Final answer:
The incorrect statement about a partner's Loss Absorption Power (LAP) is that it allows for early cash distribution before settling all debts and selling assets. LAP is actually used to determine how to allocate losses among partners in a partnership.
Step-by-step explanation:
The statement "computation of LAPs for all partners allows cash to be distributed before all partnership assets have been sold and all creditors have been paid" is incorrect when it comes to the computation of a partner's Loss Absorption Power (LAP). The primary purpose of LAP is to determine how losses are absorbed among the partners, based on their respective capital accounts and profit-loss sharing ratios.
Limited liability partnerships are attractive as they protect each partner's personal assets beyond their investment in the business. On the other hand, in general partnerships, partners share profits but also have joint and several liabilities for all business debts, exposing their personal assets to risk.
If one partner in a general partnership acts irresponsibly or unethically, the burden of this can fall on all partners. Therefore, the LAP computation is not a method to distribute cash early, but rather a tool to outline the financial responsibility of each partner when a loss occurs.