CPA Far- Module 5

Two-Step Process Is Involved in Computing Capitalized Interest—The two steps are:

(1) compute average accumulated expenditures, and (2) apply the appropriate interest rate(s).

What happens when the number of units purchased or produced is less than the number of units sold? Under LIFO, the computation of cost of goods sold for the current period first uses all the purchases for the period. Then it works backward in time and liquidates layers that were added in previous periods (latest layer added first), until the total number of units sold for the period is costed. A LIFO liquidation is that part of current-period cost of goods sold represented by the cost of goods acquired in prior years. LIFO liquidations occur either from______ or ______

(1) poor planning, or (2) lack of supply.

This section address (1) the items, and ___________

(2) costs that should be included in the inventory account.

Group/composite methods This system applies the straight-line method to groups of assets rather than to assets individually. Accumulated depreciation records are not maintained by asset; rather, only a control account is used to accumulate depreciation. Gains and losses are not recorded. The entry to dispose of an asset plugs the accumulated depreciation account. The composite depreciation rate =

(Annual group SL depreciation) / (Total original cost of group)

Service hours method The life of the asset is defined in terms of service hours, and the depreciation rate per service hour is calculated by using the formula shown below. The number of total service hours the asset will provide must be estimated and used as the denominator.Depreciation Rate =

(Cost − Salvage Value) / (Useful Life in Service Hours)

Depletion is not an expense but an allocation of the natural resource from noncurrent assets to inventory. When units of the natural resource are depleted, inventory is debited and the natural resource account is credited. Because the useful life is directly associated with the amount of resources extracted, the activity or units of production base method is widely used. Depletion for a Period =

(Depletion Rate) × (Number of Units Removed in Period)

Depletion Rate =

(Natural Resources Account Balance − Residual Value) / (Total Estimated Units)

The margin on cost is sales less cost of goods sold divided by cost of goods sold. Margin on Cost =

(Sales − Cost of Goods Sold) / Cost of Goods Sold

ormulas: The margin on sales is gross margin divided by sales, or sales less cost of goods sold divided by sales. Gross Margin Percentage = Margin on Sales =

(Sales − Cost of Goods Sold)/Sales

IFRS specifically prohibits the use of LIFO as a cost-flow assumption. In the U.S. approximately _____% of publicly traded companies use LIFO. The main motivation for LIFO in the U.S. is that it lowers net income and therefore lowers taxes. This difference in accounting is viewed as a significant barrier to convergence, as U.S. companies would be forced to recognize significant gains if they had to abandon LIFO.

30

ASU ________ provides guidance on the measurement of expected credit losses on trade accounts receivable. This guidance is referred to as the current expected credit loss (CECL) model. CECL requires the entity to measure expected credit losses for the accounts receivable as of each balance sheet date and is based on current conditions and reasonable (and supportable) forecasts. This means that in addition to estimating the allowance as shown previously, the entity will adjust the historical uncollectible percentage for forecasted losses. The entity must estimate the CECL over the entire life of the receivable (accounts receivable and notes receivable), even if the likelihood of credit loss is remote.

326-20-55

Type of Transaction—When a company transfers receivables to a third party or uses the receivables as collateral for a loan, a determination must be made as to the substance of the transaction: Is it a sale or is it a loan? Codification _______ identifies the key characteristics of a sales transaction.

860-40

Simple Bank Reconciliation—This type of reconciliation explains the difference between the balance per books and the balance per bank at the end of the month. For example, the November 20X7 bank reconciliation would reconcile the balance per books on November 30, 20X7, with the balance per bank on November 30, 20X7. There are three formats for the simple bank reconciliation

:Bank to book—The starting point is the balance per bank. All adjustments are made to this balance to arrive at the balance per book.NoteThe third format is the format that is typically emphasized on the CPA Exam and will be the focus of our coverage.Book to bank—The starting point is the balance per book. All adjustments are made to this balance to arrive at the balance per bank.Bank and book to true balance—In this format, the bank balance and the book balance are separately reconciled to the true cash balance, which is reported in the balance sheet. The adjustments to the two starting points (bank balance and book balance) are those changes in cash that have not been recorded in the bank or the books at the end of the period.

Several methods of depreciation are acceptable under GAAP. They can be categorized into two basic types: (1) straight-line methods and (2) accelerated methods. Straight-line methods (a constant rate of depreciation) Straight-line method Formula is_

Annual depreciation is calculated by the formula shown belowCost − Salvage Value / Useful Life = Annual Depreciation

Assets to Be Disposed of Other Than by SaleAccounting—Continue to classify the asset as held for use until disposal occurs, and continue to depreciate the asset. Apply the impairment standards for assets in use. Compute recoverable cost as for assets in use. These assets are treated as such because even though the plan is to dispose of the asset, the firm will derive the remaining utility of the asset (if any) from operations rather than via disposal. For exchanges and spin-offs, an additional impairment is recorded at disposal if ___

BV > FV.

Measurement of Impairment Loss An impaired asset is written down to FV. The loss equals

BV less FV

Variations—The variations of the retail inventory method are directly related to the calculation of the cost ratio. There are five variations, four of which are summarized below. The fifth is covered in the "Dollar-Value LIFO Retail" lesson. Average—The cost ratio includes beginning inventory, along with current-period purchases in both the numerator and the denominator of

C/R.

The amount of depreciation recognized each period is affected by the following four factors. Only the first factor, capitalized cost, is a definite amount. Two estimates are used, and the firm has a free choice among the available methods. ____ ____ ____ ____

Capitalized cost Estimated useful life Estimated salvage value (the cost of the asset not subject to depreciation—that is,the portion of initial cost expected to be returned at the end of the useful life) Method chosen

Summary—The LC-M valuation process has two steps:

Compute market value (the middle of the three amounts). Value inventory at the lower of original cost or market value (LC-M).

_______Many firms include depreciation expense in Selling, General, and Administrative Expense and report the components in a footnote. Accumulated depreciation is a contra-plant asset account. The use of a contra account preserves the original cost information in the plant asset account.

