On January 1, 1992, Carter Inc. purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10 year life. The equipment was sold December 31, 1996 for 50% of itsoriginal cost. If the equipment's disposition resulted in a reported loss, which of the following depreciation methods did Carter use?
Answer(s): A
The straight-line method yields the lowest amount of depreciation for the early part of the depreciable life of the asset. Because only 50% of the original cost was received and straight-line accumulated depreciation equaled 40% of cost ((100%-20%) / 10 years X 5 years( at time of sale, a 10% loss (50%-(100%-40%)) occurs.
The accounting equation reads:
Answer(s): B
The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.
Which of the following is NOT an objective of the conceptual framework devised by FASB?
Answer(s): D
The conceptual framework devised by FASB is not concerned with enforcing any rigid standards of accounting disclosures. Rather, it is a system of laying out the goals and objectives of accounting disclosure and formulating standards which could best serve the needs of the industry. In such a framework, a fair amount of flexibility is built-in so that the differing characteristics of various industries can be accommodated. The various SFACs which comprise the conceptual framework are the foundation on which the detailed principles and pronouncements of the FASB are based.
In a common-size balance-sheet statement, a firm's current assets are reported at 37% and the long- term liabilities are at 12%. The equity is shown to be 64%. The firm's current ratio equals ________.
In a common-size balance-sheet statement, all quantities are expressed as a fraction of the total assets.Therefore, since equity equals 64%, total liabilities equal 36%, of which 12% equals long-term liabilities. Thus, current liabilities equal 24%, giving the current ratio equal to 37%/24% = 1.54.
Under an inflationary environment with stable inventories, a firm may change to FIFO from LIFO due to which ofthe following reason(s)?
Under FIFO, inventory is overstated and hence, working capital is overstated under normal, inflationary conditions. At the same time, COGS is lower than under LIFO due to rising prices, increasing the taxable income and leading to higher taxes. However, firms cannot manipulate earnings under FIFO by changing purchasing patterns at the end of an accounting period, as it is able to do under LIFO, because FIFO prices are determined by the earliest goods purchased in the inventory.
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