Question Details

How would the new depreciation assumption affect the company's financial statements 



1.	The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
a.	LeMond's tax liability for the year will be lower.
b.	LeMond's taxable income will be lower.
c.	LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year.
d.	LeMond's cash position will improve (increase).
e.	LeMond's reported net income after taxes for the year will be lower.


	

	2.	Lucy's Music Emporium opened its doors on January 1, 2012, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 20 years, but in December 2012 management realized that the assets would last for only 15 years. The firm's accountants plan to report the 2012 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?
a.	The firm's net liabilities would increase.
b.	The firm's reported net fixed assets would increase.
c.	The firm's EBIT would increase.
d.	The firm's reported 2012 earnings per share would increase.
e.	The firm's cash position in 2012 and 2013 would increase.


		

	3.	DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?
a.	The firm's reported net income would increase.
b.	The firm's operating income (EBIT) would increase.
c.	The firm's taxable income would increase.
d.	The firm's net cash flow would increase.
e.	The firm's tax payments would increase.


	4.	Which of the following statements is CORRECT?
a.	If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.
b.	Dividends paid reduce the net income that is reported on a company's income statement.
c.	If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
d.	If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.
e.	Accounts receivable are reported as a current liability on the balance sheet.




	5.	Which of the following statements is CORRECT?
a.	One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.
b.	If a firm reports positive net income, its EVA must also be positive.
c.	One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
d.	One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
e.	Actions that increase reported net income will always increase net cash flow.




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