Contra Account:

Units of output methodThe life of the asset is defined in terms of units of output, and the depreciation rate per unit of output is calculated using the formula shown below. The number of total units the asset will produce must be estimated and used as the denominator. Depreciation Rate = (

Cost − Salvage Value) / (Useful Life in Units of Production)

Separation of Duties—Separation of duties makes it more difficult for employees to perpetrate fraud and gain access to the firm's cash. Separation of Duties, in effect, forces employees to collude if they attempt to fraudulently remove any of the company's cash resources. At a minimum, the duties related to cash that should be separated are:________

Custody of cash Recording of cash Reconciliation of bank accounts

_______Total depreciation to be recognized over the life of the asset. This amount equals original cost less salvage value.

Depreciable Cost:

Beginning Inventory + Net Purchases = ________+________ To assign a value to ending inventory and cost of goods sold, we apply one of four cost-flow assumptions. These cost-flow assumptions are identified below. Although the merits of each flow assumption are discussed below, remember that firms are free to decide which assumption to choose.

Ending Inventory + Cost of Goods Sold

Inventory effects are analyzed with the basic inventory equation: Beginning Inventory + Net Purchases = _____+______

Ending Inventory + Cost of Goods Sold

The weighted average method treats each unit available for sale (beginning inventory and purchases) as if it were costed at the average cost during the period. It produces cost of goods sold and ending inventory results between those of

FIFO and LIFO when prices change during the period.

IFRS is more flexible in allowing reversal of impairment losses than U.S. GAAP. In each topical area where impairment is discussed, CPAexcel® will let you know when the impairment can be reversed. The following discusses some terminology: Recoverable amount: the higher of the fair value less cost to sell or value in use: ______ _______

Fair value less cost to sell is the amount obtainable from the sale in an arms-length transaction between knowledgeable, willing, and able parties.Value in use is the discounted present value of the futures cash flows expected from the asset.

A manufacturing company has all three types of inventory items. That is, a manufacturing company has:

Finished goods inventory Work-in-process inventory Raw materials inventory

_____________ overhead is one of the four manufacturing input costs—The others are direct material, direct labor, and variable overhead. Fixed overhead does not vary with small changes in production volume and, therefore, is often allocated to production based on a predetermined overhead rate. For example, if direct labor hours is used for allocation purposes, and the fixed overhead allocation rate is $4 per direct labor hour, then a production run using 1,000 direct labor hours would receive an allocation of $4,000 of fixed overhead cost. The $4 rate is the ratio: (budgeted fixed overhead)/(budgeted direct labor hours).

Fixed

To be included in plant assets, an asset must: Be currently used in operations; Have a useful life extending more than one year beyond the balance sheet date; and______

Have physical substance. Intangible assets are different from plant assets in that they have no physical substance.

Interest on Borrowed Funds—In some cases, the proceeds from a specific construction loan are not fully used for financing the construction until well into the construction phase. Part of the proceeds may be invested in a bank account or a debt security may be purchased. Interest revenue on unused proceeds temporarily invested is not offset against interest to be capitalized. The interest revenue is reported separately and has no effect on interest capitalized. What is the Exception—_____-

If the funds are externally restricted tax-exempt borrowings, then a right of offset exists because the funds are restricted to use in construction.

Components of Capitalized Cost—The capitalized cost of a self-constructed asset includes four components: Labor—The direct labor charges related to the construction of the asset will be capitalized. Usually, labor charges are expensed in the period incurred, but in this instance, the labor charges are capitalized. This component of the cost of the asset includes any fringe benefits related to the basic labor cost. Material—The direct materials related to the construction of the asset will be capitalized. Overhead—The overhead charges related to the construction of the asset will be capitalized. Usually, the capitalization of overhead charges is accomplished by one of two approaches. ______ & ______- Interest cost incurred during the construction period—(This topic is separately discussed in detail in a later lesson.) Capitalization of interest is allowed only when assets are constructed. When assets are purchased outright, any interest on debt incurred to purchase the asset cannot be capitalized.

Incremental overhead approach—One approach is to capitalize only the incremental overhead. For example, if a company typically has $5,000,000 of overhead, but during the period of construction, overhead increased to $5,500,000, the incremental overhead related to the project is $500,000. Pro rata overhead allocation approach—Another approach is to capitalize the overhead on a pro rata basis. For example, if the project represents 15% of the total direct labor hours for the period, 15% of the total overhead will be allocated to the project.

Simple Bank Reconciliation Adjustments to the book balance

Interest earned Note collected Service charges NSF checks Errors in firms records

______- For manufacturing assets, depreciation is included in overhead and allocated to production based on machine hours or direct labors. The result is that Work in Process is debited for depreciation cost. When the products are sold, Cost of Goods Sold includes depreciation. A separate expense for depreciation is not recorded for manufacturing assets.

Manufacturing Assets:

_______Salvage value. In no case is salvage value depreciated. Thus, book value always includes salvage value. An asset cannot be depreciated such that its book value is less than salvage value.

Minimum Book Value:

A post-acquisition cost is capitalized if, as a result of the expenditure, the asset is: ____ _____ Otherwise, the expenditure is expensed. Although an argument can be made that ordinary maintenance and repairs prolongs the useful life of an asset, the estimated useful life of an asset assumes a minimum level of periodic service.

More productive (provides more benefits); or Has a longer useful life.

___________—This is the net increase in the original selling price. This amount is the net sum of additional markups above the original selling price less additional markup cancellations. A markup cancellation is a reduction of the additional markup, not a reduction below the original selling price. This amount is added only in the retail column and before computing the cost-to-retail ratio.

Net Additional Markups

__________—Shown at retail value, subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio. Abnormal Shortage (losses)—Shown at both cost and retail, the amount of merchandise available for sale has declined. Reduce the cost and retail value of goods available for sale before computing the cost-to-retail ratio. This loss is usually recoverable through insurance.

