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Free CFA-Level-I Exam Braindumps (page: 481)

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Analysis, Inc. had gross sales of 5,000 last year. Its operating expenses amounted to 339 and cost of goods sold equaled 2,386. Analysis faces a corporate tax rate of 37% and had no other revenues or costs last year.
Its net income after taxes was ________.

  1. 1,647
  2. 1,433
  3. 2,275
  4. 1,308

Answer(s): B

Explanation:

Analysis' gross profit = gross sales - cost of goods sold = 5,000 - 2,386 = 2,614. The operating expenses are deductible for tax purposes. Hence, pre-tax income equaled 2,614 - 339 = 2,275. Therefore, its after-tax income equals 2,275*(1-0.37) = 1,433.



Extraordinary items are presented on the income statement:

  1. net of taxes, separate from income from continuing operations.
  2. in the footnotes, with the required disclosures.
  3. as part of income from continuing operations, before taxes.
  4. none of these answers.

Answer(s): A

Explanation:

The present GAAP applied to extraordinary items is a refined form of the "Current Operating Performance." It mandates that income effects of extraordinary items are to be separately disclosed net of taxes after the presentation of the net income from continuing operations.



Which of the following methods does a company use to determine what the balance of the allowance for uncollectible accounts should be?

  1. percent of accounts receivable
  2. neither of these answers are correct
  3. both of these answers are correct
  4. aging

Answer(s): C

Explanation:

The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.



A firm using LIFO accounting has a LIFO reserve of 4,700, with a FIFO ending inventory of 34,600. It is currently in the 40% tax bracket. If it switches to FIFO accounting for reporting purposes, it's deferred taxes ________.

  1. decrease by 2,820
  2. increase by 2,820
  3. increase by 1,880
  4. decrease by 1,880

Answer(s): C

Explanation:

When the firm switches from LIFO to FIFO, it must recognize the additional tax liability that arises because the taxes not paid in the past will now have to be paid. This liability equals the LIFO reserve times the current tax rate and must be added to the deferred taxes account (to be completely accurate, you would have to go back all the way to the inception of the firm and recalculate historical taxes. This is never done).






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