When the weighted average method is used, ending inventory units are priced at the:
Answer(s): A
Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period).
The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the:
An entry made to recognize the cost of using an asset during the period is
Answer(s): D
Expenses should be recognized in the period in which they are incurred. In order to be consistent with the matching principle, an adjusting entry must be made to record the expense of using certain assets.
If a firm's asset turnover were to increase by 10% and the tax rate were to increase from 35% to 40%, leaving all else constant, the resultant change in the firm's ROE equals ________.
Answer(s): C
ROE = Net income/Equity. Using the Extended duPont System, = (EBT/sales)*(sales/total assets)*(total assets/ equity)*(1-tax rate) The asset turnover ratio equals sales/total assets. Therefore, ROE(after)/ROE(before) = [asset turnover(after)/asset turnover(before)*]*[0.6/0.65] = 1.1*0.6/0.65 = 1.015. Thus, the ROE increases by 1.5%.
New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, if New Gestalt had 300,000 warrants with a strike of 36 outstanding instead of the convertible bonds, its Diluted EPS would equal ________.
For Diluted EPS with warrants, numerator = net income - preferred dividends = 1.7 million - 375,000 = 1,325,000. Using the Treasury stock method, the additional shares due to warrant exercise = 300,000*(1 - 36/39) = 23,077. Total number of shares used in Diluted EPS = 200,000 + 23,077 = 223,077. Therefore, Diluted EPS = 1,325,000/223,077 = 5.94.
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