QUESTION: 2081

Which of the following relationships is true?

Gross profit margin < Net profit margin < Operating profit margin
Gross profit margin < Operating profit margin < Net profit margin
Gross profit margin > Operating profit margin > Net profit margin
Net profit margin > Gross profit margin > Operating profit margin

Answer(s): C

Explanation:

Gross profit = Net sales - COGS
Operating profit = Gross Profit - Sales & General Expenses = EBDIT Net Income = Earnings after depreciation, interest expense and taxes = Operating profit - depreciation - interest expense - taxes
Since gross profit > operating profit > net income, "Gross profit margin > Operating profit margin > Net profit margin" is the correct choice.

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QUESTION: 2082

A firm's financial data show:

Taxable income 1,500
Taxes paid 500
Non-cash operating expenses 780
Bonds retired 700
Loss on retired bonds 140

Then, the financing cash flow equals ________.

-700
-840
160
-900

Answer(s): D

Explanation:

The firm's tax rate equals 500/1,500 = 30%. Note that loss on bonds retired is an extraordinary item under US GAAP and presented after-tax. Hence, the total cash spent on retiring bonds = 700 + 140/(1-0.3) = 900. So financing cash flow = -900.

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QUESTION: 2083

Which of the following is/are FALSE?

Interest expenses that are capitalized are charged against investing cash flows.
II. Firms that expense interest costs incurred on debt must treat them as financing cash flows.
III. Firms that expense costs show lower equity than comparable firms that capitalize the costs.
IV. Capitalization of expenses leads to lower tax payments in the first year.
I, II & IV
II & IV
II & III
III & IV

Answer(s): B

Explanation:

Interest expenses are treated as operating cash flows under US GAAP. Capitalization leads to higher net income since the entire expenses are not charged against it. Due to this, the tax deductions are lower in the first year, leading to higher taxes. The higher income leads to the capitalizing firm having a higher equity. The difference in equity reduces over time to zero.

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QUESTION: 2084

The deferred income tax account

can be reported as an asset
is reported as a liability if it has a credit balance
is where the difference between income tax expense and income tax payable is reconciled
all of these answers are correct

Answer(s): D

Explanation:

The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes. It can be reported as an asset or a liability, depending on its balance and the circumstances.

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