Normal Shortage (spoilage)

Excluded from cash—Cash does not include certificates of deposit, legally restricted compensating balances, or restricted cash funds (such as a bond sinking fund). These amounts are either:

Not available for the immediate payment of debts; or Management's intent is to use these resources for specific purposes. In addition, cash excludes postdated checks received from customers (include these in accounts receivable), advances to employees (a receivable), and postage stamps (a prepaid expense).

EXAM TIP

On the CPA Exam, average LC-M is frequently referred to as the conventional retail inventory method. This method is the one most emphasized on the exam. The variations are presented here for completeness; however, the probability of questions on these variations is relatively low.

Categories Within Plant Assets WHAT ARE THE 5?

P&E Land Improvements Land Natural Resources Leasehold Improvements

There are three kinds of noncurrent assets subject to depreciation or similar process. Different terms are used for each, but all involve a systematic and rational allocation of historical cost to time periods of use:

Plant assets are depreciated; Natural resources are depleted; Intangible assets are amortized.

Benefits—Bank reconciliations provide the following benefits: Enable a periodic comparison of the bank account balance and cash balance Help identify errors in the firm's records or bank records Establish the correct ending cash balance _____ ______

Provide information for adjusting entries Help reduce cash theft by employees if the reconciler does not have access to cash records or does not have access to cash (authorization to make disbursements, or cash custody)

Because cash is easily concealed and has universal value, companies go to great lengths to safeguard their cash. A variety of internal control measures are used to safeguard cash. The auditing section of this course considers these measures in detail. For cash, the most popular ones are:

Separation of duties Bank reconciliations

If the expenditure is material in amount, the accounting treatment of the expenditure will be determined by examining the estimated time of benefit related to the expenditure. To be capitalized and then depreciated, an expenditure must make the asset "bigger, better, or last longer." In other words, the asset must have increased or improved functionality, make better products, or have a longer life. Three examples of this concept follow:

The estimated useful life of the asset is extended beyond the original estimation (i.e., expenditures for a major overhaul of a bread oven in a commercial bread bakery that might extend the life of the oven beyond the original estimate). The asset becomes more efficient or productive, meaning it can produce higher quantities or operate at a lower cost (i.e., a new laser product sorter might be added to a machine, replacing human efforts to sort out defective products and speeding up the process). Quality of the asset's output is improved (i.e., upgrades to equipment for a textile entity, which enable it to produce a sheet with a higher thread count).

In addition, two different methods of accounting for receivables may be used:

The gross method, which records receivables at gross invoice price (before cash discount) The net method, which records receivables at net invoice price (after cash discount)

The Parties Involved in a Transfer of Receivables are ____ _____ _____

The maker, which is the debtor that has borrowed funds or purchased an asset and provided a note to the original creditor. The original creditor (transferor), which is the firm that has loaned funds or sold an asset to the maker. The third-party financial institution (transferee), which provides the funds to the original creditor.

Criteria for Sale—Criteria for determining if the transfer of receivables is a sale: The transaction is a sale of the receivable if three conditions are met. If the three conditions are met, then control has effectively passed to the third party (transferee) and a sale is implied. The three conditions are:

The transferred assets have been isolated from the transferor, even in bankruptcy. The transferee is free to pledge or exchange the assets. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.

Apply the Appropriate Interest Rate—If AAE is the amount of debt that could have been retired for the year, then an interest rate multiplied by AAE is the amount of interest that could have been avoided. This is the amount of interest to be capitalized, subject to the limitation that capitalized interest cannot exceed_____

actual interest cost for the period.

Depletion is the term used to refer to the _______Depletion is taken on the natural resource asset (sum of the three costs above less the residual value).

allocation of the cost of the natural resource to inventory.

Uncollectible Accounts Receivable Entities are required to pool receivables with similar risk characteristics (e.g., geographic region or customer type) when estimating the expected credit loss. At each reporting date, the entity reestimates the amount expected to be collected and adjusts the allowance. The entity must disclose enough information about the ___________ the estimation method used, significant inputs, and circumstances that caused a change in the allowance.

allowance for credit loss so that the financial statement user can understand

Most companies will use one of two methods to account for bad debt expense. The direct write-off method is the first method presented, followed by the ________

allowance method.

Benefits of this Method—The positive aspects of the Allowance Method are twofold. First, the allowance method allows companies to value accounts receivables at net realizable value on the balance sheet. Second, the use of the allowance method _______

allows companies to recognize the revenues and expenses from credit sales in the same accounting year.

Methods of Accounting for Exploration Costs The choice between the successful-efforts and full-costing methods is among the most important a firm has to make. The choice can have a large effect on net income and total assets. The successful-efforts method best reflects the definition of _______The full-costing method reflects the matching principle—and capitalizes all costs until the natural resource deposit produces revenue through sale of the inventory. Another justification for full costing is that all exploration efforts contributed to finding the resource.

an asset because only those efforts that located the resource are capitalized to the natural resource account.

Accounting for Cash—The main reporting issue for cash is what to include in this category of assets. Several items are included in the cash account for balance sheet reporting purposes, and there are others that at first_______

appear to be cash but are excluded.

o ensure that unallocated fixed overheads are expensed, Codification 330-10-30 requires for external financial reporting purposes, that normal activity be used for the denominator level. Normal activity is a measure of the average production volume (as measured in units, direct labor cost or hours, machine hours, or other predicted amount) expected for a budget horizon typically extending beyond one year and takes into account lost production due to planned maintenance. The range in production volume over more than one period establishes the normal capacity amount. Shorter-range budgeted volumes should not be used as the denominator. During periods of abnormally low production, the use of actual production volume would result in higher overhead rates, causing more overhead to be allocated to product. By requiring normal capacity, higher amounts of fixed overhead will not be allocated to the product during low production periods. Fixed overhead that has not benefited production is not an ________

asset and should be expensed as incurred.

Matching Principle—Interest capitalization exemplifies the matching principle. Until the asset is in service, it cannot produce revenue. The asset is also not yet in its intended condition and location. Thus, expensing of the interest is deferred until the

asset can provide revenues against which to match the interest expense.

