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34 Cards in this Set
- Front
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A business should maintain accurate depreciation records of capital assets to... a) track the value of its fixed (physical) assets. b) reflect all production costs in the price of its goods and services. c) accurately determine its income tax credits or liabilities. d) All of these answers. |
D) All of these answers |
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2. A capital (physical) asset’s annual accounting depreciation is ... a) equal to its purchase price less its total depreciation b) equal to its current market value less its total depreciation c) equal to its market value at the beginning of a year minus its market valueat the end of the year. d) formula-based (straight line, declining balance , etc.) e) None of these answers. |
d) formula-based (straight line, declining balance , etc.) |
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The Declining Balance (DB) depreciation method is always preferred to theStraight Line (SL) depreciation method because the DB method completely andmore rapidly depreciates a fixed asset than the SL method. a) True b) False |
b) False |
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Which of the following statements is true? a) Smaller depreciation charges lead to more taxable income, smaller taxliabilities and smaller after-tax cash flows. b) Smaller depreciation charges lead to less taxable income, smaller taxliabilities and smaller after-tax cash flows. c) Higher depreciation charges lead to less taxable income, larger taxliabilities and larger after-tax cash flows. d) Higher depreciation charges lead to less taxable income, smaller taxliabilities and larger after-tax cash flows. e) None of the above answers. |
d) Higher depreciation charges lead to less taxable income, smaller tax liabilities and larger after-tax cash flows. |
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A major difference between the analysis of private sector projects and theanalysis of public sector projects is that the analysis of a) private sector projects includes all tangible and intangible impacts whilethe analysis of public sector projects is limited to tangible impacts. b) private sector projects includes only tangible impacts as does the analysisof public sector projects. c) private sector projects include only tangible impacts while the analysis ofpublic sector projects includes both tangible and intangible impacts. d) None of these answers. |
c) private sector projects include only tangible impacts while the analysis of public sector projects includes both tangible and intangible impacts. |
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The net income (i.e., income after tax from the “Income and Expense Statement”)of a business is equal to its a) before-tax cash flow + income taxes paid + annual depreciation. b) after-tax cash flow + income taxes paid. c) before-tax cash flow + income taxes paid + annual depreciation. d) after-tax cash flow - annual depreciation. e) None of these answers. |
d) after-tax cash flow - annual depreciation. |
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A company’s annual income taxes are considered explicit cash flows while itsannual depreciation charges are implicit cash flows. a) True b) False |
a) True |
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At the end of a physical asset’s projected service life, its book and salvagevalues will always be equal with the straight line (SL) depreciation method but willmost likely differ with the Declining Balance (DB) depreciation method. a) True b) False |
a) True |
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When the service requirements for a capital asset extend beyond the defender’sremaining service life, it is usually assumed that the defender will be replaced by a) a lower-cost asset b) the challenger c) an asset with an identical cost. d) None of these answers |
c) an asset with an identical cost. |
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The half-year rule was introduced by the Government of Canada in 1981 to a) provide incentives to businesses for the purchase of more physical assets. b) alleviate the income tax burden of businesses with significant income fromoperations c) minimise the income tax advantage arising from the purchase ofphysical assets. d) increase business operating profits. |
c) minimise the income tax advantage arising from the purchase of physical assets. |
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The cash flow analysis of a private project can be performed from twoperspectives: a) Efficiency and equity b) Insider and outsider c) Project and sponsors (owners) d) Balance Sheet and Income/Expense financial statements |
c) Project and sponsors (owners) |
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Economic life is defined as the a) period of time after which an asset can no longer be repaired orrefurbished so that it can perform a useful function b) period of time after which an asset cannot perform its intended functionwithout a major overhaul c) length of time an asset might reasonably be expected to be useful in theproduction of income. d) period of time over which a prudent owner will retain an existing facility tominimise costs. |
d) period of time over which a prudent owner will retain an existing facility to minimise costs. |
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The defender is beyond its economic life when its marginal cost (or its cost forthe coming year) is a) less than the annual equivalent cost for its economic life. b) equal to the annual equivalent cost for its economic life. c) larger than the annual equivalent cost for its economic life. d) independent of the annual equivalent cost for its economic life. |
c) larger than the annual equivalent cost for its economic life. |
