Accounting Exam 3
Journal entry for credit sale of $100?
Accounts Receivable 100 Sales 100
An erosion of LIFO inventory layers is referred to as a LIFO
liquidation
markup on cost
markup on Retail/1-Markup on retail
markup on Retail
markup on cost/ 1+markup on cost
Markup as a Percentage of Retail
markup/selling price
average days to sell inventory ratio def
measures the average number of days' sales for which a company has inventory on hand
Which of the methods used above will yield the lowest figure for gross profit for the income statement?
LIFO
Zagat Inc. is a calendar-year corporation. Its financial statements for the years 2017 and 2016 contained errors as follows: 2017 2016 Ending Inventory $9,000 overstated $18,000 overstated Depreciation Expense $6,000 understated $13,500 overstated Assume that the proper correcting entries were made at December 31, 2016. By how much will 2017 income before taxes be overstated or understated?
$15,000 overstated
The following are held by Smite Co.: Cash in checking account $20,000 Cash in bond sinking fund account 30,000 Post-dated check from customer dated one month from balance sheet date 250 Petty cash 200 Commercial paper (matures in two months) 7,000 Certificate of deposit (matures in six months) 5,000 What amount should be reported as cash and cash equivalents on Smite's balance sheet?
$27,200
Colicchio Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of knife X001, and 3,000 units of knife X002. X001 normally sells for $20 per unit, and X002 for $10 per unit. If Colicchio sells 1,000 units of X002, what amount of gross profit should it recognize?
$3,330
Harper Company's average collection period is 45 days and its average accounts receivable are $600,000. What is the estimated amount of Harper Company's net credit sales for the period?
$4,860,000.
Viewpoint Company's October 31 inventory was destroyed by fire. The company's beginning inventory was $500,000, and purchases for January through October were $1,200,000. Sales for the same period were $1,800,000. The company's normal gross profit percentage is 30% of sales. Using the gross profit method, the October 31 inventory is estimated to be
$440,000.
Web World began using dollar-value LIFO for costing its inventory last year. The base year layer consists of $400,000. Assuming the current inventory at end of year prices equals $552,000 and the index for the current year is 1.10, what is the ending inventory using dollar-value LIFO?
$512,000
Granger Company had January 1 inventory of $150,000 when it adopted dollar-value LIFO. During the year, purchases were $900,000 and sales were $1,500,000. December 31 inventory at year-end prices was $189,750, and the price index was 110. What is Granger Company's gross profit?
$624,750.
Notes Receivable—Valuation Issues.
1. Notes should be reported at net realizable value although the allowance for doubtful accounts can be difficult to estimate for long-term notes. 2. Companies must disclose the fair value of notes receivables in the notes to the financial statement. 3. A note receivable is considered impaired when it is probable that the creditor will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the receivable. In this case, a loss is recorded for the amount of the impairment.
If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)?
18%
Alma Company's average collection period is 45 days and its net sales are $2,430,000. What are Alma Company's average accounts receivables for the period?
300000
Days' Outstanding formula
365/ A/R Turnover
LIFO Liquidations
A frequent occurrence when a specific-goods approach to LIFO is used. When the inventory balance declines (liquidated), the cost of the old inventory layers is included in cost of goods sold, resulting in higher net income.
The inventory turnover ratio is computed by dividing:
cost of goods sold by average inventory.
Cash Discount (Sale Discounts) Gross Method: Sales of $10,000, terms 2/10, n/30
Accounts Receivable 10,000 Sales Revenue 10,000
Which one of the following is deducted from both the cost and retail columns in computing the cost-to-retail ratio?
Abnormal shortages.
For example, if Lululemon sells a yoga outfit to Jennifer Burian for $100 on account, the yoga outfit is transferred when Jennifer obtains control of this outfit. When this change in control occurs, Lululemon should recognize an account receivable and sales revenue. Lululemon makes the following entry
Accounts Receivable 100 Sales Revenue 100
Cash Discount (Sale Discounts) Net Method: Payment on $6,000 of sales received after discount period
Accounts Receivable 120 Sales Discounts Forfeited 120 Cash 6,000 Accounts Receivable 6,000
Assume that Max Glass sells $5,000 of hurricane glass to Oliver Builders on account. Max Glass estimates that $400 of these glass sales will either be returned or an allowance will be granted. Max Glass records the sale on account and records an allowance for sales returns and allowances as follows
Accounts Receivable 5,000 Sales Revenue 5,000 Sales Returns and Allowances 400 Allowance for Sales Returns and Allowances 400
Periodic Inventory System: Sale of 600 units at $12
Accounts Receivable 7,200 Sales Revenue 7,200
Perpetual Inventory System: Sale of 600 units at $12
Accounts Receivable 7200 Sales Revenue 7200 COGS 3600 (600x6) Inventory 3600
EI formula
BI + Purchases- purchases returns and allowances + freight-in- COGS= EI
Allowance Method Assume that Brown Furniture in 2017, its first year of operations, has credit sales of $1,800,000. Of this amount, $150,000 remains uncollected at December 31. The credit manager estimates that $10,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles (assuming a zero balance in the allowance account) is:
Bad Debt Expense 10,000 Allow for Doubtful Accts 10,000
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15 Allowance for Doubtful Accounts 15
Restricted cash
Cash restricted for some special purpose (such as the retirement of bonds) is reported separately in either the current assets section or the long-term assets section of the balance sheet, depending on the date of availability or disbursement.
Receivables: def
Claims held against customers and others for money, goods, or services.
Purchases and inventory misstated
Consists of a failure to include an item as a recorded purchase combined with failure to include and record the item in the ending inventory count.
On April 1, 2017, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). Prepare the journal entry for Rasheed's collection of $350,000 of the accounts receivable during the period from April 1, 2017, through June 30, 2017.
Cash 350,000 Accounts 350,000
Cash Discount (Sale Discounts) Gross Method: Payment on $6,000 of sales received after discount period
Cash 6,000 Accounts Receivable 6,000
When the cost-of-goods-sold method is used adjust cost to "net realizable value" in the lower-of-cost-and-net-realizable-value (LCNRV) approach, what account is debited?
COGS
COGS formula for LIFO reserve
COGS + Ending LIFO R -Beginning LIF) R = COGS for the next year
Collected $333 on account?
Cash 333 Accounts Receivable 333
Which of the following methods of determining annual bad debt expense violates the expense recognition concept?
