978-0133423822 chapter 3 Part 2

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13) Based on the information contained in Table 3, what is Snark Enterprise’s gross proit

margin in 2012.

A) 5.6%

B) 4.5%

C) 29.7%

D) 2.2%

Question Status: New question

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

14) Which of the following best represents operating income?

A) Income after inancing activities

B) Earnings before interest and taxes

C) Income from capital gains

D) Income from discontinued operations

Question Status: Previous edition

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

15) Which of the following best represents the stream of income that is available to

stockholders?

A) Net proit after tax

B) Earnings before interest, taxes and dividends

C) Gross proit

D) Operating proit

Question Status: Revised

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

16) Which of the following is NOT included in operating income?

A) Cost of goods sold

B) Sales

C) Taxes

D) Operating expenses

Question Status: Previous edition

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

17) Using the information provided, calculate net income for 2013. Assume a tax rate of 35

percent.

Year 2013

Inventory $5,000

Revenues 200,000

Depreciation expense 5,000

Cost of goods sold 100,000

Interest expense 10,000

Operating expenses 30,000

A) $35,750

B) $44,000

C) $50,000

D) $19,250

Question Status: Revised

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

18) The practice of shifting income from good years to poor years in order to show a record

of steady growth is

A) known as earnings management and is considered unethical.

B) highly recommended but not required by GAAP.

C) a basic requirement of accrual accounting.

D) impossible if Generally Accepted Accounting Principles are followed.

Question Status: New question

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 5: Individuals respond to incentives.

19) Firms should compare their gross, operating and net proit margins to past years and

other companies in order to

A) evaluate the irm’s performance.

B) identify expenses that seem to be out-of-line

C) better manage the reporting of the irm’s earnings.

D) Both A and B.

Question Status: New question

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

20) The income statement represents a snapshot of account balances at one point in time.

Question Status: Previous edition

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

21) Generally Accepted Accounting Principles (GAAP) require companies to smooth

earnings by shifting some proits from good years to bad years.

Question Status: New question

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

22) The income statement describes the inancial performance of a irm over a ixed period

such as a quarter or a year.

Question Status: Revised

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

23) On an accrual basis income statement, revenues and expenses always match the irm’s

cash low.

Question Status: Previous edition

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

24) Corporate income statements are usually compiled on an accrual, rather than cash,

basis.

Question Status: Previous edition

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

25) The company’s gross proit margin is EBIT divided by net sales.

Question Status: New question

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

Table 4

Financial Data for Dooley Sportswear, December 31, 2013

Inventory $206,250

Interest expense 5,000

Accumulated depreciation 442,500

Cash 180,000

Net sales (all credit) 1,500,000

Accounts receivable 225,000

Operating expenses 525,000

Cost of goods sold 937,500

Accounts payable 168,750

Prepaid insurance 80,000

Accrued wages 65,000

Federal income taxes 5,750

26) From the scrambled list of items presented in Table 4, prepare an income statement

Dooley Sportswear Company. Not all items from Table 4 will be used.

Question Status: Previous edition

Objective: 3.2 Evaluate irm proitability using the income statement.

Keywords: income statement

Principles: Principle 3: Cash Flows Are the Source of Value

3.3 Corporate Taxes

1) 2013 U.S. Corporate tax rates are shown below:

Taxable Income Marginal Tax Rate

$0-$50,000 15%

$50,001-$75,000 25%

$75,001-$100,000 34%

$100,001-$335,000 39%

$335,001-$10,000,000 34%

$10,000,001-

$15,000,000 35%

$15,000,001-

$18,333,333 38%

Over $18,333,333 35%

RJH Inc. has earnings before taxes of $100,000 in 2013. The company‘s tax expense will be

A) $22,250

B) $24,670

C) $25,000

D) $34,000

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

2) 2013 U.S. Corporate tax rates are shown below:

Taxable Income Marginal Tax Rate

$0-$50,000 15%

$50,001-$75,000 25%

$75,001-$100,000 34%

$100,001-$335,000 39%

$335,001-$10,000,000 34%

$10,000,001-

$15,000,000 35%

$15,000,001-

$18,333,333 38%

Over $18,333,333 35%

Boufard Co. has earnings before taxes of $100,000,000 in 2013. The company‘s tax

expense will be

A) $3,500,000

B) $36,500,000

C) $31,875,000

D) $35,000,000

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

3) A & K Co. expects to have earnings before taxes of $250,000 to $300,000. The

company’s marginal tax rate is 39% and its average tax rate about 33%. For every

additional dollar of interest expense, A & K’s taxes will

A) increase by 39 cents.

B) fall by 39 cents.

C) be unafected.

D) fall by about 33 cents.

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

4) A & K Co. expects to have earnings before taxes of $250,000 to $300,000. The

company’s marginal tax rate is 39% and its average tax rate about 33%. For every

additional dollar A & K pays out in common dividends, its income tax liability will

A) increase by 39 cents.

B) fall by 39 cents.

C) be unafected.

D) fall by about 33 cents.

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

5) Tax tables are based on ________ tax rates.

A) marginal

B) average

C) implied

D) investment

Question Status: Previous edition

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

6) The marginal tax rate would equal the average tax rate for irms with earnings less than

$50,000 or more than $18,333,333.

Question Status: Revised

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

7) The interest payments on corporate bonds are tax-deductible.

Question Status: Previous edition

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

8) A corporation’s average tax rate will always be lower than or equal to its marginal tax

rate.

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

9) The highest marginal corporate tax rate is 35%.

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

10) When analyzing the cash lows from a new project proposal, a company should always

use its marginal tax rate.

Question Status: New question

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

11) Pearls, Inc. had sales in 2013 of $2.1 million. The common stockholders received

$600,000 in cash dividends. Interest totaling $150,000 was paid on outstanding debts.

Operating expenses totaled $300,000, and cost of goods sold was $500,000. What is the

tax liability of Pearls, Inc.? 2013 U.S. Corporate tax rates are shown below:

Taxable Income Marginal Tax Rate

$0-$50,000 15%

$50,001-$75,000 25%

$75,001-$100,000 34%

$100,001-$335,000 39%

$335,001-$10,000,000 34%

$10,000,001-

$15,000,000 35%

$15,000,001-

$18,333,333 38%

Over $18,333,333 35%

Question Status: Revised

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value

12) Goodwin Enterprises had a gross proit of $2,500,000 for the year. Operating expenses

and interest expense incurred in that same year were $595,000 and $362,000, respectively.

Goodwin had 200,000 shares of common stock and 180,000 shares of preferred stock

outstanding. Management declared a $2.50 dividend per share on the common and a $1.50

dividend per share on the preferred. Securities purchased at a cost of $37,500 in a

previous year were resold at a price of $50,500. Compute the taxable income and the

resulting tax liability for Goodwin Enterprises for the year.

Use the following tax rates:

Income Tax rate

$0-$50,000 15%

$50,001-$75,000 25%

$75,001-$100,000 34%

$100,001-$335,000 39%

over $335,001 34%

Question Status: Revised

Objective: 3.3 Estimate a irm’s tax liability using the corporate tax schedule and distinguish

between the average and marginal tax rate.

Keywords: tax liability

Principles: Principle 3: Cash Flows Are the Source of Value