Question

Please give me the correct answer:

Lucy’s Music Emporium purchased $50 million in fixed assets in January and their accountant told them that they would have to depreciate the assets over 20 years (they use the same depreciation calculations for shareholder reporting and income tax purposes). In December they learned that their accountant did not have a college degree and fired him. They hired a new accountant with a college degree and she told them that they could depreciate the assets over 15 years. How would the new depreciation assumption affect the company's financial statements relative to the old assumption?

1. The firm's EBIT would increase.

2. The firm's cash position would increase, all else held equal.

3. The firm's reported earnings per share would increase.

4. The firm's reported net fixed assets would increase.

5. The firm's net liabilities would increase.

Which of the following statement is incorrect?

1. Most of the answers are correct.

2. Total net operating capital = NOWC + Operating long-term assets.

3. Cost of goods sold (COGS) are the revenues less any discounts or returns.

4. An S corporation is a small corporation which, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization.

5. Accounts receivable arises when a firm sells its products to customers but does not demand immediate payment, and the customers then have obligations to make the payment at a later time, usually less than a year.

Which of the following statement is incorrect?

1. Most of the answers are correct.

2. A firm’s balance sheet is a statement of the firm’s financial position at a specific point in time.

3. Retained earnings is the portion of the firm’s earnings that have been saved rather than paid out as dividends.

4. Operating long-term liabilities are the liabilities that are a natural consequence of the firm’s operations, such as accounts payable and accruals and include notes payable or any other short-term debt that charges interest.

5. S corporations are businesses that have the limited-liability benefits of the corporate form of organization yet are taxed as partnerships or proprietorships.

Which of the following statement is incorrect?

1. A capital gain occurs when an asset is sold for less than its book value.

2. The income statement reports the results of operations over a period of time, and it shows earnings per share as its “bottom line.”

3. The LIFO (last-in, first-out) method assumes that the items most recently placed in inventory are the first ones used in production.

4. Most of the answers are correct.

5. On a typical balance sheet, cash, short-term investments, accounts receivable, and inventories are listed as current assets because those items are expected to converted into cash within a year.

Jessie's Bobcat Rentals' operations provided a negative net cash flow last year, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles?

1. The company sold some of its fixed assets.

2. The company retired a large amount of its long-term debt.

3. The company dramatically increased its capital expenditures.

4. The company repurchased some of its common stock.

5. The company had high depreciation expenses.

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

1. The company pays a dividend.

2. The company repurchases common stock.

3. The company gives customers more time to pay their bills.

4. The company issues new common stock.

5. The company purchases a new piece of equipment.

Which of the following statement is correct?

1. All the answers are incorrect.

2. The income statement begins with assets, which are the “things” the company owns.

3. Cost of goods sold (COGS) reflects the estimated costs of the assets that wear out in producing goods and services.

4. Gross income is defined as taxable income less a set of exemptions and deductions which are spelled out in the instructions to the tax forms individuals must file.

5. The fundamental value of a company to its investors depends on the present value of its expected future FCFs which are discounted at the company’s weighted average cost of capital (WACC).

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

1. The company would have to pay less taxes.

2. The company's net income would increase.

3. The company's taxable income would fall.

4. The company would have less common equity than before.

5. The company's interest expense would remain constant.

Answer 1

Answer (1): Due to a reduction in life of asset it will result in an increase in the value of depreciation. If a company is showing Accumulated depreciation liability side of the balance sheet (instead of reducing from asset side), it will result in an increase of liability. So the answer is 5th Option.

Answer(2) 1,2 and 3rd is incorrect

Answer(3) All are correct

Answer (4) 1 is incorrect i.e. A capital gain occurs when an asset is sold for less than its book value.

Answer (5) The company sold some of its fixed assets. Because this activity will not affect operating activity.

Answe (6) The company issues new common stock. would increase company's cash balance.

Answer (7) The fundamental value of a company to its investors depends on the present value of its expected future FCFs which are discounted at the company’s weighted average cost of capital (WACC).

Answer (8) 2. The company's net income would increase, due to reduction in interest cost.