Question

Which of the following statements is incorrect?

a) All the answers are correct except one.
b) Earnings before taxes (EBT) shows what is earned purely from operations and reflects how efficiently the firm can manufacture and sell its products with taking into account the cost of the productive asset base (plant and equipment and intangible assets).
c) Total assets = Total liabilities + Total stockholder's equity.
d) Earnings per share (EPS), where EPS equals net income divided by the number of common shares outstanding.
e) An increase in common and preferred stock is a source of cash.

Answer 1

The incorrect statement is e) An increase in common and preferred stock is a source of cash, as it confuses the act of selling stock for cash with the increase in stock value which shows equity, not a cash transaction.

Step-by-step explanation:

The incorrect statement among the options provided is: e) An increase in common and preferred stock is a source of cash. This statement is misleading because while issuing stock does result in an influx of cash to the company, the increase in stock itself, as reflected in the equity section of a balance sheet, is not a source of cash flows in financial accounting terms.

Instead, the cash flow comes from the sale of the stock to investors, not the increase in stock amount. So when a company issues stock, it does provide a source of cash, but the stock numbers themselves are a representation of raised capital, which is an increase in stockholders' equity, rather than a direct cash transaction. The rest of the statements are correct: a) is a general declaration, b) correctly describes Earnings Before Taxes (EBT), c) is the basic accounting equation, and d) accurately defines Earnings Per Share (EPS).