QUESTION: 1597

Which of the following is a valid reason for an analyst to question the value of a deferred asset or justify capitalizing it?

Rapid product obsolescence.
Over estimation of future sales.
All of these answers.
The proper amortization might be substantially shorter that the one selected by management.
Non-existence of future benefits.

Answer(s): C

Explanation:

The analyst needs to scrutinize all factors related to the value of deferred assets. Conditions such as rapid obsolescence can considerably shorten the time horizon that a future project's value is based upon. Further, management can be overly optimistic in the estimation of future sales; these sales may fall far short, or they may never materialize. It is the analysts' responsibility to research all facts available and come to an independent conclusion as to the validity of such claims.

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QUESTION: 1598

Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

Cash $725,000
Accounts receivable (net) $1,640,000
Inventories $2,945,000
Total current assets $5,310,000
Accounts payable $1,236,000
Accrued liabilities $831,000
Total current liabilities $2,067,000

The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997. Assume that the only transactions that affected Milton during May 1997 were the dividend transactions.
Milton's total shareholders' equity would be

unchanged by either the dividend declaration or the dividend payment.
decreased by the dividend declaration and unchanged by the dividend payment.
decreased by the dividend payment and unchanged by the dividend declaration.
none of these answers.
increased by the dividend declaration and unchanged by the dividend payment.

Answer(s): B

Explanation:

The declaration of the dividend results in an increase in dividends payable (a current liability account) and a corresponding decrease in retained earnings (a shareholders' equity account). Therefore, the declaration of a dividend reduces shareholders' equity. The subsequent payment of the dividend has no effect on shareholders' equity because that transaction reduces cash and reduces the previously recorded dividends payable.

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QUESTION: 1599

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.

Cash from operating activities $60,000

Net Income (4,000)
Depreciation (2,000)
Increase in accounts receivable (1,000)
Increase in deferred tax liability $53,000

Cash from investing activities ($48,000)
Purchase of marketable securities 2,500
Dividends received 1,500
Dividends paid ($44,000)
Cash from financing activities (500)
Increase in Short-term debt (2,500)
Increase in Long-term debt ($3,000)
Increase in cash $ 6,000

The correct Cash flows from financing activities is ________.

None of these answers
$1,500
$3,000
($4,500)

Answer(s): B

Explanation:

The increase in short-term and long-term debt are cash inflows, not outflows. The dividend paid is also a financing activity. $500 + $2,500 - $1,500 = $1,500.

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QUESTION: 1600

Stockholders' Equity is

the rights to the assets of the business once the liabilities have been met
assets plus liabilities
all of these answers are correct
the financial obligations of the company

Answer(s): A

Explanation:

The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.

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QUESTION: 1600

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