QUESTION: 1841

A firm's tax rate is 30%. If the beginning inventory was overstated by 50, the purchases understated by 30 and the ending inventory overstated by 10, the income is ________.

overstated by 12
understated by 10
overstated by 21
understated by 7

Answer(s): D

Explanation:

Ending inventory = beginning inventory + Purchases - COGS Hence, in this case, COGS is overstated by 50 + (-30) - 10 = 10. Therefore, income is understated by 10*(1-tax rate) = 7. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.

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QUESTION: 1842

Oils Galore is a large firm that prefers to use the Successful Efforts method of accounting. A similar firm, Rival Oil & Gas, Inc., uses the Full Cost method. An inspection of their financial statements would reveal that:

Oils Galore has a higher debt-to-asset ratio.
II. Rival O&G has higher equity.
III. Oils Galore is burdened with higher taxes.
IV. Rival O&G shows higher cash flows.
I & III
II & IV
III & IV
I & II

Answer(s): D

Explanation:

The Successful-efforts method requires expensing of all dry-hole costs while Full Cost method allows these to be capitalized. Therefore, Rival shows higher assets, higher income and hence, higher taxes. It also shows higher equity. Since Rival pays higher taxes, it has lower cash flows.

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QUESTION: 1843

A firm currently has a negative working capital. Which of the following is true?

The firm is close to bankruptcy.
The firm's accounting profits are low.
The firm's current ratio is less than 1.
The firm has a high debt-to-asset ratio.

Answer(s): C

Explanation:

Working capital = Current assets - Current liabilities. If working capital is negative, then current liabilities exceed current assets, implying a current ratio of less than 1.

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QUESTION: 1844

Companies reporting consolidated cash flows using the direct method must report all of the following cash receipts except for:

other operating cash receipts, if any.
cash from customers, including lessees, licensees and similar.
repayments of funds from foreign subsidiaries.
interest and dividend payments received.

Answer(s): C

Explanation:

Subsidiaries are part of the same company. Since the cash flows are consolidated there is no effect on the statement for repayments of funds from foreign subsidiaries.

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QUESTION: 1841

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QUESTION: 1843

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QUESTION: 1844

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