The following data are available for a firm for a given year:Net Sales 21,896Sales & marketing expenses 4,346Administrative expenses 2,143COGS 10,084Depreciation 967Interest expense 573Tax rate 35%Dividends paid 3,445Preferred Dividends 897Average total equity 37,432Average common equity 26,782Average total liabilities 18,583In the above example, the firm's return on total capital equals ________.
Answer(s): C
Return on total capital = (Net income + interest expense)/average total capital. The average total capital includes debt, common equity and preferred stock. Note that since Total assets = Total liabilities + Total Equity, the denominator is also equal to total assets. In the above example, Net Income = Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459. Therefore, Return on total capital = (2,459 + 573)/(37,432 + 18,583) = 5.41%.
The construction of cash flow statement using the indirect method requires which of the following?
Answer(s): A
In the indirect method of construction of the cash flow statement, you start with the net income and start adding back non-cash expenses, adjusting for tax effects. In addition, one needs to look at changes in assets and liabilities accounts to back out investing and financing cash flows. Thus, you need both income statement and the balance sheet for the indirect method of cash flow construction.
Which of the following is a long-term liability?
Answer(s): B
Only bonds would be a long-term liability. Long-term liabilities are repaid over a time frame of greater than one year. Bonds are repaid over many years, whereas accounts payable and commercial paper are current liabilities (repaid over less than one year); cost of goods sold is an expense not a liability.
According to FASB, initial franchise fees should be recognized as income when
Accounting and reporting standards for franchisors require that revenue be recognized when the franchisor has substantially performed or satisfied all material services and conditions.
The retail industry has __________ asset turnover ratio compared to that of a capital intensive industry like the auto industry.
Total asset turnover = net sales/average total assets Since the auto industry is highly capital intensive compared to the retail industry, it require far more capital assets to generate the same revenues as the retail industry.
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