Direct write-off
Acme Boot Company uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. At January 1, 2017, the Allowance to Reduce Inventory to LIFO balance is $20,000. At December 31, 2017, the balance should be $50,000. As a result, Acme Boot realizes a LIFO effect and makes the following entry at year-end. Journal entry to reduce inventory to LIFO:
Cost of Goods Sold 30,000 Allowance to Reduce Inventory to LIFO 30,000
Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., on a without recourse basis. Commercial Factors assesses a finance charge of 3 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make the following journal entries for the receivables transferred without recourse.
Crest Textiles, Inc. Cash 460,000 Due from Factor 25,000 Loss on Sale of R 15,000 Accounts (note) R 500,000 Commercial Factors, Inc: Accounts (Note) R 500,000 Due to Customer(crest) 25,000 Interest Revenue 15,000 Cash 460,000
Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., on a with recourse basis. Commercial Factors assesses a finance charge of 3 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make the following journal entries for the receivables transferred without recourse. Recourse liability of $6,000
Crest Textiles, Inc: Cash 460,000 Due from factor 25,000 Loss on Sale of R 21,000 Accounts Receivable 500,000 Recourse Liability 6,000 Commercial Factors, Inc: Accounts (Note) R 500,000 Due to Customer(crest) 25,000 Interest Revenue 15,000 Cash 460,000
AG Inc. made a $15,000 sale on account with the following terms: 1/15, n/30. If the company uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?
Debit Accounts Receivable for $15,000
Evaluation of the gross profit method.
Disadvantages: a. It provides an estimate. b. The estimate is based on past percentages. c. Use of a blanket gross profit rate is not appropriate when a company handles different lines of merchandise with widely varying rates of gross profit. Normally unacceptable for financial reporting purposes. GAAP requires a physical inventory as additional verification.
In a period of rising prices which inventory method generally provides the greatest amount of net income?
FIFO
Cash 37,500 AR 36,500 Discounts not taken 750 Alfisol, Inc. offers sales discounts of 2% on all credit sales paid within 15 days. For year 1, gross credit sales totaled $150,000 and 75% of Alfisol's customers took advantage of the discount. Under the net method
For cash receipts after the discount period, discounts not taken must be credited for $750.
Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet?
LIFO
March 1, 2017, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. Collection in March of $440,000 of accounts less cash discounts of $6,000 plus receipt of $14,000 sales returns
Howat Mills: Cash 434,000 Sales Discounts 6,000 Sales Returns and A 14,000 Accounts R 454,000 Citizens Bank: no entry
Which of the following statements about IFRS for inventory accounting is true?
IFRS provide less detailed guidelines than GAAP for inventory accounting. IFRS allows reversals of write-downs up to the amount of the previous write-down. IFRS prohibits the use of LIFO.
Periodic Inventory System: End of period entries for inventory accounts, 400 units at $6
Inventory (ending, by count) 2400 COGS 3600 Purchases 5,400 Inventory (beginning) 600
Perpetual Inventory System: Purchase 900 units at $6
Inventory 5400 Accounts Payable 5400
Assume that at the end of the reporting period, the perpetual inventory account reported an inventory balance of $4,000. However, a physical count indicates inventory of $3,800 is actually on hand. The entry to record the necessary write-down is as follows.
Inventory Over and Short 200 Inventory 200 shows up in COGS
Specific-goods pooled LIFO approach.
Inventory items are combined in pools of similar items. This approach may help prevent LIFO liquidations because decreases in one quantity may be offset by increases in another quantity.
Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFO had been used
Inventory, COGS, Cash, Income Taxes, Retained Earnings
In a period of rising prices, the inventory method that produces the lowest ending inventory is the:
LIFO periodic method.
Ending Inventory Cost 82000 minus Ending inventory (at NRV) 70000 Adjustment to LCNRV 12000 Loss Method:
Loss Due to Decline in Inventory 12,000 Inventory 12,000 or allowance too reduce inventory to market
Ending Inventory Cost 82000 minus Ending inventory (at NRV) 70000 Adjustment to LCNRV 12000 Loss Method using an allowance account:
Loss Due to Decline of Inventory to NRV 12,000 Allowance to Reduce Inventory to NRV 12,000
Markup as a Percentage of Cost
Markup/Cost
Advantages of LIFO
Matching Tax Benefits/Improved cash flow Future Earnings hedge
If ending inventory for 2017 is understated because certain items were missed in the count, then
Net income for 2017 will be understated and CGS for 2018 will be understated.
If ending inventory for 2017 is understated because certain items were missed in the count, then:
Net income for 2017 will be understated and CGS for 2018 will be understated.
A/R turnover formula
Net sales/ Average Trade Receivables (net)
In a bargained transaction entered into at arm's length, the stated interest rate is presumed to be fair unless:
No interest rate is stated, or Stated interest rate is unreasonable, or Face amount of the note is materially different from the current cash sales price.
On April 1, 2017, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). On July 1, 2017, Rasheed paid Third National all that was due from the loan it secured on April 1, 2017. Prepare the journal entry to record this payment.
Notes Payable 200,000 Interest Expense 5,000 Cash 205,000
Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site. Oasis accepted in exchange a five-year note having a maturity value of $35,247 and no stated interest rate. The land originally cost Oasis $14,000. At the date of sale the land had a fair market value of $20,000. Oasis uses the fair market value of the land, $20,000, as the present value of the note. Oasis therefore records the sale as:
Notes Receivable 35,247 Discount on Notes R 15,247 Land 14,000 Gain on D of L 6,000
LIFO liquidation def.
Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes.
St. Regis Paper Co. signed timber-cutting contracts to be executed in 2018 at a price of $10,000,000. Assume further that the market price of the timber cutting rights on December 31, 2017, dropped to $7,000,000. St. Regis would make the following entry on December 31, 2017. When St. Regis cuts the timber at a cost of $10 million, it would make the following entry.
Purchases (Inventory) 7,000,000 Est. Liability on Purchase Commitment 3,000,000 Cash 10,000,000
Gross Method: Purchase cost $10,000, terms 2/10, net 30
Purchases 10,000 Accounts payable 10,000
Periodic Inventory System: Purchases 900 units at $6
Purchases 5,400 Accounts Payable 5,400
Net Method: Purchase cost $10,000, terms 2/10, net 30
Purchases 9,800 Accounts payable 9,800
Net Method def.
Sales and receivables are recorded at the net amount. Sales discounts not taken by customers are credited to the Sales Discounts Forfeited account, which is reported in the other revenue section of the income statement. (I have not seen the presentation of this item in the non-operating section of an income statement in practice.)
Valuation of Notes Receivable
Short-Term reported at net realizable value (same as accounting for accounts receivable). Long-Term - FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements.
Required inventory disclosures under GAAP
Significant or unusual inventory financing arrangements. The composition of the inventory. The inventory costing methods employed.
