Firm A currently shows assets worth 2,000 and equity of 1,500. During the year, it capitalized interest expense worth 200, of which 50 was depreciated/amortized. The firm faces a tax rate of 50%. If the firm had expensed the interest paid, which of the following would be true?
Answer(s): B
If the firm's assets without capitalization equal A, then we have A+200-50 = 2,000. Hence, A = 1,850.
Contingent losses are recognized:
Answer(s): A
II and III must hold together for a recognition of contingent losses to take place. GAAP defines "probable" as "greater than 50% chance." Since this is subjective, the management has considerable discretion on the timing of recognition.
A firm has a cash conversion cycle of 31.6 days. It turns over its inventory on average in 43.1 days and pays off its payables in an average of 23.2 days. Its receivables turnover ratio equals ________.
CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period).Hence, 31.6 = Average receivables collection period + 43.1 - 23.2, giving Average receivables collection period = 31.6 - 43.1 + 23.2 = 11.7 days. Since Average receivables collection period = 365/receivables turnover, the receivables turnover ratio equals 365/11.7 = 31.2.
The cash conversion cycle equals:
Answer(s): D
The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. The first two of these represent sources of cash while accounts payable represent a future drain of cash. So the cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). A low cash conversion cycle could indicate that you are either collecting your debts or churning inventory faster or you are paying your bills slower.
Investments in debt securities classified as held-to-maturity securities should be valued at
Accounting rules specify that debt securities classified as held-to-maturity must be valued at amortized cost.
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