Question 1

Which of the following is the amount of shareholders' equity on the company's books for each share of its capital?

Accepted Answer

Book value is the amount of shareholders' equity on the company's books for each share of its capital.

Question 2

Which of the following factors may cause a difference between book profit and taxable income?

Accepted Answer

The use of different depreciation methods for book and tax purposes can lead to differences in reported profit and taxable income.

Question 3

Normally, a company's book profit and taxable income should be the same.

Accepted Answer

A company's book profit and taxable income may differ due to differences in accounting methods and tax laws. For example, a company may use accelerated depreciation for tax purposes but straight-line depreciation for book purposes, resulting in different levels of taxable income and book profit.

Question 4

Amethyst Company's income statement shows net profit before income tax of $56 000. The company's tax return shows taxable income of $64 000. Company's tax rate is 30%. Which of the following entries would be used to record tax expense and tax payable?

Accepted Answer

The tax expense is based on accounting profit ($56,000 x 30% = $16,800), while the tax payable is based on taxable income ($64,000 x 30% = $19,200). The difference of $2,400 is recorded as a future income tax benefit.

Question 5

Sheffield Company had $42 000 of net profit in 2013. Equity at the beginning of the year was $1 200 000 and at the end of the year was $1 600 000. Sheffield has no preference shares. Please calculate the rate of return on ordinary shareholders' equity. (Please round to three decimal places.)

Accepted Answer

The rate of return on ordinary shareholders' equity is calculated as Net Profit divided by Average Equity. Average Equity = ($1,200,000 + $1,600,000) / 2 = $1,400,000. Rate of Return = $42,000 / $1,400,000 = 0.030 or 3.0%.

Question 6

If a company has a strong rate of return on ordinary shareholders' equity, that is an indication of strong profitability.

Accepted Answer

A strong rate of return on ordinary shareholders' equity indicates that the company is generating a good return on the investments made by its shareholders, which is a key indicator of profitability.

Question 7

If a company has a strong rate of return on ordinary shareholders' equity, that is an indication of good cash flow.

Accepted Answer

The answer of If a company has a strong rate...

Question 8

A company's income tax expense is calculated on the basis of book profit, but the income tax payable amount is based on the:

Accepted Answer

Income tax payable is based on taxable income, which is calculated according to tax laws and reported on the income tax return, not on book profit.

Question 9

Deferred tax would normally arise from which of the following situations?

Accepted Answer

Deferred tax arises when there is a difference between the accounting treatment of an item in the financial statements and its treatment for tax purposes, such as when a company makes different choices for its tax return versus its book net profit.

Question 10

Onyx Company's income statement shows net profit before income tax of $38 000. The company's tax return shows taxable income of $34 000. Company's tax rate is 30%. Which of the following entries would be used to record tax expense and tax payable?

Accepted Answer

The tax expense is calculated on the net profit before tax ($38,000 * 30% = $11,400), while the tax payable is based on taxable income ($34,000 * 30% = $10,200). The difference of $1,200 is recorded as a deferred tax liability.

Question 11

Which of the following measures a company's success in using assets to earn income?

Accepted Answer

The rate of return on total assets measures how effectively a company is using its assets to generate earnings.

Question 12

If a company has a strong rate of return on total assets, that shows that they can easily pay off their current liabilities with their current assets.

Accepted Answer

A strong rate of return on total assets indicates that the company is generating a high amount of profit relative to their assets, but it does not necessarily indicate that they can easily pay off their current liabilities with their current assets. The ability to pay off current liabilities is generally measured by the current ratio or quick ratio.

Question 13

The rate of return on total assets and the rate of return on ordinary shareholders' equity are used to evaluate the:

Accepted Answer

These ratios measure how effectively a company is using its assets and equity to generate profits, thus evaluating the profitability of the business.

Question 14

Which of the following shows the relationship between net profit available to ordinary shareholders and average ordinary equity?

Accepted Answer

The rate of return on ordinary shareholders' equity measures the profitability relative to the equity held by ordinary shareholders, showing the relationship between net profit available to them and average ordinary equity.

Question 15

Deferred tax can either be an asset or a liability.

Accepted Answer

Deferred tax can either be an asset or a liability depending on whether temporary differences create future tax benefits or future tax obligations.

Quiz 24: Appendix