Sparrow Corporation has recently acquired notes receivable that have a fair value of $405,000 and a carrying amount of $310,000. Sparrow decides on December 31, 2017, to use the fair value option for the first valuation of these receivables. Which of the following is correct?
Sparrow must value these receivables at fair value in all subsequent periods in which it holds these receivables. Interest revenue will be reported as part of net income for the year ended December 31, 2017. An unrealized holding gain of $95,000 will be reported as part of net income for the year ended December 31, 2017.
Comparison of LIFO APPROACHES
Specific-goods LIFO - costing goods on a unit basis is expensive and time consuming. Specific-goods pooled LIFO approach. Reduces record keeping and clerical costs. More difficult to erode the layers. Using quantities as measurement basis can lead to untimely LIFO liquidations.
LIFO effect
The change in the allowance balance from one period to the next . Debit COGS and credit the allowance for this amount.
disadvantage to COGS method
The disadvantage is that the inventory decline is buried in the cost of goods sold figure and not disclosed separately.
Notes Bearing Interest Equal to the Effective Rate—
The interest element is ignored for short-term notes and therefore they are carried at face value. However, long-term notes are recorded at the present value of the cash expected to be collected.
Secured Borrowing
The owner of the accounts receivable borrows cash by writing a promissory note designating the accounts receivable as collateral. a. The borrower and lender agree as to the specific receivable accounts that serve as security. The assignor (borrower) typically makes collections on the assigned accounts and remits the collections plus a finance charge (interest cost) to the lender. b. The borrower also recognizes all discounts, returns and allowances, and bad debts.
Face value
The principal amount due that is stated on the face of the note. The debit balance of the Notes Receivable account is always equal to the face amount.
Amortization
The process of writing off the discount or premium over the life of the note. The effective-interest method of amortization should be used.
Sale Without Recourse
The purchaser assumes the risk of collectibility and absorbs any credit losses. This is an outright sale of receivables both in form and substance. A loss on the sale is recognized for the excess of the face value of the receivables over the cash proceeds (1) A Due From Factor account (reported as a receivable) is used by the seller to account for any proceeds retained by the factor to cover probable sales discounts, sales returns, and sales allowances. (2) The factor maintains a corresponding "Due To" account (reported as a liability).
Implicit interest rate
The rate that a company computes when it knows the future amount and the present value of a note.
Of the following conditions, which is the only one that is required if the transfer of receivables with recourse is to be accounted for as a sale?
The transferee does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity. The transferred asset has been isolated from the transferor. The transferees have obtained the right to pledge or exchange the receivables.
All of the following are required before a transfer of receivables can be recorded as a sale.
The transferred receivables are beyond the reach of the transferor and its creditors. The transferor has not kept effective control over the transferred receivables through a repurchase agreement. The transferee can pledge or sell the transferred receivables.
Cash Discounts (Sales Discounts). def
These are inducements for prompt payment and may be recorded using the gross or net method.
Which of the following statements istrue as it relates to the dollar-value LIFO inventory method?
Under the dollar-value LIFO method, it is possible to have the entire inventory in only one pool. Several pools are commonly employed in using the dollar-value LIFO inventory method. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in terms of total dollar value, not physical quantity.
When is the relative sales value method used?
When purchasing a group of varying units.
All of the following are advantages of LIFO
a deferral of income tax occurs as long as the price level increases. an improvement of cash flow. recent costs are matched against current revenues.
If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is
cost assignments typically parallel the physical flow of goods.
Fair Value Option
a. If companies choose the fair value option, receivables are recorded at fair value and unrealized holding gains or losses are reported as part of net income. b. Unrealized holding gains or losses are the net change in the fair value of receivables from one period to another, excluding interest revenue.
The conceptual deficiencies of the LCNRV and LCM rules include:
a. Inconsistent treatment of recognizing a loss in the period when inventory values decrease delays any inventory value increases until the period when inventory is sold. b. Application of the rules results in inconsistency causing the inventory to be valued at cost in one year and at market in the next year. c. LCM and LCNRV inventory valuation results in a conservative inventory value on the balance sheet, but it may have the opposite effect on the income statement in subsequent periods if expected sales price declines do not materialize. d. Subjectivity in calculating a "normal profit" may present opportunities for income manipulation.
LIFO would not be the preferred method if:
a. Prices tend to lag behind costs. b. Specific identification is traditional. c. Unit costs tend to decrease as production increases, thereby nullifying the tax benefit that LIFO might provide.
LIFO will be the preferred method if:
a. Selling prices and revenues have been increasing faster than costs, and b. A company has a fairly constant "base stock."
If a company cannot determine the fair value of the goods exchanged for a note, and if the note has no ready market,
an imputed interest rate is used to value the note.
Accounts receivable def
are oral promises of the purchaser to pay for goods and services sold.
Bank overdrafts should be reported as
current liabilities.
Non-trade receivables include all of the following
deposits paid to cover potential losses claims against defendants under suit dividends receivable
Major disadvantages of LIFO
doesn't approximate the physical flow of inventory lower profits reported in inflationary times inventory is understated future earnings will increase instead of being affected substantially, if there are future price declines
Receivables classified as
either trade or nontrade, and can be current or noncurrent.
In no case can "market" in the lower-of-cost-or-market rule be more than
estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
short term liability notes are reported at what?
face value
LIFO is appropriate where prices tend to lag behind costs.
false
inventory turnover ratio def
measures the liquidity of the inventory and is computed by dividing cost of goods sold by the average inventory
Under dollar-value LIFO each layer in ending inventory at LIFO cost is calculated by:
first expressing the year at base-year prices and then extending it to current LIFO cost by multiplying by the year's price index.
The interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note is the
implicit rate
Losses on noncancelable purchase contracts should be recognized:
in the period a decline in market price occurs.
Nontrade receivables def
include advances to officers, employees, or subsidiaries, and for dividends and interest receivable or income taxes receivable
Inventory def.
inventories are asset items held for sale in the ordinary course of business, or goods that will be used or consumed in the production of goods to be sold.
FBS Corporation uses the perpetual inventory method and the gross method for recording purchases on account. On May 11, it purchased $44,000 of inventory, terms 2/10, n/30. On May 13, FBS returned goods that cost $4,000. On May 19, FBS paid the supplier. On May 19, the company should credit
inventory for $800.
Special Sales Agreements
involve the transfer of legal title that is not accompanied by a transfer of the risks of ownership.
Liquidity is what?
is an indication of an enterprise's ability to meet its obligations as they come due.
A note receivable
is supported by a formal promissory note. is a negotiable instrument. always contains an interest element.
FIFO; LIFO acronym
last in still here; last in not here
When using dollar-value LIFO, if the incremental layer was added last year, it should be multiplied by
last year's cost ratio and last year's index.