The impairment loss recorded equals the difference between the ________). The estimated cost to sell increases the loss.

asset's BV and its (FV less cost to sell

Asset Groups—Many, if not most, assets do not function independently but are rather part of a working group. For purposes of the test for impairment, assets are grouped__________ The three amounts (BV, FV, RC) are measured at this level. One intended effect of this rule on grouping at the LOWEST level rather than a higher one is to decrease the incidence of merging assets with impairment losses with those for which FV > BV in which case there would be__________recognized.

at the lowest possible organizational level at which cash flows can be identified. fewer or no impairment losses

Receivables are valued on the _______. Depending on the type of receivable, there are several factors that cause the valuation of a receivable to be less than its face or nominal value.

balance sheet at net realizable value, the amount of cash that the entity expects to collect at due date or at maturity

Variations—The variations of the retail inventory method are directly related to the calculation of the cost ratio. There are five variations, four of which are summarized below. The fifth is covered in the "Dollar-Value LIFO Retail" lesson. FIFO—The C/R excludes the cost of ____- from the numerator and the retail value of beginning inventory from the denominator. Thus, C/R measures the cost-to-retail ratio only for the current-period purchases on the assumption that all beginning inventory will be sold (first-in, first-out). If ending inventory consists entirely of current-period purchases, the C/R should not include beginning inventory.

beginning inventory

Methods of Accounting for Exploration Costs Full-costing method—All costs of exploring for the resource are

capitalized to the natural resources account. (The total amount capitalized cannot exceed the expected value of resources to be removed.)

Methods of Accounting for Exploration Costs Successful-efforts method—Only the cost of successful exploration efforts is

capitalized to the natural resources account; unsuccessful efforts are expensed.

Interest cost is typically expensed in the period incurred. However, when a company constructs a fixed asset, the interest cost incurred during the construction period is considered a get-ready cost and is, therefore, ______

capitalized. Interest capitalization increases both plant assets and income.

The get-ready costs include all costs incurred to get the asset on the company's premises and ready for use. For example, the setting up and testing of new machinery is a get-ready cost. The general rule for capitalizing expenditures related to the acquisition of plant assets is similar to the rule for

capitalizing costs to inventory.

The balance sheet and the statement of cash flows: If a business enterprise uses the term cash on the statement of cash flows, the term used on the balance sheet will likewise be cash. If a business enterprise uses the term cash and cash equivalents on the statement of cash Flows, the term on the balance sheet will be_____ & ______--

cash and cash equivalents.

IFRS is more flexible in allowing reversal of impairment losses than U.S. GAAP. In each topical area where impairment is discussed, CPAexcel® will let you know when the impairment can be reversed. The following discusses some terminology: Cash-generating unit (CGU) is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets. Impairment tests are all applied to the individual asset level. If the cash flows for the individual asset are not identifiable, then you measure the cash flows from the_______

cash-generating unit.

If the inventory is measured using LIFO or the Retail Inventory Method (RIM), then the subsequent measurement is cost (as determined by LIFO or RIM) or market (L-CM) with market defined below and limited to a

ceiling and a floor.

Companies often commit (in a contract) to the purchase of materials to lock in the unit price of an item needed for production or resale in order to aid in cash flow budgeting and to protect against price increases. Sometime the market price of the item declines below the contract price. The accounting for this price decline depends on whether the contract can be revised in light of the

changing market conditions.

Declining-balance method This method differs from those discussed previously in three ways: Salvage value is not used in the computation of depreciation. Annual depreciation is based on the beginning book value of the asset. This book value declines over time, hence the name of this group of methods. This also is why salvage value is not subtracted. Book value always includes salvage value because salvage value is never depreciated. Each year, accumulated depreciation must be hecked to ensure______

checked to ensure that book value does not fall below salvage value.

Non-Interest Bearing Note Receivable—The interest element is not explicitly stated. For example, the note might be identified as a two-year, $13,000 non-interest-bearing note. The amount of cash to be collected from a non-interest-bearing note is the face amount of the note. That is, the face amount of the note includes principal and interest that will be

collected at maturity date.

Increase the larger asset account by the post-acquisition cost. This approach is used when the productivity rather than the useful life of the larger asset is enhanced, and when the accounting system does not maintain records of the old

component cost and accumulated depreciation.

Depreciation on Assets Used in Extraction—Depreciation on equipment used in the extraction effort is a ______-. It does not contribute to depletion. The entry for extraction costs generally includes a debit to extraction costs and a credit to accumulated depreciation for depreciation on the cost of assets used in extraction. How the equipment is depreciated depends on whether it can be moved from one site to another.

component of total extraction costs

Specific Identification—The results (values placed on cost of goods sold and ending inventory) for this cost-flow assumption are the same for both the periodic and perpetual systems. The specific cost of each item sold is used to

compute the cost of goods sold.

Assets to Be Disposed of Other Than by Sale This category includes disposal by abandonment, by exchange for a similar asset, and by distribution to shareholders as a spin-off. Note that dissimilar asset exchange is not included in this category because that transaction is

considered a sale—the culmination of an earnings process.

If the transaction is completed without recourse, the transferor is not responsible for nonpayment on the part of the maker of the receivable. Typically, nonrecourse transfers are accounted for as sales because

control has passed to the transferee (financial institution).

Effective January 1, 2017, if the entity uses FIFO or weighted average inventory valuation method, then the subsequent measurement is _____-

cost (as determined by FIFO or weighted average) or net realizable value (LC-NRV).

Net Purchases—Net purchases (purchases less purchase returns plus transportation in) is included in both _________ values. Add net purchases to both cost and retail before calculating the cost-to-retail ratio.

cost and retail

Lower of Cost or Market ComparisonThe individual item basis yields the most conservative (lowest) inventory value (and largest holding loss) because for each item the lower of cost or market is chosen. There is no chance for items with market exceeding cost to cancel against items with __________, as there is with the other two approaches.

cost exceeding market

Remember that in this entire discussion, for external purposes the firm is using LIFO, applied through the DV LIFO method. The firm may use another

cost flow assumption (typically FIFO) internally.

