QUESTION: 1969

Firms A and B have simple capital structure with the same number of common stock outstanding. A finances its operations relying on debt financing while B prefers issuing preferred equity. If both the firms had the same net income last year, Firm A will have a:

higher EPS than B.
lower EPS than
all of these answers can happen.
the same EPS as B.

Answer(s): A

Explanation:

For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares Since both the firms have the same net income and common shares outstanding, Firm B will show a lower EPS due to the payment of preferred stock dividends.

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QUESTION: 1970

The peaks and valleys of the business cycle tend to be magnified using which inventory method?

LIFO
FIFO
gross profit method
weighted average

Answer(s): B

Explanation:

Businesses tend to increase selling prices as costs rise, regardless of the fact that inventories may have been purchased before the price rise. The reverse effect occurs in periods of price decreases.

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QUESTION: 1971

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: 1972

Patterson Company has the following information of one of its vehicles purchased on January 1, 1992:

Vehicle cost $50,000
Useful life, years, estimated 5
Useful life, miles, estimated 100,000
Salvage value, estimated $10,000

Actual miles driven:

1992 30,000
1993 20,000
1994 15,000
1995 25,000
1996 12,000

No estimates were changed during the life of the asset. The 1996 depreciation expense using the units-of- production method was ________.

$4,800
$4,000
$6,000
$10,000
$5,000

Answer(s): B

Explanation:

Under the units-of-production method, periodic depreciation is based on the proportion of expected total production that occurred. For the years 1992 to 1995, the total accumulated depreciation was $36,000 (($50,000-10,000) X (30,000 + 20,000 + 15,000 + 25,000) / 100,000(. Therefore, the remaining depreciation for the last year, 1996, is only $4,000 ($40,000-36,000). Given that the 12,000 miles driven in 1996 exceeded the remaining estimated production of 10,000 miles, only $4,000 can be taken as depreciation in 1996.

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QUESTION: 1969

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QUESTION: 1971

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