Why May a Large Increase in Earnings Not Translate into a Large

question 5

Multiple Choice

Why may a large increase in earnings not translate into a large increase in dividends?

• A)the earnings will be taxed.
• B)some investors may prefer capital gains.
• C)managers wish to assess the earning's persistence.
• D)the earnings may already be a part of retained earnings.

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Definitions:

Net Operating Income

The financial gain a company receives from its essential business operations, prior to the removal of interest and tax costs.

Variable Costing

Variable costing is an accounting method that only includes variable production costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of a product.

Net Operating Income

The total profit of a company after all operating expenses are subtracted from total revenues but before deducting taxes and interest.

Absorption Costing

An accounting method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a unit of a product.