Question 1

Why does accounting income differ from cash flow?

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Question 2

Would the following activities increase or decrease the firm's cash balance?
a.Inventories are increased.
b.The firm reduces its accounts payable.
c.The firm issues additional common stock.
d.The firm buys new equipment.

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Question 3

Professor Diehard found an effective antibiotic for the DEPRESS virus,and patented the drug.He believes that he can sell the patent for $20 million.He then formed a corporation and invested $400,000 in setting up a production plant.If the professor's belief is correct,what are the book and market values of the firm? If there are 2 million shares of stock in the firm,what would be the price per share and the book value per share?

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Question 4

Describe the practice of double taxation of corporate earnings in the United States.

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Question 5

What is the tax liability for an individual with $52,000 of income,which includes $2,000 of dividends,if the tax rate is 15% on income up to $25,350 and 28% on income over $25,350?

Accepted Answer

First, we need to calculate the taxable income by subtracting any deductions and exemptions from the gross income. We don't have that information, so we'll assume the taxable income is equal to the gross income.

For income up to $25,350, the tax rate is 15%, which means the tax liability is:

$25,350 x 0.15 = $3,802.50

For the remaining income of $26,650 ($52,000 - $25,350), the tax rate is 28%, which means the tax liability is:

$26,650 x 0.28 = $7,462

Adding the two tax liabilities together gives us:

$3,802.50 + $7,462 = $11,264.50

Therefore, the tax liability for an individual with $52,000 of income is $11,264.50, which is choice B.

Question 6

Which statement is correct about the tax treatment of dividend income and capital gains for pension funds?

Accepted Answer

Pension funds are typically exempt from taxes on both dividend income and capital gains, allowing them to grow investments tax-free until distributions are made to beneficiaries.

Question 7

Who pays the taxes on earnings distributed as dividends?

Accepted Answer

The corporation pays taxes on its earnings before distributing dividends, and the investor pays taxes on the dividends received.

Question 8

Discuss the premise of accrual accounting.Why is it considered preferable over cash-basis accounting?

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Question 9

Discuss reasons why a market-value balance sheet may be distinctly different from a book-value balance sheet.

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Question 10

Compute the total tax liability,the average tax rate,and the marginal tax rate for the following corporation: $1,000,000 in taxable income; 15% tax up to $50,000,25% up to $75,000,34% up to $100,000,39% over $100,000.

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Question 11

Why may it be difficult to rely on profits to get an overall impression of the firm's cash flows?

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Question 12

Your bookstore is set up as an incorporated business.If you draw $70,000 from your bookstore as your salary,such that your bookstore's taxable income for the year becomes $30,000,how much personal tax and corporate tax must you pay to the federal government? By how much would your taxes change if you reduce your salary to $27,950,such that your bookstore's taxable income becomes $72,050? Assume that you pay personal taxes as an unmarried taxpayer,and that the tax rates are as shown below.

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Question 13

What is the change in cash balance for a firm with the following: $10,000 cash flow from operations,$1,600 cash used for new investment,a reduction in the level of debt of $2,000,$1,000 in cash dividends,and $200 in depreciation expense?

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Question 14

Determine the net cash flows for periods 1 through 3 for a firm with the following transactions: $1,000 spent in period 1 and $2,000 spent in period 2 to produce goods to be sold in the following periods-sales of $2,000 in period 2 and $4,000 in period 3.One-half of all sales are in cash with the other half collected in the following period.

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Question 15

Which of the following forms of income can individuals defer from taxation?

Accepted Answer

Individuals can defer taxation on unrealized capital gains by holding on to an asset without selling it. Once the asset is sold, the capital gains become realized and are subject to taxation. Dividends, interest, and realized capital gains are all taxable forms of income.

Question 16

What is the overall change in working capital resulting from the following changes? $300 increase in inventories,$150 increase in accounts payable,$120 decrease in accounts receivable,$60 decrease in other current assets,$150 decrease in other current liabilities.

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Question 17

If depreciation is a method of allocating cost rather than an actual cash flow,discuss how depreciation impacts the income statement and overall cash flows.

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Question 18

Congress passed the Sarbanes-Oxley Act in 2001.The act attempts to ensure that the firm's financial reports accurately represent its financial condition.However,general consensus thinks that accounting rules still give firms considerable leeway when preparing their financial statements.List three examples of gray areas that allow for judgment calls.

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Question 19

Determine earnings before interest and taxes,net income,and also the cash flow from operations for the following firm: $500,000 sales,$10,000 cash dividends,$300,000 cost of goods sold,$20,000 administrative expense,$20,000 depreciation expense,$40,000 interest expense,$10,000 purchase of productive equipment,no changes in working capital,and a tax rate of 35%.

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Question 20

What information is contained in the balance sheet,income statement,and statement of cash flows?

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Quiz 3: Accounting and Finance