Bad debt expense traditionally has been considered a-_______rather than a sales adjustment.

cost of doing business

The basic method: The method can be shown in equation form: EI(cost) = EI(retail) × C/R, where EI is ending inventory and C/R is the cost-to-retail ratio for the period. The retail inventory method can be used with FIFO, LIFO, and average cost-flow assumptions. Cost of goods sold is found by subtracting ending inventory at cost from ________

cost of goods available for sale.

If the business entity has somewhat large, distinguishable products, it might be appropriate to use specific identification. For example, an automobile dealer might find this cost flow assumption appropriate. To continue the example, the dealer counted a total of 49 automobiles in inventory at year-end. The dealer can identify each automobile by vehicle number and match the invoice cost by vehicle number as well. To value its ending inventory, the dealership is able to specifically identify the cost of each of the inventory items and then total the individual cost of all the inventory items. Likewise, the dealership can specifically identify the cost of each item sold and total these amounts to determine

cost of goods sold for the period.

Intermediate accounting considers the general issue of costing inventory but limits its consideration to merchandise inventory—that is, inventory purchased for resale. The Management Accounting section of CPAexcel® addresses a related issue: how to determine the _________. Manufactured inventory ultimately should reflect the actual cost of manufacturing.

cost of manufactured inventories

In assessing the relative attributes of LIFO, it is important to remember three important points of emphasis. If LIFO is employed by a business entity, the matching of revenues and expenses on the income statement is significantly improved over FIFO. That is, the income statement involves the matching of revenues of the current year with the

cost of merchandise acquired in the current year.

he main difference in the recognition criteria between U.S. GAAP and IFRS is that IFRS defines revenue from a balance sheet point of view and is based on the inflow of economic benefits during the ordinary course of business. This means that accounts receivable (and revenue) can be recognized if there is a firm sales commitment and the recognition criteria have been met. The revenue and asset are recognized when:

There are probably future economic benefits. Revenue can be measured reliably. Costs can be measured reliably. Significant risk and rewards of ownership are transferred. Managerial involvement is not retained as to ownership or control. Therefore, a firm sales commitment may meet the IFRS criteria for recognition, but in the U.S. the revenue and asset from a firm sales commitment would not be recognized.

Indicators of Impairment—Impairment testing must be completed when any of the following conditions occur. Significant decrease in the fair value of the asset Significant change in the way asset is used or physical change in asset An unfavorable change in laws, regulations, or the business climate that would adversely affect the use of the asset Significantly higher than expected costs involved with the construction or acquisition of an asset ________ _________

There have been or projected to be negative operating or cash flow (losses) from the asset. The entity decides to sell the asset before the end of its expected life.

Factors Affecting Receivable Valuation— Several items affect the net valuation of receivables (and net sales). Accounts receivable typically reflects more adjustments than notes receivable. Accounts receivable is shown at its net collectible amount. The adjustments to accounts receivable include:

Trade (quantity) discounts Cash (sales) discounts Sales returns and allowances Noncollectible accounts

But What Interest Rate Should Be Used? U.S. GAAP does not limit capitalized interest to specific construction loan interest. Rather, the more general concept of avoidable interest is used. Two ways of computing total interest to be capitalized are allowed:

Weighted Average Method—Capitalizes interest using the weighted average rate on all interest bearing debt. Specific Method—Capitalizes the interest on specific construction loans first. Then, if needed, capitalize interest on all other debt based on the average interest rate for that debt.

The retail inventory method, which is really a family of related methods, is based on three basic calculations. First, ending inventory at retail is calculated or counted at year-end. Second, the cost-to-retail ratio is calculated. Third, the ending inventory at retail is multiplied by the________-

cost-to-retail ratio to arrive at estimated inventory at cost.

If LIFO is employed by a business entity, the balance sheet presentation of inventory is less than ideal. For the company employing LIFO, inventory on the balance sheet typically reflects the cost of the "oldest" merchandise included in the company's inventory records. This means the balance sheet does not reflect the ________- and often times, means the inventory is undervalued on the balance sheet.

current cost of inventory

land is held for investment purposes or for future development, it is excluded from plant assets because it

currently is not a productive asset.

Trade Receivable—Another name for _____ Nontrade Receivables—Those receivables created in noncustomer transactions.

customer accounts receivable.

Simple Bank Reconciliation Explanations of adjustments to the bank balance

deposit in transit Cash on hand outstanding checks errors made by the bank

Partial or fractional year depreciation Assets not purchased at the beginning of a fiscal year must be depreciated on a fractional year basis. Firms often use a simplifying convention such as:________&________. Over large groups of assets, these conventions are acceptable if applied consistently. However, a more exact approach is required on the CPA Exam.

depreciate all assets a full year in the year of acquisition, and recognize no depreciation in the year of disposal

Additions—Extensions or enlargements of existing assets.If an integral part of the larger asset, depreciate the addition over the shorter of its useful life or the remaining useful life of the larger asset.If not, _-

depreciate the addition over its useful life.

Component Depreciation—When an item of PPE comprises individual components for which different depreciation methods or rates are appropriate, each component is _______ For example, a building can be broken down into components: roofing, electrical system, plumbing system, structural, etc. Component depreciation is based on the premise that each component of the asset has its own useful life and fair value.

depreciated separately.

The use of the gross margin method depends on how the margin on sales is expressed. Margin on cost is always greater than margin on sales because sales exceed cost. The two ways of expressing the margin are related. The following two examples show how each may be converted to the other. The goal is to use one of the two formulas to _____ It is the cost/sales ratio that is used to determine cost of goods sold.

determine cost/sales.

Cost-Flow Assumptions In choosing the appropriate cost-flow assumption, a business entity should select the cost-flow assumption that allows the company to do the best job of _______

determining periodic net income.

Assets in Use—Assets in use are written down to fair value if their recoverable cost is less than book value. The amount of the impairment loss recognized is the _______ Note that the determination of impairment is a step separate from the measurement of the loss; both use different values.

difference between book value and fair value.

loss is not probable given that the contract can be revised. The Contract Cannot be Modified—In this case, the loss must be accrued because the loss is probable and estimable. The inventory, when acquired, is recorded at market value and a loss is recognized for the )________ If the contract has not been executed as of the balance sheet date, the following adjusting entry is made:

difference between the market value and the contract price.

