Under an inflationary environment with a constant inventory quantity, the LIFO Reserve tends to ________.
Answer(s): A
As prices increase and LIFO layers are maintained, the inventory value at FIFO keeps increasing while that at LIFO remains constant. Hence, the reserve keeps increasing.
At December 31, 1996, Eaton Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 1997 at a cost of $1,500,000. In 1997, Eaton appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in 1998. In its 1997 balance sheet, what amount should Eaton report as appropriated retained earnings?
Answer(s): E
Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. This is done by reducing retained earnings and transferring the money to appropriated retained earnings. When the appropriation is no longer necessary, the money is moved back to retained earnings.
Which of the following would not be a limitation of the balance sheet?
The balance sheet does not report the market value of a firm's assets, liabilities, or equity, although the information provided can be useful when estimating the market value of the firm or its securities.
Which combination leads to the lowest income tax paid in earlier years of a firm?Inventory valuationDepreciation
In the earlier years, this combination results in the lowest income reported and hence, the lowest taxes.
A firm has a constant pre-depreciation income using assets that last 5 years. The straight-line method results in a rate of return that ________ over the life of the assets. The accelerated methods result in a rate of return that ________ over the life of the assets.
The straight line and all accelerated depreciation methods giving an increasing rate of return on assets over the asset life (the pre-depreciation income is held constant to isolate the effect). This is a mathematical fact which you can easily prove.
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