A Company Failed to Record Unrealized Gains of $20 Million

question 83

Multiple Choice

A company failed to record unrealized gains of $20 million on its trading security investments. Its tax rate is 30%. As a result of this error, total shareholders' equity would be:

• A)Understated by $14 million.
• B)Understated by $7 million.
• C)Understated by $20 million.
• D)Unaffected.Unrealized gains on trading securities are included in earnings, so retained earnings would be increased by the after-tax amount: $20,000,000 (1 30%) = $14,000,000.

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Definitions:

Cash Flows

The total sum of cash and cash-equivalent assets moving in and out of a company.

Income Tax Payable

The amount of income tax a company owes to the government but has not yet paid.

Direct Method

A way to prepare the cash flow statement, where operating cash receipts and payments are listed directly to calculate net cash from operating activities.

Cash Payments

Financial transactions that involve the transfer of cash from one entity to another.