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QUESTION: 1886

When prices are falling, which of the following is/are true?

FIFO results in higher current assets.
II. LIFO results in higher taxes.
III. LIFO results in higher income.
IV. FIFO allows earnings manipulation through purchasing behavior.
II & III
II, III & IV
I & IV
II only

Answer(s): A

Explanation:

When prices are falling, the units purchased later have a lower purchase price. Therefore, under the FIFO cost- flow assumption, the higher cost goods will be assumed to have been sold first. This will raise COGS, lower the ending inventory value (and therefore lower current assets), lead to lower income and hence lower income taxes compared to LIFO. However, earnings manipulation is not possible under FIFO.

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QUESTION: 1887

If an overstatement of depreciation by 100 and an understatement of accounts receivables by 40 causes a firm's net income to be understated by 70, the firm's tax rate is ________.

Answer(s): D

Explanation:

An overstatement of depreciation by 100 causes the income to be understated by 100*(1-tax rate). Hence, tax rate = 30%.

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QUESTION: 1888

Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

Cash $725,000 Accounts receivable (net) $1,640,000 Inventories $2,945,000 Total current assets $5,310,000 Accounts payable $1,236,000 Accrued liabilities $831,000 Total current liabilities $2,067,000

Cash $725,000
Accounts receivable (net) $1,640,000
Inventories $2,945,000
Total current assets $5,310,000
Accounts payable $1,236,000
Accrued liabilities $831,000
Total current liabilities $2,067,000

The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997. Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's current liabilities would have been

unchanged by either the dividend declaration or the dividend distribution.
unchanged by the dividend declaration and decreased by the dividend distribution.
decreased by the dividend declaration and increased by the dividend distribution.
increased by the dividend declaration and decreased by the dividend distribution.
increased by the dividend declaration and unchanged by the dividend distribution.

Answer(s): A

Explanation:

The declaration and distribution of a stock dividend involves transferring an amount from retained earnings to common stock. However, there is no impact on current liabilities as there is no future obligation created to distribute cash.

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