Charles Scrab Inc Has Beginning Inventory of $15,000, Purchases of $25,000

question 92

Multiple Choice

Charles Scrab Inc has beginning inventory of $15,000, purchases of $25,000, and ending inventory of $10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 2010. An accounting clerk input the ending inventory as $12,000. What is the effect on 2011 net income?

• A)Net income for 2011 will be $1,200 higher than 2010.
• B)Net income for 2011 will be $1,200 lower than 2010.
• C)Net income for 2011 will be $10,200.
• D)Net income for 2011 cannot be calculated with the information given.

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Definitions:

Interest Tax Shield

A deduction allowed for the interest paid on debt, thereby reducing taxable income and the total tax owed.

M&M Proposition I

outlines that in a perfect market, without taxes and transaction costs, a company's value is unaffected by its capital structure.

Direct Bankruptcy Costs

The expenses incurred by a company when going through the process of declaring bankruptcy, including legal fees, accounting fees, trustee fees, and other associated administrative expenses.

Pre-Packaged Bankruptcy

A plan for financial reorganization that a company prepares in cooperation with its creditors before filing for bankruptcy.