When a Firm Retains Cash, It Pays Corporate Tax on the Interest

question 61

Multiple Choice

When a firm retains cash, it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed ________.

• A) once
• B) at a rate of zero
• C) twice
• D) none of the above

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Definitions:

LIFO Reserve

The difference between the cost of inventory calculated using the Last In, First Out method and the First In, First Out method, reflecting the impact of inflation on inventory valuation.

Balance Sheet

A summary document detailing a firm's assets, liabilities, and equity held by shareholders at a certain moment.

Cumulative Effect

The total impact of one or more changes in accounting policies or corrections of errors made in previous years, reflected in the current year's financial statements.

Just-In-Time Inventory

A strategy that companies use to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.