Which of the following relationships is true?
Answer(s): C
Gross profit = Net sales - COGSOperating profit = Gross Profit - Sales & General Expenses = EBDIT Net Income = Earnings after depreciation, interest expense and taxes = Operating profit - depreciation - interest expense - taxesSince gross profit > operating profit > net income, "Gross profit margin > Operating profit margin > Net profit margin" is the correct choice.
A firm's financial data show:Taxable income 1,500Taxes paid 500Non-cash operating expenses 780Bonds retired 700Loss on retired bonds 140Then, the financing cash flow equals ________.
Answer(s): D
The firm's tax rate equals 500/1,500 = 30%. Note that loss on bonds retired is an extraordinary item under US GAAP and presented after-tax. Hence, the total cash spent on retiring bonds = 700 + 140/(1-0.3) = 900. So financing cash flow = -900.
Which of the following is/are FALSE?
Answer(s): B
Interest expenses are treated as operating cash flows under US GAAP. Capitalization leads to higher net income since the entire expenses are not charged against it. Due to this, the tax deductions are lower in the first year, leading to higher taxes. The higher income leads to the capitalizing firm having a higher equity. The difference in equity reduces over time to zero.
The deferred income tax account
The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes. It can be reported as an asset or a liability, depending on its balance and the circumstances.
In periods of rising prices, which inventory costing method results in the smallest income tax expense?
LIFO assigns the largest dollar value amounts to COGS when purchase prices are rising, thus resulting in lower net income and lower income taxes.
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