Which of the following best describes retained earnings?
Answer(s): E
Retained earnings represent the earned capital of a firm. It consists of the accumulated undistributed earnings (net profits, less cash dividends) of a firm since inception.
Which of the following would be reported as an extraordinary item?
Answer(s): C
An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.
Permanent earnings refers to
Answer(s): D
Permanent earnings is similar to economic earnings; it is the base to which a multiple is applied to arrive at a "fair price."
If the beginning inventory is overstated and the ending inventory is understated, which of the following is/are true:
COGS = Beginning inventory - Ending inventory + Purchases Hence, if BI is overstated and EI understated, COGS is overstated, implying income is understated. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.
Which of the following is NOT a change in accounting?
Answer(s): B
Correction to an accounting error is not considered a change in accounting. It is treated as a "prior period adjustment" to the beginning balance of retained earnings. All other are considered accounting changes.
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