Loretta Plans to Start a Small Business,operated Through a Corporation

question 42

Multiple Choice

Loretta plans to start a small business,operated through a corporation.In year 0,she expects the corporation to generate a loss of $100,000.Subsequently,she expects the corporation to be profitable,and projects profit of $150,000 in year 1,and $250,000 in year 2.Using Appendix A and a 10% discount rate,calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.

• A)$52,910 total tax cost
• B)$88,250 total tax cost
• C)$94,350 total tax cost
• D)$118,800 total tax cost

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Definitions:

Receivables Turnover Ratio

A financial ratio indicating how efficiently a company collects on its accounts receivable, calculated as net credit sales divided by average accounts receivable.

Gross Accounts Receivable

The total amount of money owed to a company by its customers for goods or services delivered but not yet paid for, before any deductions for returns or bad debts.

Credit Sales

Credit sales refer to transactions where goods are sold and payment is allowed at a later date, extending credit to the buyer.

Current Ratio

A financial metric assessing a firm's capacity to settle short-term debts or obligations due within a year, determined by dividing current assets by current liabilities.