QUESTION: 1681

Which of the following temporary differences will result in a deferred tax asset?

Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
Prepaid expenses accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
Use of the straight-line depreciation method for financial statement purposes and the Modified Accelerated Cost Recovery System (MACRS) for income tax purposes.
None of these answers.
Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.

Answer(s): E

Explanation:

A deferred tax asset records deferred tax consequences attributable to deductible temporary differences.
Advance rental receipts accounted for on the accrual basis for accounting purposes and on a cash basis for tax purposes would give rise to a deferred tax asset. The income statement would show no revenue and no related tax expense. However, on the tax return, the cash received is reported as revenue and the tax would be due now, resulting in a prepaid tax on the balance sheet called a deferred tax asset.

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QUESTION: 1682

Jumbotron's accountant has mistakenly understated depreciation by 125 and understated accounts payables by 65. Jumbotron's tax rate is 40%. Which of the following is/are true?

Assets are overstated by 125
II. Income is overstated by 125
III. Current liabilities are understated by 65
IV. Operating cash flow is understated by 125
III only
I & III
none of them
II, III & IV

Answer(s): B

Explanation:

If depreciation is understated by 125, the income is actually overstated by 125*(1-tax rate) = 75. The understatement of accounts payables does not affect the income statement; it understates the reported current liabilities. It also affects the operating cash flow. Note that operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts Since income is overstated by 75, a non-cash expense (depreciation) is understated by 125 and another non-cash expense (accounts payable) is understated by 65, operating cash flow is understated by -75 + 125 + 65 = 115.

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QUESTION: 1683

When merchandise inventory is purchased under a periodic system, which account is debited?

Accounts Payable
Cash
Merchandise Inventory
Purchases

Answer(s): D

Explanation:

The periodic inventory system records purchases of merchandise inventory in an income statement account called Purchases.

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QUESTION: 1684

The section of a firm's annual report entitled "Management's Discussion and Analysis" (MD&A)

is a technical analysis of past results and a defense of those results of management.
includes the company president's letter.
covers three financial aspects of a firm's business: liquidity, capital resources, and results of operations.
covers marketing and product line issues.
none of these answers.

Answer(s): C

Explanation:

The MD&A is included in SEC filings. It addresses in a nonquantified manner the prospects of a company. The SEC examines it with care to determine that management has disclosed material information affecting the company's future results.

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QUESTION: 1681

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QUESTION: 1682

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QUESTION: 1683

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QUESTION: 1684

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