Accounts receivable turnover ratio:
measures the number of times, on average, receivables are collected during the period. Companies frequently use the average collection period, also known as days' outstanding, to assess the effectiveness of a company's credit and collection policies.
Double-extension
merely means that inventory prices must be maintained for both base year prices and current year prices in order to calculate the index
The percentage markup on cost can be computed by dividing gross profit on selling price by 100%:
minus gross profit on selling price.
Inventories of certain minerals and agricultural products are valued at:
net realizable value.
Under IFRS, bank overdrafts are
netted against cash and a net cash amount reported.
Conventional Retail includes what
normal shortages, employee discounts
The accounts receivable turnover ratio measures the
number of times the average balance of accounts receivable is collected during the period.
The procedure that provides a reasonably accurate estimate of the receivables' realizable value is often referred to as the:
percentage-of-receivables approach.
Because the gross profit method results in an estimated of the ending inventory, it is not acceptable for annual financial statements.
true
Ceiling - prevents overstatement of the value of obsolete, damaged, or shopworn inventories. Floor - deters understatement of inventory and overstatement of the loss in the current period.
true
Which cost flow assumption would be most appropriate when a relatively small number of costly, easily distinguishable items are sold?
specific identification
LIFO conformity rule
states that a company employing LIFO for tax purposes must use LIFO for book purposes as well.
Period Costs
such as selling and general and administrative expenses are not considered to be directly related to the acquisition or production of goods. They are recorded as non-product costs and expensed when incurred.
short-term paper with a maturity of 6 months is classified as what?
temporary investment
If cash equivalents contain restrictions or penalties on their conversion to cash, they should be reported as?
temporary investments
No gain or loss should be recognized. If the contract price is greater than the market price and the buyer expects that losses will occur when the purchase is affected, the buyer should recognize losses in the period during which such declines in market take place. No gains are recognized.
true
Ordinary purchase orders that are subject to cancellation by the buyer or seller represent neither an asset nor a liability to the buyer. They are not "purchase commitments" and are not recorded or reported in the financial statements.
true
Period costs include freight charges on goods sold.
true
Perpetual System Freight-in is debited to Inventory. Purchase returns and allowances and purchase discounts are credited to Inventory.
true
The exchange price is the amount due from the debtor.
true
Bonita Commodities Company signed a long-term noncancelable purchase commitment with a major vegetable supplier to purchase produce in 2018 at a cost of $572,000. At December 31, 2017, the produce to be purchased has a market value of $514,800.
unrealized holding gain or loss income 57200 estimated liability on purchase commitments 57200
Atlantic Company had 500 units of "CL-10" in its inventory at a cost of $12 each. It purchased 300 more units of "CL-10", for $8,400. Atlantic then sold 400 units of "CL-10 at a selling price of $30 each, resulting in a gross profit of $4,800. The cost flow assumption used by Atlantic is
weighted average.
Cook Co. had the following balances on December 31, 17: Cash in checking account $350,000 Cash in money market account 250,000 U.S. Treasury bill, purchased 12/1/17, maturing 2/28/18 800,000 U.S. Treasury bond, purchased 3/1/17, maturing 2/28/18 500,000 Cook's policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Cook report as cash and cash equivalents in its December 31, 17, balance sheet
$1,400,000
High Country Corporation acquired two inventory items at a lump-sum cost of $80,000. The acquisition included 6,000 units of product A, and 14,000 units of product B. Product A normally sells for $12 per unit, and product B for $4 per unit. If High Country sells 2,000 units of A, what amount of gross profit should it recognize?
$9,000
Everhart Corporation uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. The balance in the LIFO Reserve account at the end of 2016 was $120,000. The balance in the same account at the end of 2017 is $180,000. Everhart's Cost of Goods Sold account has a balance of $900,000 from sales transactions recorded during the year. What amount should Everhart report as Cost of Goods Sold in the 2017 income statement?
$960,000.
Formal purchase commitments for which a firm price has been established:
(1) Debit an unrealized holding loss account and credit a liability account— Estimated Liability on Purchase Commitments in the period the decline occurs. (2) When the inventory is acquired, eliminate the liability account. Record any additional price decline as an additional loss. Record any price recovery (up to the contract price) as an unrealized gain. (3) As a result of this procedure: (i) The loss is reported in the period of price decline rather than in the period of acquisition. (ii) The inventory is reported at the lower of contract price or market as of the date of acquisition. (Debit to inventory for the market price, Debit the liability to get it off the books, credit cash for the contract price.)
Sales with repurchase agreement
(1) In essence, the "seller" finances the cost of the inventory by transferring legal title to a third party from which the seller receives "payment." The "seller" then agrees to "buy" the inventory back at a specified price over a specified future period. (2) These transactions are often described as "parking transactions" because the seller simply parks the inventory on another firm's balance sheet and uses it as a financing device. (3) In these arrangements, the inventory and related liability from the repurchase agreement should remain on the "seller's" books. No sale should be recorded.
Corrections of inventory errors may involve two procedures:
(1) Preparation of correcting journal entries. Generally, a purchase is recorded when the invoice arrives. If this does not coincide with passage of legal title by the end of the accounting period, correcting entries may be required to prevent "cut-off errors." (2) Computation of the correct amounts of inventory and related items including purchases, cost of goods sold, net income, retained earnings, accounts payable, working capital, and the current ratio.
Sales with high rates of return.
(1) The goods should be considered sold by the seller only if the amount of returns can be reasonably estimated. In this case, the seller must establish a return liability for the amount of estimated returns. (2) If returns are unpredictable, but likely, the seller should not consider the goods sold and the goods should not be removed from the seller's inventory account.
GAAP/IFRS differences
(1) The requirements for accounting for and reporting inventories are more principles based under IFRS. That is, GAAP provides more detailed guidelines in inventory accounting. (2) A major difference between IFRS and GAAP relates to the LIFO cost flow assumption. GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. (3) IFRS does not have an exception to the LCNRV rule (4) Under GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the writedown may be reversed in a subsequent period up to the amount of the previous write-down. (5) IFRS requires both biological assets and agricultural produce at the point of harvest to be reported at net realizable value.
The FASB requires that all three of the following conditions must be met before a company can record a sale:
(1) The transferred asset has been isolated from the transferor. (2) The transferees have obtained the right to pledge or exchange either the transferred assets or beneficial interests in the transferred assets. (3) The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity.