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The after-tax cash flow is a) sensitive to the method selected to capture the declining value of a capitalasset. b) not sensitive to the method selected to capture the declining value of acapital asset. |
a) sensitive to the method selected to capture the declining value of a capital asset. |
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What is the formula for the conventional benefit-cost ratio, using PW? |
PW(Project Benefits)/(PW(Project Costs)-PW( Salvage Value)) |
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Aside from PW, what other measures can be used in benefit-cost ratios? |
AEW and FW |
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What is the formula (PW) of a modified benefit-cost ratio? |
(PW(Benefits-Operating and maintenance costs))/(PW(Initial Cost)-PW(Salvage value)) |
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How should benefit-cost ratios be used to choose between mutually exclusive projects, and what is the decision criteria? |
The incremental BCR is used (delta B/delta C); it is applied only after determining that at least one project has a valid BCR. The best project is chosen after all possible pairs have been compared by BCRs. |
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How should benefit-cost ratios be used to choose between independent projects, and what is the decision criteria? |
All projects with acceptable BCRs are selected (no capital rationing) The only decision criteria is for B/C >= 1 |
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What is equity (how is it found in a balance sheet?) |
Equity is the personal stake of owners in the firm's total assets. This is equal to the total assets - total liabilities. |
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How are income and expense statements calculated? |
Operating revenues (sales, investment income) - Operating expenses (salaries, utilities, loan interest, purchases, depreciation) = Income BEFORE taxes Subtract income taxes from this to get Net Profit (after taxes) |
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What are liquidity ratios and how are they calculated? |
Liquidity ratios are a firm's ability to meet unforeseen cash flow fluctuations (larger ratio = better ability) There are two kinds of liquidity ratios: 1. Current ratio (or working capital) = current assets/current liabilities 2. Acid-test ratio (quick ratio) = quick assets (current assets that can be quickly turned into cash)/current liabilities |
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What is a leverage or debt management ratio, and how is it calculated? |
A leverage ratio is the extent to which a firm relies on debt (bank loans, bond, etc.) An equity ratio is a kind of leverage ratio. Equity ratio = total owner's equity/total assets |
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What is an asset-management (efficiency or effectiveness) ratio and how is it calculated? |
An asset-management ratio assesses how how efficiently a firm is using its asset. A type of this ratio is an Inventory Turnover Ratio. ITR = total sales (over a period) / inventory (at one point) |
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What is a profitability ratio and how is it measured? |
A profitability ratio looks at how well assets have been used in creating a profit. A type of profitability ratios is return-on-assets (ROA) or net-profit ratios. ROA = Net income (before extraordinary items, after taxes)/total assets This can also be a return-on-equity ratio. ROE = Net income (same conditions)/Total equity |
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What is the cost principle of accounting? |
Assets are valued based on their cost rather than market or other values. |
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What is a balance sheet and how are its sections calculated? |
A balance sheet is a snapshot of a firm's financial position at a particular point in time. It lists assets, liabilities, and owners' and shareholders' equity. Assets include current (convertible to cash within a year) and long-term. Liabilities are claims on assets; this includes current (due within a year) and long-term. Owner's equity is assets - liabilities. It appears as par value (price per share when first issued) and retained earnings (cumulative sum from normal operations, retained to purchase more assets) |
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What are three reasons for depreciation? |
1. Use-related physical loss 2. Time-related physical loss 3. Functional loss (due to legislation, style, etc.) |
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What is the market value of an asset? |
The actual value at which an asset can be sold for in an open market. |
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What is the book value of an asset? |
The depreciation value for accounting purposes found using a depreciation model |
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What is the scrap value of an asset? |
The actual value at the end of an asset's physical life, or an estimate of this value using a depreciation model. |
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What is the salvage value of an asset? |
The actual value at the end of an asset's useful life, or an estimate of this value using a depreciation model. |
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What are the formulas for straight-line depreciation per period (Dsl(n)) and book value (BVsl(n))? |
Dsl(n) = (P - S)/N BVsl(n) = (P - n)*(P - S)/N P = purchase price or current market value S = salvage value of asset in periods N = useful life of asset in periods |
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What is the formula for net salvage value (NSV)? |
NSV = salvage value - tax rate (salvage value minus depreciation over specified period) |