Capitalized interest is limited to actual interest incurred because avoidable debt is the lower of (1) AAE (average accumulated expenditures) and (2) total interest-bearing debt. The actual amount of interest incurred sets the ceiling on interest to be capitalized. When AAE < total interest-bearing debt, reported interest expense for the period is the ________ When AAE > total interest-bearing debt, all interest cost is ________

difference between total interest cost and the amount of interest capitalized. In this case, because AAE is less than total debt, not all debt could have been avoided. capitalized and there is no reported interest expense for the period. In this case, all debt could have been avoided had construction activities not taken place.

Only ______ incremental costs are used in the computation of cost to sell.

direct

Depreciation is not a source of funds. Although it provides a tax deduction, the same can be said for any deductible expense. Note that most firms use straightline (SL) depreciation for financial reporting, and MACRS (modified accelerated cost recovery system) for income tax reporting. MACRS is the same as the d____--

double-declining balance (DDB) method with a half-year convention applied.

Thus, if LIFO is chosen, the inventory value in the balance sheet can be a very noncurrent and irrelevant amount, but cost of goods sold (and, therefore, gross margin and income) are considered to be much more current or relevant. LIFO favors the income statement. These effects hold regardless of th_________. In addition, LIFO tends to minimize inventory profits (also called phantom or illusory profits).

e direction of price level changes (increase or decrease) during the period

During periods of rising specific inventory prices, LIFO produces the lowest net income because cost of goods sold is costed with the highest-cost (latest) purchases in the period. This feature of LIFO is considered an advantage because reported gross margin reflects the latest purchase costs and therefore is more indicative of future gross margin. However, the ending inventory reflects the lowest (earliest) costs. Whenever the firm purchases (or produces) more units than it sells, a layer is added. This layer is costed with the ______- After several years of adding layers, ending inventory may reflect very old costs. Ending inventory under LIFO is a less reliable amount compared with FIFO ending inventory.

earliest costs of the period in which the layer is added, under the periodic system.

Present Value—In accordance with U.S. GAAP, all notes are recorded at the present value of future cash flows (notes of less than one-year term need not be recorded at present value). The discount rate used in this calculation is the market rate of interest on the date of note creation (this rate may be different from the note's stated rate—the rate that appears on the note). Furthermore, any discounts related to notes will be amortized by applying the _______ method.

effective interest

An entity will evaluate past history of the collection of accounts receivable to determine a rate from which to estimate future uncollectible accounts. This analysis may result in the application of a percentage to the ending accounts receivable. Alternatively, the company may analyze the__________This aging process involves grouping receivables by the amount of time they have been outstanding. Once the aging schedule is completed, the company then applies the rate of uncollectibility to each group of receivables.

ending accounts receivable by aging the ending accounts receivable.

The Retail Inventory Method—This method is used by retailers to estimate _________ Most retailers know the markup on the inventory items and are able to count ending inventory at retail prices (ever see the store employees counting items on a shelf?). This method is used both for internal decision purposes and for financial reporting of cost of goods sold and ending inventory.

ending inventory at cost.

Ending inventory End of the period—Under the periodic inventory system, a physical count of ending inventory is required. Once the number of units in ending inventory has been counted, a value is assigned to the_______- and the following year-end adjusting entry is prepared.

ending inventory,

FIFO—The results (values placed on cost of goods sold and ending inventory) for this cost flow assumption are the same for both the periodic and perpetual systems. The cost of the beginning inventory and earliest units purchased are assigned to cost of goods sold leaving the most recent purchase costs to be assigned to___-

ending inventory.

Inventories Carried at LIFO or RIM Use LC-M Calculate Market Value If the replacement cost value is within the range established by the ceiling value and the floor value, market is equal to replacement cost. If the replacement cost value is greater than the ceiling value, market is ________ If the replacement cost value is less than the floor value, market is equal ______ Market is also simply the middle amount (in dollar terms) of the three amounts: replacement cost, net realizable value, and net realizable value less normal profit margin. Market cannot exceed the______or ______-

equal to the ceiling value. to the floor value. ceiling or be less than the floor.

Interest/Market Rate—If the stated interest rate is not equal to the market rate of interest, the present value of future cash flows will not be equal to the face amount of the note. In this situation, a discount related to the note will exist. For a non-interest-bearing note, the present value of future cash flows will not be_________In this situation, a discount related to the note will exist.

equal to the face amount of the note.

The three methods of assigning value to inventory under IFRS are: FIFO, specific identification, and weighted average. IAS 2 presumes that the inventory valuation method will _______

follow the physical flow of goods to the extent possible.`

The asset is written down to (FV less cost to sell)—here the test for impairment and the measurement of the loss are the same. The term "recoverable cost" is not used for assets

for sale. If sale is expected beyond one year, the cost to sell is discounted.

Decision to Dispose If the decision to dispose of an asset and the ultimate disposal occur in the same period, the actual _________continuing operations. The disposal loss or gain equals the difference between FV and BV (if BV > FV, then a loss occurs; if BV < FV, then a gain occurs). Depreciation should be recognized to the date of the disposal unless the firm uses a convention for fractional year depreciation. The accumulated depreciation account is removed along with the asset's original cost.

gain or loss on disposal is recognized in income from

Cost-Flow Assumption—A perpetual system considers only goods on hand when computing cost of goods sold for a specific sale. As opposed to the periodic system, which considers all goods on hand during the period when computing cost of goods sold, a perpetual system computes cost of goods sold only for the _______

goods that have actually been purchased through the date of sale.