The retail inventory method can be adapted for use with:
(1) any of the major inventory cost flow assumptions: FIFO, LIFO, or Average cost. (2) any of the inventory valuation methods: cost, LCNRV or LCM. (3) either of the LIFO approaches:
Direct write off method problems
(1) fails to match costs with revenues of the period. (2) does not result in receivables being stated at net realizable value in the balance sheet
Methods of estimating bad debt expense under the allowance method.
(a) Percentage-of-Sales (Income Statement Approach). Bad debt expense is estimated directly by multiplying a percentage times credit sales. (b) Percentage-of-Receivables (Balance Sheet Approach): (i) First the required ending balance in the Allowance for Doubtful Accounts account is estimated by multiplying a percentage (a single composite rate or an aging schedule) times the ending outstanding receivables. (ii) Then bad debt expense is equal to the difference between the required ending balance and the existing balance in the Allowance account.
Gross method def.
(more practical than the net method). Sales and receivables are recorded at the gross amount. Sales discounts taken by customers are debited to the Sales Discounts account which is reported in the income statement as a reduction to get to Net Sales.
Basic issues in inventory valuation
1) physical goods to be included in inventory 2) the costs to include in inventory 3) the cost flow assumption to adopt
Impairments
1. An impaired loan receivable exists when it is probable that the company will be unable to collect all amounts due (principal and interest) according to terms of the loan. 2. Impairment loss is the difference between the investment in the loan and the present value of the future cash flows discounted at the loan's historical effective interest rate.
Net Method: Invoices of $4,000 are paid within discount period two percent discount
Accounts Payable 3,920 Cash 3,920
Net Method: Invoices of $6,000 are paid after discount period two percent discount
Accounts Payable 5,880 Purchase Discounts Lost 120 Cash 6,000
Gross Method: Invoices of $6,000 are paid after discount period
Accounts Payable 6,000 Cash 6,000
Cash Discount (Sale Discounts) Net Method: Sales of $10,000, terms 2/10, n/30
Accounts Receivable 9,800 Sales Revenue 9,800
Under a perpetual inventory system which accounts should be debited the each time a sale on account is made?
Accounts Receivable and Cost of Goods Sold.
During the year, Trout Enterprises made an entry to write off an $8,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $100,000 and the balance in the allowance account was $9,000. The net realizable value of accounts receivable before and after the write-off entry was
Accounts Receivable, $100,000 - Allowance Account, $9,000 = $91,000. After: (Accounts Receivable, $100,000 - $8,000) - (Allowance Account, $9,000 - $8,000) = $91,000.
Gross Method: Invoices of $4,000 are paid within discount period two percent discount
Accounts payable 4,000 Purchases discounts 80 Cash 3,920
The financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1. The entry to record the write-off is:
Allowance for Doub Acct 1,000 Accounts Receivable 1,000
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10 Accounts Receivable 10
Assume that Max Glass now grants an allowance of $400 to Oliver Builders because some of the hurricane glass is of lower quality than originally ordered. The entry to record this transaction is as follows.
Allowance for Sales Return& A 400 Accounts Receivable 400
On December 31, 2017, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key's December 31, 2017, balance sheet?
Alpha $10,000 Omega $ 8,570
Zero-Interest or Unreasonable Interest-Bearing Notes—
An appropriate rate of interest must be determined in order to compute the present value of the note. a. The present value of the note can be determined by measuring the fair value of the cash or other property, goods, and services exchanged for the note. b. If the fair value of the note or other property is not determinable, an interest rate may be imputed on the basis of the issuer's credit standing, collateral, etc. (this is the more common approach)
Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson's assets and retained earnings at year end?
Assets: understated Retained earnings: understated
Discount on notes receivable—
At the date of issuance, this represents the excess of the face value of the note over the present value. A discount arises because the market rate is greater than the stated interest rate. The Discount on Notes Receivable account is a valuation (contra-asset) account with a credit balance.
Allowance method
At the end of each accounting period an estimate is made of expected losses from collectible accounts. This estimate is debited to Bad Debt Expense and credited to the Allowance for Doubtful Accounts. This method is justified because a company has experienced a loss the moment customers receive goods or services for which they will never pay. This is true even if the specific identity of such customers will not be known for some time.
Direct Write-Off Method Assume, for example, that on December 10 Cruz Co. writes off as uncollectible Yusado's $8,000 balance. The entry is:
Bad Debt Expense 8,000 Accts R (Yusado) 8,000
Dollar-value LIFO advantages
Broader range of goods in pool. Permits replacement of goods that are similar. Helps protect LIFO layers from erosion.
Ending Inventory Cost 82000 minus Ending inventory (at NRV) 70000 Adjustment to LCNRV 12000 COGS Method:
COGS 12,000 Inventory 12,000 allowance too reduce inventory to market
Sheffield Suppliers reported cost of goods sold for 2017 of $690,000 and retained earnings of $1,250,000 at December 31, 2017. Sheffield later discovered that its ending inventories at December 31, 2016 and 2017, were overstated by $48,000 and $64,800, respectively. Determine the corrected amounts for 2017 cost of goods sold and December 31, 2017, retained earnings.
COGS: 706800 Retained Earnings: 1185200
On April 1, 2017, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). Prepare the April 1, 2017, journal entry for Rasheed Company.
Cash 192,000 Finance Charge 8,000 Notes Payable 200,000
Cash Discount (Sale Discounts) Net Method: Payment on $4,000 of sales received within discount period
Cash 3,920 Accounts Receivable 3,920
Cash Discount (Sale Discounts) Gross Method: Payment on $4,000 of sales received within discount period
Cash 3,920 Sales Discounts 80 Accounts Receivable 4,000
Ending inventory misstated
Consists of the correct recording of purchases, but incorrect computing and recording of ending inventory count.
Some companies must compute internal price indices. The double-extension method is used to determine indices internally. The price index for the current year is:
Ending Inventory for the Period at Current Cost/ Ending Inventory for the Period at Base-Year Cost
In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is
LIFO
Which inventory costing method most closely approximates current cost for each of the following:
Ending Inventory: FIFO COGS: LIFO
Two most common types of inventory errors
Ending inventory misstated-Consists of the correct recording of purchases, but incorrect computing and recording of ending inventory count Purchases and inventory misstated-Consists of a failure to include an item as a recorded purchase combined with failure to include and record the item in the ending inventory count.
The specific-goods approach to costing LIFO inventories is often unrealistic for two reasons:
Erosion of the LIFO inventory can easily occur (LIFO liquidation) which often distorts net income and leads to substantial tax payments.
St. Regis Paper Co. signed timber-cutting contracts to be executed in 2018 at a price of $10,000,000. Assume further that the market price of the timber cutting rights on December 31, 2017, dropped to $7,000,000. St. Regis would make the following entry on December 31, 2017. Assume the Congress permitted St. Regis to reduce its contract price and therefore its commitment by $1,000,000.
