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WALL STREET PREP: ADVANCED
ACCOUNTING COMPREHENSIVE 2025
UPDATED ACTUAL EXAM WITH CORRECT
SOLUTIONS.
How would raising capital through share issuances affect
earnings per share (EPS)? - correct answer- The impact on
EPS is that the share count increases, which decreases EPS.
But there can be an impact on net income, assuming the share
issuances generate cash because there would be higher
interest income, which increases net income and EPS.
However, most companies' returns on excess cash are low, so
this doesn't offset the negative dilutive impact on EPS from the
increased share count.
Alternatively, share issuances might affect EPS in an
acquisition where stock is the form of consideration. The
amount of net income the acquired company generates will be
added to the acquirer's existing net income, which could have a
net positive (accretive) or negative (dilutive) impact on EPS.
How would a share repurchase impact earnings per share
(EPS)? - correct answer- The impact on EPS following a share
repurchase is a reduced share count, which increases EPS.
However, there would be an impact on net income, assuming
the share repurchase was funded using excess cash. The
interest income that would have otherwise been generated on
that cash is no longer available, causing net income and EPS
to decrease.
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But the impact would be minor since the returns on excess
cash are low, and would not offset the positive impact the
repurchase had on EPS from the reduced share count.
What is the difference between the effective and marginal tax
rates? - correct answer- Effective tax rate: % corporations must
by in taxes
Effective tax rate = Taxes paid / earnings before tax
Marginal tax rate: % on the last dollar of a company's taxable
income.
Why is the effective and marginal tax rate often different? -
correct answer- Effective and marginal tax rates differ because
the effective tax rate calculation uses pre-tax income from the
accrual-based income statement. Since there's a difference
between the taxable income on the income statement and
taxable income shown on the tax filing, the tax rates will nearly
always be different. Thus, the "Tax Provision" line item on the
income statement rarely matches the actual cash taxes paid to
the IRS.
Could you give specific examples of why the effective and
marginal tax rates might differ? - correct answer- Under GAAP,
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many companies follow different accounting standards and
rules for tax and financial reporting.
i. Most companies use straight-line depreciation (i.e., equal
allocation of the expenditure over the useful life) for reporting
purposes, but the IRS requires accelerated depreciation for tax
purposes - meaning, book depreciation is lower than tax
depreciation for earlier periods until the DTLs reverse.
ii. Companies that incurred substantial losses in earlier years
could apply tax credits (i.e., NOL carryforwards) to reduce the
amount of taxes due in later periods.
iii. When debt or accounts receivable is determined to be
uncollectible (i.e., "Bad Debt" and "Bad AR"), this can create
DTAs and tax differences. The expense can be reflected on the
income statement as a write-off but not be deducted in the tax
returns.
What are deferred tax liabilities (DTLs)? - correct answer-
Deferred tax liabilities ("DTLs") are created when a company
recognizes a tax expense on its GAAP income statement that,
because of a temporary timing difference between GAAP and
IRS accounting, is not actually paid to the IRS that period but is
expected to be paid in the future.
DTLs are often related to depreciation. Companies can use
accelerated depreciation methods for tax purposes but elect to
use straight-line depreciation for GAAP reporting. This means
that for a given depreciable asset, the amount of depreciation
WALL STREET PREP: ADVANCED
ACCOUNTING COMPREHENSIVE 2025
UPDATED ACTUAL EXAM WITH CORRECT
SOLUTIONS.
How would raising capital through share issuances affect
earnings per share (EPS)? - correct answer- The impact on
EPS is that the share count increases, which decreases EPS.
But there can be an impact on net income, assuming the share
issuances generate cash because there would be higher
interest income, which increases net income and EPS.
However, most companies' returns on excess cash are low, so
this doesn't offset the negative dilutive impact on EPS from the
increased share count.
Alternatively, share issuances might affect EPS in an
acquisition where stock is the form of consideration. The
amount of net income the acquired company generates will be
added to the acquirer's existing net income, which could have a
net positive (accretive) or negative (dilutive) impact on EPS.
How would a share repurchase impact earnings per share
(EPS)? - correct answer- The impact on EPS following a share
repurchase is a reduced share count, which increases EPS.
However, there would be an impact on net income, assuming
the share repurchase was funded using excess cash. The
interest income that would have otherwise been generated on
that cash is no longer available, causing net income and EPS
to decrease.
,2 | Page
But the impact would be minor since the returns on excess
cash are low, and would not offset the positive impact the
repurchase had on EPS from the reduced share count.
What is the difference between the effective and marginal tax
rates? - correct answer- Effective tax rate: % corporations must
by in taxes
Effective tax rate = Taxes paid / earnings before tax
Marginal tax rate: % on the last dollar of a company's taxable
income.
Why is the effective and marginal tax rate often different? -
correct answer- Effective and marginal tax rates differ because
the effective tax rate calculation uses pre-tax income from the
accrual-based income statement. Since there's a difference
between the taxable income on the income statement and
taxable income shown on the tax filing, the tax rates will nearly
always be different. Thus, the "Tax Provision" line item on the
income statement rarely matches the actual cash taxes paid to
the IRS.
Could you give specific examples of why the effective and
marginal tax rates might differ? - correct answer- Under GAAP,
, 3 | Page
many companies follow different accounting standards and
rules for tax and financial reporting.
i. Most companies use straight-line depreciation (i.e., equal
allocation of the expenditure over the useful life) for reporting
purposes, but the IRS requires accelerated depreciation for tax
purposes - meaning, book depreciation is lower than tax
depreciation for earlier periods until the DTLs reverse.
ii. Companies that incurred substantial losses in earlier years
could apply tax credits (i.e., NOL carryforwards) to reduce the
amount of taxes due in later periods.
iii. When debt or accounts receivable is determined to be
uncollectible (i.e., "Bad Debt" and "Bad AR"), this can create
DTAs and tax differences. The expense can be reflected on the
income statement as a write-off but not be deducted in the tax
returns.
What are deferred tax liabilities (DTLs)? - correct answer-
Deferred tax liabilities ("DTLs") are created when a company
recognizes a tax expense on its GAAP income statement that,
because of a temporary timing difference between GAAP and
IRS accounting, is not actually paid to the IRS that period but is
expected to be paid in the future.
DTLs are often related to depreciation. Companies can use
accelerated depreciation methods for tax purposes but elect to
use straight-line depreciation for GAAP reporting. This means
that for a given depreciable asset, the amount of depreciation