Impairments under IFRS have some general guidelines that will apply to loan impairment and other impairments we will discuss throughout the specific financial accounts. IAS 36 governs impairment of assets and in general the purpose of the standard is to make sure that assets are not carried at more than the recoverable amount. If the assets carrying value is ___________ then it is impaired.

greater than the amount that could be recovered through the assets use or by selling the asset,

For a variety of reasons, companies may need to estimate ending inventory using the______. A company may use an estimate of ending inventory for internal purposes during interim periods when a physical count is prohibitively expensive or when inventory is destroyed as the result of a casualty. The gross margin method can be used only for estimation purposes. It may not be used for financial reporting of inventory

gross margin method

The successful-efforts method results in a lower depletion rate but a higher exploration expense in periods of significant exploration.The successful-efforts method results in a lower depletion rate but a_______

higher exploration expense in periods of significant exploration.

Accelerated Methods—Accelerated methods of depreciation recognize depreciation at a faster rate early in the life of the asset. Later in the life of the asset, the amount of depreciation per period declines. This pattern of depreciation

holds regardless of how the asset is used in any given period.

Service Hour Method Depreciation for any given year is calculated by multiplying the service hours for the year by this constant depreciation rate per service hour. Annual depreciation varies with the number of service hours provided in the year. There is no expectation that depreciation will be the same amount each year. Justification—The asset will provide______-

essentially the same benefits per service hour. A delivery vehicle is an example of an asset appropriately depreciated on the service-hours method.

Depreciation for any given year is calculated by multiplying the units of output for the year by this constant depreciation rate per unit of output. Annual depreciation varies depending on the number of units produced in the year. There is no expectation that depreciation will be the same amount each year. Justification—The asset will provide _______

essentially the same benefits per unit produced. Oil drilling equipment is an example of an asset appropriately depreciated on the units of production method.

Negative Aspects of the Direct Write-Off Method—Aspects of the direct write-off method: First, ____- Second, ______ So, due to poor balance-sheet valuation and poor matching of revenues and expenses, the direct write-off method is not considered in accordance with GAAP unless there is no basis for estimating bad debts.

if the direct write-off method is employed, accounts receivable are overvalued on the balance sheet. for companies employing the direct write-off method, the company usually recognizes the revenue from a credit sale in one year and typically recognizes the bad debt expense in a subsequent year.

If book value (BV) > RC, then the asset is ______ because book value will not be recovered. If BV is $100 and RC is $70, then there is no accounting justification for reporting the asset at $100.

impaired

Impairment applies to those assets carried at cost or amortized cost. Assets carried at fair value with the unrealized gains and losses recording in income do not create an impairment loss because the

impairment is already captured in the fair value.

An entity must complete a review of its long-lived assets when triggering events occur and at each balance sheet date to determine if there is evidence that

impairment may exist.

Assets should be evaluated for impairment when certain indications are present, rather than on a regular basis. Significant declines in FV, changes in legal climate or physical nature of the asset are examples of signals that suggest an-______

impairment may have occurred.

Cost of goods sold is an ___________, rather than a directly calculated amount under this method.

implied amount

Interest Is Capitalized During Periods in Which All Three of the Following Conditions Are Met Activities that are necessary to get the asset ready for its intended use are

in progress. (Construction is proceeding.)

Cash Transaction—If the transaction is a cash transaction, such as a lending transaction, the present value of future cash flows will equal the amount of cash that

exchanged hands on the date of note creation.

Modifications—Improvements (betterments), replacements, and extraordinary repairs all involve a modification of an ______

existing component or part of the larger asset.

The analysis of ending accounts receivable has one simple objective: the determination of the needed or desired balance in the allowance account. By needed balance, we mean the balance needed to properly value accounts receivable on the balance sheet. The desired allowance balance equals the ___________

expected write-offs to occur in the future based on the receivables at the balance sheet date.

When the inventory of resource is sold, the costs that have been debited to it (depletion, extraction, production) are recognized as

expense through cost of goods sold.

Fixed overhead rates—These are subject to estimation errors and are affected by the choice of denominator measure and the budgeting horizon reflected in the denominator. Assuming no numerator (fixed overhead cost) variation, if actual production is less than the production budgeted for the denominator, less fixed overhead will be applied to product than is actually incurred. Underapplied fixed overhead resulting from low production volume must be ________ Low production volume does not imply that the inventory produced should carry a higher cost or is in any way more valuable.

expensed rather than allocated back to product.

Repairs keep the asset in an ordinarily efficient operating condition. Repairs do not typically x________ Repairs are typically expensed in the period incurred.

extend the life of the asset or increase its value

Market Value—If the stated interest rate is equal to the market rate of interest, the present value of future cash flows will be equal to the __________ In this situation, no discounts will exist.

face amount of the note.

All notes have an interest element. In an interest-bearing note, the interest element is explicitly stated, while in a non-interest-bearing note, the interest element is not explicitly stated but rather is included in the________- Notes typically result from the sale of property, conversion of accounts receivable, and lending transactions.

face value of the note.

Factoring without recourse—This type of factoring is usually accounted for as a sale because the ________against the transferor if there is a default on the receivables. The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments such as sales discounts and returns and allowances because they are considered preconditions.

factor has no recourse

An asset held for sale is impaired if its BV exceeds its_______

fair value less cost to sell at the end of the reporting period.

If the estimated time of benefit is related to the current accounting period only, the expenditure is recorded as an expense. Such expenditures are called "revenue expenditures"or "period costs." I f the estimated time of benefit is related to the current and future accounting periods, the expenditure is capitalized. The term "capitalized" means____-

included in an asset account.

Debit accumulated depreciation. This approach is used when the expenditure ________. The debit to accumulated depreciation turns back the clockon the life of the larger asset. This approach is suited especially to extraordinary repairs.

increases the useful life of the larger asset

Partial Year Computations—Construction projects may begin or end during a reporting period. Also, new debt may be incurred and other liabilities may be retired during a reporting period. GuidelinesInterest rate—Adjust the interest rate for the fraction of the year the debt is outstanding. If new interest-bearing debt is __________Assume a firm capitalizes interest quarterly. If $100,000 of 12% debt is incurred May 1, then for quarter 2, $2,000 of interest is included in the numerator of the rate (2 months' interest), and $100,000 is included in the denominator .Expenditures—Weight by the percentage of the _______qin the project. An expenditure occurring at the beginning of the second month of a quarter receives a weight of 2/3.

incurred during an interest capitalization period, the interest rate reflects the period the debt was outstanding. period invested `

If there is objective evidence that impairment may exist, the entity should measure and record the impairment loss. Previously recognized impairment loss is subject to reversal if the annual impairment test determines a recovery of a previously recognized impairment loss. The recovery cannot exceed the _____-

initial loss.