Est. Liability on Purchase Commitment 1,000,000 Unrealized Holding Gain or Loss—Income 1,000,000
An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
FIFO
Sale
Factoring
Purchase Commitments—A Special Problem
Generally seller retains title to the merchandise. Buyer recognizes no asset or liability. If material, the buyer should disclose contract details in note in the financial statements. If the contract price is greater than the market price, and the buyer expects that losses will occur when the purchase is effected, the buyer should recognize losses in the period during which such declines in market prices take place.
March 1, 2017, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. Collection in April of the balance of accounts less $2,000 written off as uncollectible
Howat Mills: Cash 244,000 Allowance for D A 2,000 Accounts R 246,000 Citizens Bank: no entry
March 1, 2017, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. Transfer of Accounts receivable and issuance of note on March 1st, 2017
Howat Mills: Cash 493,000 Interest 7,000 Notes Payable 500,000 Citizens Bank: Notes Receivable 500,000 Interest Revenue 7,000 Cash 493,000
March 1, 2017, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. Remitted March collections plus accrued interest to the bank on April 1, 2017
Howat Mills: Interest Expense 5,000 Notes Payable 434,000 Cash 439,000 Citizens Bank: Cash 439,000 Interest Revenue 5,000 Notes Receivable 434,000
March 1, 2017, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. Remitted the balance due of $66,000 (500-434) on the note plus interest on May 1,2017
Howat Mills: Interest expense 660 Note payable 66,000 Cash 66,660 Citizens Bank: Cash 66,660 Interest Revenue 660 Notes Receivable 66,000
On December 31, 2017, Swan Company sold for $150,000 an old machine having an original cost of $170,000 and a book value of $120,000. The terms of the sale were as follows: $30,000 down payment $60,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2017 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
In instances where no interest rate is stated, the company measures the present value of the note. The present value of the annuity is ($60,000 × 1.75911) or $105,546.
Specific Identification
Includes in cost of goods sold the costs of the specific items sold. Used when handling a relatively small number of costly, easily distinguishable items. Matches actual costs against actual revenue. Cost flow matches the physical flow of the goods. May allow a company to manipulate net income.
Which statement is true about the gross profit method of inventory valuation?
It may be used to estimate inventories for interim statements It may be used by auditors.
Which statement is true about the retail inventory method?
It may be used to estimate inventories for interim statements. It may be used to estimate inventories for annual statements. It may be used by auditors.
Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note?
Jan. yr. 1: Notes Receivable 10,000 Cash 10,000 Dec. yr. 1: Cash 1,000 Interest Revenue 1,000
Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. Prepare the journal entry to record the receipt of the note?
Jan. yr. 1: Notes Receivable 10,000 Discount on Note R 480 Cash 9,520 Dec. yr. 1: Cash 1,000 Discount on Notes R 142 Interest Rev 1,142
Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note?
Jan. yr. 1: Notes Receivable 10,000.00 Discount on Notes R 2,278.20 Cash 7,721.80 Dec. yr. 1: Discount on Notes R 694.96 Interest Rev. 694.96
Stated interest rate—
The rate that is stated on the face of the note. This rate is used to determine the amount of periodic interest payments. A note may be zerointerest-bearing (i.e. have a stated rate of zero).
Sale With Recourse
The seller guarantees payment to the purchaser for those receivables which become uncollectible. (1) A Due from Factor account is maintained as indicated in a sale without recourse. (2) A Recourse Obligation account (reported as a liability) is used by the seller to recognize the probable payment to the factor for uncollectible accounts. (3) Loss on sale calculation: (a) Net proceeds = cash received + due from factor - recourse obligation (b) Loss = book value of receivables sold - net proceeds
Interest Element. def
Theoretically, receivables should be measured at their present value, but the accounting profession has chosen to ignore the implicit interest element in receivables which are due within one year.
Trade discounts def.
These reductions from the list price are not recognized in the accounting records; customers are billed an amount that is net of trade discounts.
Cash equivalents
This category includes short-term, highly liquid investments that are both (1) readily convertible to known amounts of cash, and (2) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates (generally 3 months or less).
Dollar- Value LIFO
This differs from specific-goods pooled LIFO in that increases and decreases in a pool are measured in terms of the total dollar value and not the physical quantity of goods in the inventory pool.
Net carrying amount of the note—
This is the amount at which notes are reported on the balance sheet. It is equal to the face value of the note less the unamortized discount or plus the unamortized premium
Effective (market) rate of interest
This is the rate that is used to look up present value factors in order to account for the note at the date of issuance
Gross Profit Method.
This method is used when an estimate of a firm's inventory is required. The resulting estimate is acceptable for interim reporting purposes, but not generally for annual reporting. This method can also be used to estimate the amount of inventory lost in casualty (fire, flood, earthquake, etc) by estimating the inventory excluding the loss using the gross profit method and comparing the estimate to the actual inventory remaining (counted) after the loss. It can also be used by the company's auditors as a "reasonableness check" on the value of the inventory presented in the balance sheet.
Why Retail Inventory Method is used
To permit the computation of net income without a physical count of inventory. Control measure in determining inventory shortages. Regulating quantities of merchandise on hand. Insurance information.
Why are inventories stated at lower-of-cost-or-net realizable value?
To report a loss when there is a decrease in the future utility below the original cost
Measurement is complicated by:
Trade Discounts Cash Discounts (Sales discounts) Interest element
examples of cash equivalents include what?
Treasury bills, commercial paper, money market funds, money market savings certificates, certificates of deposit, and similar types of deposits are nearly "equivalent to cash" in terms of liquidity.
St. Regis Paper Co. signed timber-cutting contracts to be executed in 2018 at a price of $10,000,000. Assume further that the market price of the timber cutting rights on December 31, 2017, dropped to $7,000,000. St. Regis would make the following entry on December 31, 2017.
Unrealized Holding Gain or Loss—Income 3,000,000 (other expenses and losses in income statement) Estimated Liability on Purchase Commitment 3,000,000 (current liabilities on the balance sheet)
LIFO Reserve.
Used when a company maintains a FIFO, average cost, or standard cost system for internal reporting purposes and LIFO for tax and external reporting purposes. The difference between inventory cost using a company's internal reporting method and the LIFO cost is known as the LIFO reserve. This amount is maintained in the ledger as the Allowance to Reduce Inventory to LIFO, a contra account to inventory. This contra account is not shown on the balance sheet, but the amount of the LIFO Reserve is disclosed in the notes to the financial statements. Reasons: Pricing decisions. Recordkeeping easier. Profit-sharing or bonus arrangements. LIFO troublesome for interim periods.
