Two otherwise identical firms, A and B, have one difference. A has a higher interest expense than B, arising from its higher reliance on debt financing. All other accounting statistics, including net sales and expenses are equal for the two firms. The return on total capital for firm A will be __________ that for firm B.
Answer(s): D
The return on total capital equals the net income before interest expense as a fraction of the average total capital invested. Therefore, if interest expenses were not tax deductible, the two firms would have exactly the same return on total capital. However, due to tax advantages of interest expenses, firm A will show a higher net income and hence, a higher return on capital.
Where is Unearned Revenue reported in the financial statements?
Answer(s): A
Unearned revenue represents "services owed" and is reported in the liability section of the balance sheet.
The balance sheet of firm A shows the following:Cash & Cash equivalents 386Receivables 119Inventories 204Marketable securities 143Short-term loans 649Current portion of long-term debt 312The cash ratio of the firm equals ________.
The cash ratio is the most conservative liquidity ratio calculated using only cash and marketable securities relative to current liabilities. Thus, Cash ratio = (cash + marketable securities)/current liabilities In this case, Cash ratio = (386+143)/(649+312) = 0.55
Which of the following are considered when applying generally accepted accounting principles.
The rules or standards of accounting determine such matters as how assets are measured, when liabilities are incurred, when income is recognized as earned, and when expenses and losses accrue.
A capital lease is recorded as ________.
According to the GAAP, leases that transfer substantially all of the benefits and risks of the property to the lessee be treated as an asset acquisition and an assumption of liability. Hence, capital leases generate an asset and a liability.
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