Asked by Taylor Fujimoto on Jul 22, 2024
Verified
What are the abnormal earnings for Firm A?
A) ($4,000)
B) ($6,000)
C) $4,000
D) $6,000
Abnormal Earnings
Profits that exceed or fall below what is typically expected, often due to unusual events or one-time gains and losses.
Actual Earnings
The real income a company generates from its business activities, distinct from its reported or projected earnings.
- Acquire knowledge of the crucial significance of analyzing cash flow in evaluating the financial condition of a business.
Verified Answer
AP
Alyize PiedraJul 27, 2024
Final Answer :
A
Explanation :
Abnormal earnings are calculated as the actual earnings minus the expected earnings (which are the book value of the firm multiplied by the required rate of return). For Firm A, the expected earnings are $100,000 * 10% = $10,000. The actual earnings are $6,000. Therefore, the abnormal earnings are $6,000 - $10,000 = -$4,000.
Learning Objectives
- Acquire knowledge of the crucial significance of analyzing cash flow in evaluating the financial condition of a business.