In a transfer of receivables accounted for as a secured borrowing:
a finance charge is recorded.
General classification rules:
a. Segregate the different types of receivables, if material. b. Appropriately offset valuation accounts against the proper receivable accounts. c. Determine that receivables classified as current assets will be converted into cash within the year or the operating cycle, whichever is longer. d. Disclose any loss contingencies that exist on the receivables. e. Disclose any receivables designated or pledged as collateral. f. Disclose the nature of credit risk inherent in the receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes in the allowance for credit losses.
Presentation of Inventories. The following items must be disclosed:
a. The composition of manufactured inventory (raw materials, work in process, and finished goods). b. Significant or unusual financing arrangements including related party transactions, firm purchase commitments, involuntary LIFO liquidation, etc. c. The inventory costing methods used. d. The consistency of costing methods from one period to another.
Evaluation of the Retail Inventory Method.
a. The method permits: (1) the computation of net income without a physical count of inventory. (although physical counts are ultimately required to validate inventory levels). (2) a control measure in determining inventory shortages. (3) regulating quantities of merchandise on hand. (4) a basis for insurance information. c. The method has an averaging effect on varying rates of gross profit. Problems may arise when the averages being used are not reflective of underlying conditions. This effect can be minimized by applying the method at the department and inventory type level (as many companies do).
Product costs
are those costs directly connected with bringing goods to the buyer's place of business and converting them to a sale-able condition. They are recorded in the Inventory account and then transferred to Cost of Goods Sold when a transfer of title occurs.
Notes receivable def
are written promises to pay a certain sum of money on a specified future date.
Postage stamps on hand should be reported as
as office supplies inventory or as a prepaid expense.
The cost amount that should be used in the lower-of-cost-or-market comparison of boots.
asking for the historical cost of the item
Companies value and report receivables
at net realizable value (the net amount they expect to receive in cash).
A new layer is formed under dollar-value LIFO when the ending inventory at:
base-year prices exceeds the beginning inventory at base-year prices.
Petty cash funds and change funds should be included in what?
cash
Short-term paper with maturities of less than 3 months should be classified as
cash equivalents
In the lower of cost or market rule, net realizable value is referred to as the:
ceiling.
All of the following are properly classified as temporary investments
certificates of deposit (CDs). money market certificates. money market funds (no checking privileges).
purchases formula
purchases + purchases returns and allowances - freight-in = purchases
Cost Retail includes what
purchases allowances, purchase discounts
Postdated checks and I.O.U.s should be reported as
receivables
Travel advances are treated as
receivables if collected from employees or deducted from employees or deducted from their salaries.
In the gross method of recording cash discounts, sales discounts are:
recorded when payment is received within the discount period.
Disadvantages of LIFO
reduced earnings Physical flow involuntary liquidation poor buying habits
Write-off of Accounts Receivable
regardless of which Allowance Method is used, when a company determines that a specific account receivable should be written off specifically as uncollectible, the company removes the account in question by crediting Accounts Receivable for the amount to be written off and debiting Allowance for Doubtful Accounts. By doing this, the company removes the specific uncollectible account from both its receivable balance and its allowance (if it is uncollectible, there is no need to hold an allowance for it).
Fifo approximates the physical flow of goods; fails to match current costs against current revenues
true
The relative sales value method is used to allocate a lump-sum purchase price to the various types of inventory purchased based on their relative sales values.
true
Interest costs
the FASB ruled that companies should capitalize interest costs related to construction of discrete projects (such as ships or real estate projects) for sale or lease. If these items being constructed are Inventory held for sale, the interest costs incurred during construction should be included in the cost of the inventory. Interest costs associated with financing the purchase or holding of inventory should be expensed as incurred even if the financing is tied directly to the inventory and repayment is tied to the sale of the inventory
In applying Lower-of-Cost-or-Market, the designated market value is
the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin.
Inventory may be recorded at net realizable value if
there is a controlled market with a quoted price. there are no significant costs of disposal. the inventory consists of precious metals or agricultural products.
If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices,
this fact should be disclosed.
Accounts Receivable—Recognition Issues. These involve the concepts
timing and measurement
Compute the estimated inventory at May 31, assuming that the gross profit is 35% of cost.
to get estimated inventory you need to take at cost percentage such .35 and do .35/1+.35
Accounts Receivable (oral promises of the purchaser to pay for goods and services sold) is a
trade receivable
Bonds issued at a discount will have interest expense that is higher than the interest paid each period (amortization will increase the carrying value each period). Bonds issued at a premium will have interest expense that is lower than the interest paid each period (amortization will increase the carrying value each period).
true
(Beginning Inventory, Retail, $140,000 + Purchases, Retail, $640,000 + Net markups, retail, $40,000 - Net markdowns, Retail, $28,000 - Sales, $672,000) = $120,000
true
(Note: the market rate is sometimes referred to as the "yield", the "effective rate" or the "implicit rate")
true
A Purchase Discounts Lost account implies that the purchased inventory item is recorded at price less discount whether taken or not.
true
A company recognizes inventory and accounts payable at the time it controls the asset. Passage of title is often used to determine control because the rights and obligations are established legally.
true
Accounts receivable generally arise as part of a revenue arrangement.
true
All companies need periodic verification of the inventory records by actual count, weight, or measurement, with counts compared with detailed inventory records.
true
Allowance for Sales Returns and Allowances is a contra asset account to Accounts Receivable
true
An estimated loss on purchase commitments is reported as Unrealized Holding Gain or Loss (Income) under "Other Expenses and Losses" in the Income Statement.
true
Average cost measuring a specific physical flow of inventory is often impossible under this method
true
Banks overdrafts are not offset against the cash account unless there is available cash in another account at the same bank.
true
Certain goods (such as certain minerals and agricultural products) that are sold in a controlled market with a quoted price applicable to all quantities that have no significant disposal costs may be reported at net realizable value, even when this amount is above cost.
true
Companies ignore interest revenue related to accounts receivable because the amount of the discount is not usually material in relation to the net income for the period.
true
Companies may elect to use the fair value option at the time the financial instrument is originally recognized or when some event triggers a new basis of accounting (such as when a business acquisition occurs) Must continue to use fair value measurement for the specific instrument until the company no longer owns this instrument If not elected at date of recognition, company may never use fair value option on that specific instrument.
true
Companies may elect to use the fair value option at the time the financial instrument is originally recognized or when some event triggers a new basis of accounting (such as when a business acquisition occurs).
true
Companies must allocate the cost of all the goods available for sale (or use) between the goods that were sold or used and those that are still on hand.
true
Companies should take the physical inventory near the end of their fiscal year, to properly report inventory quantities in their annual accounting reports.
