An increase in the LIFO reserves implies which of the following?
Answer(s): C
The LIFO Reserve equals the difference in the inventory value under FIFO and under LIFO. This reserve will increase if either prices have risen sufficiently to cause a high ending inventory value or if the firm purchased more goods than it sold in times of rising prices. Note that II represents a LIFO liquidation, not an increase in the reserves. III does not lead to a change in LIFO reserves. Finally, remember that IV is one way firms using LIFO can manipulate earnings and taxes, by changing the purchasing behavior at year-end.
Which of the following is a valid reason for an analyst to question the value of a deferred asset or justify capitalizing it?
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.
Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:Cash $725,000Accounts receivable (net) $1,640,000Inventories $2,945,000Total current assets $5,310,000Accounts payable $1,236,000Accrued liabilities $831,000Total current liabilities $2,067,000The 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
Answer(s): B
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.
Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.Cash from operating activities $60,000Net Income (4,000)Depreciation (2,000)Increase in accounts receivable (1,000)Increase in deferred tax liability $53,000Cash from investing activities ($48,000)Purchase of marketable securities 2,500Dividends received 1,500Dividends 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 $ 6,000The correct Cash flows from financing activities is ________.
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.
Stockholders' Equity is
Answer(s): A
The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.
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