Which of the following does not affect a firm's cash flows:
Answer(s): C
When the depreciation method is changed, the taxes paid are affected, thus affecting the cash flows indirectly.Sales or purchases of assets and expenses like warranty costs have a direct impact on cash flows. However, when stock is issued to finance an acquisition, there is no net cash involved in the transaction.
Which of the following is/are true under accrual accounting?
Answer(s): D
III is not necessarily true. It is used only by a few specific firms under a method called "Percentage completion of contract."
Which of the following is/are revenue recognition methods?
Answer(s): B
IV refers to a method under which costs in drilling oil wells can be capitalized and is not a revenue recognition method.
Current liabilities are recorded at ________.
While all assets and liabilities, for analysis purposes, should be considered at their fair present value, the short horizon of current liabilities means that in practice, they are recorded at their face value. This means that the stated principal value of the liability is recorded as is, without factoring in interests expenses. This practice covers current liabilities arising from both operating activities (like advance payments and taxes payable) and financing activities (like accounts payable and short-term loans).
In its 1996 income statement, Coopers Co. reported income before income taxes of $300,000. Coopers estimated that, because of permanent differences, taxable income for 1996 would be $280,000. During 1996, Coopers made estimated tax payments of $50,000, which were charged to income tax expense. Coopers is subject to a 30% tax rate. What amount should Coopers report as income tax expense?
Answer(s): A
Income tax expense is the sum of current income tax and deferred tax expense. There is no timing difference in this case and, therefore, no deferred tax expense. Thus, the income tax expense equals current income tax expense which is the amount of taxes payable and equal to $84,000 ($280,000 X 30%).
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