true
Cost Flow Assumption Adopted does not need to be consistent with physical movement of goods Method adopted should be one that most clearly reflects periodic income
true
Cost-of-goods-sold method. Report the inventory at Net realizable value in both the balance sheet and the cost of goods sold section of the income statement. The disadvantage is that the inventory decline is buried in the cost of goods sold figure and not disclosed separately
true
Debit decreases allowance for doubtful account Credit increases allowance for doubtful account
true
Estimated Liability on Purchase Commitment 3,000,000 (current liabilities on the balance sheet)
true
For companies that use the LIFO or retail inventory methods of costing inventory, a "designated market value" of the inventory is compared to cost The term "market" in the phrase "lower-of-cost-or-market" generally means the cost to replace the item by purchase or reproduction.
true
Gross Method: Purchases discounts account is reported in the income statement as a reduction of purchases Net Method: Purchase Discounts Lost are reported in the income statement in the other expense section of the income statement
true
If beginning inventory is overstated, cost of goods sold is overstated and net income and retained earnings are understated.
true
If inventory declines in value below its original cost, a company should write down the inventory to reflect this loss A company abandons the historical cost principle when the future utility (revenue producing ability) of the asset drops below its original cost.
true
If the transfer with recourse does not meet these three conditions, the transaction is accounted for as a secured borrowing and a liability is recorded.
true
In a period of rising prices, the LIFO method always produces the lowest ending inventory and LIFO periodic results in a lower inventory than LIFO perpetual.
true
In instances where no interest rate is stated, the company measures the present value of the note.
true
In order to accelerate the receipt of cash from receivables, they may be transferred to a third party for cash.
true
Interest costs associated with financing the purchase or holding of inventory should be expensed as incurred even if the financing is tied directly to the inventory and repayment is tied to the sale of the inventory.
true
LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value.
true
LIFO is preferable if revenues have been increasing faster than costs.
true
LIFO liquidations often distort net income and may result in substantial tax payments.
true
Like the gross profit method, the retail inventory method provides an estimate of ending inventory. Unlike the gross profit method, the retail inventory method produces estimates that may be acceptable for financial statement purposes.
true
Loss method. Report the inventory decline with a debit to a loss account and a credit to an allowance account. This allowance amount is deducted from Inventory on the balance sheet. The allowance account must be adjusted each period Using the loss method implies that inventory write downs are infrequent or unusual as the loss account is shown in the "other expenses and losses" section of the income statement. If these write-downs are not unusual infrequent, the losses should be charged to cost of goods sold (even if you use a loss account in the ledger).
true
Manufacturing costs should be included in work in process or finished goods Inventory
true
Markup can be expressed as a percentage of cost or as a percentage of retail. If you are given the markup on cost, you must convert it to a Gross Profit Rate (markup on retail) to apply in the Gross Profit Method of estimating Inventory.
true
Rationale for this lower-of-cost-or-"constrained-market" rule: (1) A decline in the selling price of an item is not always accompanied by a decline in cost. That is, a reduction in the replacement cost of an item fails to indicate a corresponding reduction in its utility. (2) If an item has not lost its revenue-producing power, a writedown to replacement cost in the current period would understate current income and overstate income in the period of sale.
true
Remember that the ending inventory of one period is the beginning inventory of the next period. So errors will affect two periods.
true
Sales Returns and Allowances is a contra revenue account to Sales Revenue.
true
Supplies inventory account is often used for indirect materials in manufacturing companies
true
The LCNRV rule may be applied either (a) directly to each item, (b) to the total of the inventory, or (c) to the total of the components of each major category. Many companies price inventory on an item-by-item basis. This approach gives the most conservative valuation for balance sheet purposes. It may be beneficial for companies to use a pooling approach and aggregate inventory items into pools of similar items if justifiable. The higher the level of aggregation for inventory pools, the less likely there will be a write down.
true
The SEC recommends that legally restricted deposits held as compensating balances against borrowing arrangements be reported separately in either the current assets section or the noncurrent assets section, depending on whether the borrowing arrangement is short-term or long-term.
true
The consignee makes no entry to the inventory account for goods received.
true
The direct write-off method usually fails to record expenses in the same period as the associated revenue and therefore violates the expense recognition concept. Percentage of sales and percentage of receivables both estimate bad debt expense and report in the same period as the related sales.
true
The effect of an error on net income in one year will be counterbalanced in the next, however the income statement will be misstated for both years
true
The present value of the future cash flows is the proper amount to record for notes.
true
The profession specifically excludes from present value considerations "receivables arising from transactions with customers in the normal course of business which are due in customary trade terms not exceeding approximately one year."
true
The understatement does not affect cost of goods sold and net income because the errors offset one another
true
Unrealized holding gains and losses from fair value adjustments are reported as a component of other comprehensive income
true
When a sale on account is made under a perpetual inventory system, Accounts Receivable is debited for the selling price of the goods and Cost of Goods Sold is debited for the cost of the goods.
true
When sales are recorded gross, companies do not recognize sales discounts.
true
With respect to inventories, IFRS defines "market" as net realizable value.
true
collection of cash only requires one party in secured borrowing examples
true
expense inventories when sold
true
fair value recorded as net income
true
freight in is not calculated in retail subtract inventory losses due to normal breakage from retail
true
inventory adjustment = LIFO inventory + LIFO reserve = FIFO inventory
true
loss on sale of receivables is the interest revenue for the purchaser
true
physical inventory which involves an actual inventory count, should be performed at least once annually.
true
review CPA question 07 on practice question Chapter 8
true
sales-(salesxgross profit percentage)= estimated ending inventory
true
the retail inventory method produces estimates that may be acceptable for financial statement purposes.
true
when computing COGS when using cost/retail; compute using the cost information to get COGS
true
writing something off is debiting the contra asset account so reduce the allowance account by subtracting
true
Effective-interest method
—Amortization method which determines periodic interest revenue by applying a constant interest rate (the market rate at which the note was issued) to the net carrying amount of the note. The dollar amount of interest revenue changes each period as the net carrying amount of the note changes.
Present value
—At the date of issuance, a note is valued at the present value of the future principal and interest cash flows, discounted at the market rate of interest. Changes in the market rate of interest are ignored throughout the remainder of the life of the note.
Premium on notes receivable—
—At the date of issuance, this represents the excess of the present value of the note over the face value. A premium arises because the market rate is less than the stated rate.
Direct write off method
—When a specific account is determined to be uncollectible (which may not occur in the period of sale), Bad Debt Expense is debited and Accounts Receivable is credited. If receivables or the amounts not collectible are material, this method is not permitted under US GAAP.
