For accounting purposes, which of the following is/are TRUE about assets?
Answer(s): C
Assets are defined as "probable future benefits obtained or controlled by a particular entity as a result of past transactions or events." III refers to "Equity" while IV is not correct since the benefits need not be solely in the form of cash.
The financial statements of Multiverse for 1997 showed the following:
Answer(s): D
Items a, e, f, g and h are financing items. However, remember that item g, gain on bonds retired, is an extraordinary item under SFAS 4 and presented after-tax. Hence, the total cash spent on retiring bonds = 400 - 25/(1-0.5) = 350.Therefore, financing cash flow = -60 + 225 - (400 - 25/0.5) - 195 = - 380.
When a business is acquired, the purchasing company calculates goodwill associated with the acquisition as the difference between the purchase price and the ________.
Answer(s): E
Goodwill is the difference between the amount paid for the business and the fair value of this business. The fair value can be calculated using net assets (total assets minus total liabilities), or shareholders' equity.
A firm has legal cash expenses of 300 and a tax rate of 40. If it chooses to capitalize the costs and depreciated them over 3 years, the operating cash flow under capitalization, compared to that under expensing, will be ________.
Under expensing, the operating cash flow will be reduced due to this expense by 300*(1-0.4) = 180 (there is an outflow of 300 but since the expenses are tax deductible, taxes on total income get reduced by 120). Instead, if the firm capitalized the expense, an asset value of 300 will be generated. The entire expense will be charged against investing cash flow. Depreciation of capitalized expense leads to a depreciation expense of 300/3 = 100. This will reduce taxes paid by 100*0.4 = 40. Thus, capitalization leads to an increase in the operating cash flow of 40. In summary, expensing reduces the expense by 180 while capitalization increases operating cash flow by 40. Thus, operating cash flow under capitalization is larger by 40 - (-180) = 220.
Which of the following would not be included as equity in a corporate balance sheet?
Cash does not represent equity; equity consists of the book value of a company; i.e., assets, minus liabilities.
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