cash flows.
Stock splits have the following effects on the financial statements except:
Answer(s): D
The shareholder's percentage interest in the corporation is unchanged.
Hupta Corporation reports cost of goods sold for the year ended December 31, 1998 of $3,500. Other information as of December 31 is as follows:1997 1998Accounts Receivable $500 $550Inventory $400 $380Accounts Payable $250 $290Cash paid to suppliers for year ended December 31, 1998 is ________.
An increase in accounts payable shows that $40 less than the $3,480 of purchases ($3,500 COGS + (20) change in inventory) was paid: $3,480 - $40 = $3,440.
A firm using LIFO accounting has a LIFO reserve of 600, with a LIFO ending inventory of 4,900. It is currently in the 40% tax bracket. If it switches to FIFO accounting, it's equity ________.
The presence of a LIFO reserve implies that by following LIFO, the firm has been able to deduct higher COGS from gross income than under FIFO (remember that LIFO reserve equals inventory value under FIFO minus inventory value under LIFO and this will be positive when the COGS under FIFO is lower than that under LIFO).thus, the retained earnings (and hence equity) is understated by LIFO Reserve*(1 - tax rate). Therefore, when the firm switches from LIFO to FIFO, the equity is increased by 600*(1 - 0.4) = 360.
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.