Dimension 3 - 105 -139

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What is the basis for reporting notes payable in financial statements?

Face value

Present value of expected future payments (correct)

Fair market value

Historical cost

How should commitments such as alimony or charitable pledges be reported?

At face value

At historical cost

At the discounted present amount (correct)

At fair market value

What type of details should a financial statement disclose about notes payable?

Only the maturity date

Maturities, interest rates, collateral, and other pertinent details (correct)

Only the principal amount

Nothing beyond the total owed

Under what conditions should commitments be reported at a discounted present amount?

If there is no requirement of future service by others Signup and view all the answers

Why is it important to consider other liabilities and contingent liabilities in financial analysis?

To avoid hidden liabilities not recorded in the financial statement Signup and view all the answers

What is the purpose of adjusting for noncash items in cash flow estimation?

To align income and expenses with actual cash receipts and payments. Signup and view all the answers

In cash flow estimation, why are rents and royalties generally skipped?

Because they are usually obtained from a separate tax form. Signup and view all the answers

When estimating cash flow, why are gains and losses often ignored?

Because they do not necessarily indicate actual cash flow. Signup and view all the answers

What is the primary difference between the direct and indirect methods of cash flow analysis?

The indirect method involves fewer adjustments than the direct method. Signup and view all the answers

Why might some partnerships retain cash instead of distributing it to partners?

To encourage reinvestment in the business. Signup and view all the answers

What is the maximum amount that each taxpayer can deduct per year under Section 179?

$100,000 Signup and view all the answers

In the scenario where a corporation pays a 40% tax rate and distributes all after-tax income to shareholders taxed at 20%, how much is available after-tax for shareholders from a taxable income of $10,000?

$4,800 Signup and view all the answers

For S corporations to qualify as such, how many shareholders are they allowed to have according to the provided text?

75 shareholders Signup and view all the answers

What is one of the key distinguishing factors for partnerships in terms of taxation compared to corporations?

Partners pay taxes on their share of pro-rata income Signup and view all the answers

In which category do rental activities fall under for tax purposes?

Passive income Signup and view all the answers

What happens to current year passive income losses when they exceed current year passive income ?

It is used to offset passive income, and carried forward to next year Signup and view all the answers

Why do some taxpayers with passive activity losses invest in profitable passive activities?

To offset losses from old investments against profits from new investments. Signup and view all the answers

In limited partnerships, who is responsible for all partnership debts?

General partners Signup and view all the answers

What type of cash items are typically not shown on tax returns?

Meals and travel expenses Signup and view all the answers

Why might individuals overstate their income on personal financial statements but not on tax returns?

To appear wealthier on paper Signup and view all the answers

Which of the following statements about personal financial statements is true?

They disclose the amounts of operating leases and other non-cancellable commitments not recorded as liabilities. Signup and view all the answers

What is the purpose of the statement of changes in net worth?

To show how income, changes in asset/liability values, and other items contribute to changes in net worth. Signup and view all the answers

Which of the following is not a suggested guideline to adjust an individual's net worth?

Include the full value of closely held businesses that provide the customer's major source of cash flow. Signup and view all the answers

Why should closely held businesses and loans to businesses be eliminated when adjusting net worth?

All of the above. Signup and view all the answers

What is the purpose of adjusting the provision for estimated taxes when determining adjusted net worth?

To ensure estimated taxes are consistent with the revised asset and liability values. Signup and view all the answers

What is the maximum amount of capital loss that can be deducted from other income for an individual in a given year?

$3,000 Signup and view all the answers

If an individual expects to report taxable income of $2,000,000 with taxes payable of $800,000, what is the minimum amount that must be paid in each quarterly estimated tax payment to avoid penalties?

$180,000 Signup and view all the answers

Which of the following sources of income is considered nontaxable?

Interest earned on municipal bonds Signup and view all the answers

If an individual has a net capital gain of $6,500 and taxable income from other sources of $400,000, what is the total taxable income for the year?

$406,500 Signup and view all the answers

Which of the following statements accurately describes the treatment of partners' income from a partnership?

Partners are taxed on their pro-rata share of the partnership's income, regardless of the cash distributions received. Signup and view all the answers

What information is necessary to accurately estimate an individual's cash flow in addition to their tax return?

Investments in stocks, bonds, and other non-depreciable property, loan principal payments and receipts, and FICA withholding taxes. Signup and view all the answers

When predicting future cash flow, what should be assumed about one-time activities such as penalties, fines, and medical expenses?

Ignore them, as they are not expected to recur in the future. Signup and view all the answers

When predicting future cash flow for a partner in a partnership, what should be adjusted on the Schedule K-1 worksheet?

Only the expected cash distribution to the partner should be adjusted, leaving other items the same. Signup and view all the answers

In the absence of time to recalculate the tax return, what is the most practical approach to estimating future tax payments?

Assume the tax payment will be the same as the previous year's tax liability. Signup and view all the answers

What should be the initial assumption when analyzing dividends received by a client for cash flow purposes?

Consider all dividends as cash received by the client. Signup and view all the answers

When analyzing interest income on Form 1040, what is important to distinguish if the interest is material?

The portion that is accrual basis income. Signup and view all the answers

What does Form 1040 summarize in relation to tax returns?

The tax payable and individual income Signup and view all the answers

What does Line 10 on Form 1040 represent in terms of tax refunds?

Overpayment of state and local taxes from the previous year. Signup and view all the answers

Why is it necessary to differentiate between ordinary dividends and qualified dividends for tax purposes?

To determine the tax rate applied to the dividends. Signup and view all the answers

What is a common method used by borrowers to commit financial statement fraud?

Understating assets and income Signup and view all the answers

Which statute can be used for prosecuting financial statement fraud according to the provided text?

Securities Act of 1933 Signup and view all the answers

What areas are listed as vulnerable to fraud or irregularities in financial statements according to the text?

Revenue recognition Signup and view all the answers

Which of the following is a common practice by corporations and partnerships to commit financial statement fraud?

Increasing earnings per share Signup and view all the answers

What is a key factor in detecting most fraud according to the text?

Comparing individual line items between financial statements and tax returns Signup and view all the answers

Which of the following is a method used by borrowers to manipulate financial data in their favor?