Terminology and Guidance in Applying the Retail Inventory Method Original Selling Price—Cost plus___

initial markup.

Some firms classify the natural resource as an intangible asset because they have purchased the rights to utilize the land and do not own the land itself. These mineral rights are an _____- asset.

intangible

Capitalize all expenditures necessary to bring the plant asset to its ____

intended condition and location.

Impaired Loans Receivables are Written Down to The present value of the future cash flows expected to be collected using the original effective interest rate for the loan, or Market value if this value is more determinable.The Write-Down (Loss)—This is accomplished with a debit to bad debt expense and a credit to a contra-receivable account. After the write-down, interest revenue is recognized under any of several methods found in practice, including the____ OR ___

interest method and cost-recovery methods (Codifications 310-10-35).

The justification for interest capitalization is that had the construction not taken place, the funds used in construction could have been used to reduce interest-bearing debt. This avoidable interest is the amount of ___-In a sense, the construction then caused that amount of interest, which, therefore, should be included in the cost of the asset constructed.

interest that would have been avoided had the construction not taken place.

The establishment of inventory pools simply means the company needs to group similar products into _________- For example, a department store might have one inventory pool that includes appliances. The conversion index can be calculated internally or obtained from an external source. Regardless of the method of acquisition, the conversion index represents the calculation shown below Conversion Index =

inventory groups.v Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars

Definitions Extraction Costs:Depreciation on removable assets, wages, and material costs pertaining to the extraction effort; these costs are debited to the ______-, not to the natural resources account.

inventory of resource

Production Costs:Additional processing costs after extraction; this cost also is debited to the________ , not to the natural resources account.

inventory of resource

The same cost formulas (e.g., valuation method FIFO) must be applied to inventory that is similar in nature and use. In the U.S., there is no restriction and different cost formulas can be applied to

inventory that is similar or with similar use.

End of the Period—A physical count of ending inventory should be completed to confirm inventory records. If inventory shrinkage has occurred (loss, theft, breakage), or if recording errors have been made, an appropriate adjusting entry would be prepared to reduce _________

inventory to the amount per the physical count. The entry would reduce the inventory account and record a shrinkage loss.

In consignment arrangements, the merchandise is owned by the consignor. The merchandise is always included in the consignor's ending inventory even though the inventory typically ________

is never on the consignor's premises.

The general concept is that an entity must recognize a loss on inventory if the utility of the inventory has declined. If subsequent value of the inventory is below cost, then inventory must be written down and a loss recognized. The loss resulting from a decline in value cannot be postponed until the period of sale. If cost < market or NRV, there_____ If cost > market or NRV, a ______-

is no loss recognition and the inventory is reported at cost. loss is recognized and the inventory is written down as described below.

Assets Held-for-Sale (Disposal)—Recoverable cost______used for assets held for disposal. Rather, the test for impairment and the loss computation both use the same values (BV and FV less cost to sell).

is not

The adjustment to net realizable value is applied on an-------however, inventory with similar characteristics can be grouped together. The process of applying lower of cost or NRV, and the entry made for the write-down, is similar to the process and entry used under U.S. GAAP. Under U.S. GAAP, when inventory is reported and lower of cost or market (LC-M), market is defined as replacement cost with a ceiling (NRV) and a floor (NRV less normal profit margin).

item-by-item basis

Equipment that can be used at more than one natural resource site—depreciate as usual over _____ Equipment dedicated to one site (often not movable or removable)—depreciate over the shorter of useful life or life of natural resource site. The most efficient method in this case is to use the ____- method with the same denominator as the depletion base.

its useful life. units-of-production

Land and Capitalized Interest —The effect on interest capitalization of expenditures made for land depends on the purpose for acquiring the land.For land used as a building site, the cost of the land is included in AAE for the building, and interest is capitalized to the building; (the land is not being constructed.) For land developed for sale, interest is capitalized to the land; For land held for speculation, no interest is capitalized because the______

land is in its condition of intended use, and there is no asset under construction.

Cost of goods sold is the_______- In other words, it is a derived amount based on the other three values in the above equation. Also, Cost of Goods Available for Sale equals the value of either side of the above equation, although in published reports, costof goods available for sale is shown as the subtotal of beginning inventory and net purchases.

last amount computed.

Counting the items in inventory at the end of the year and applying the appropriate costs, depending on the cost-flow assumption, to the items on hand, typically find the ending inventory cost. Cost of goods sold is computed _______- To calculate cost of goods sold for a company employing the periodic inventory system, the calculation shown below is used. This approach is the equation approach illustrated previously, placed into a schedule format.

last.

Cash is a Monetary Asset —A monetary asset is an asset with fixed nominal (stated) value. The nominal value of a monetary asset does not change with inflation. Cash is the most "monetary" of all assets. There is no uncertainty as to the stated or nominal value of cash at present or in the future. A $100 bill is always worth exactly $100. However, the purchasing power of cash declines with inflation. The amount of real goods and services a fixed amount of cash can buy decreases as the general price _______- The effect is the opposite during times of deflation.

level increases.

The main difference between U.S. GAAP and IFRS is that bank overdrafts can be subtracted from cash, rather than classified as ____

liabilities.

Interest Is Capitalized During Periods in Which All Three of the Following Conditions Are Met Interest cost is being incurred. Only actual interest cost is capitalized. Imputed interest is not capitalized. The total amount of interest to be capitalized for a period is _____

limited to actual interest incurred in the period.

The Contract Can be Modified—In this case, the loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the

loss is not probable given that the contract can be revised. The Contract Cannot be Modified—In this case, the loss must be accrued because the loss is probable and estimable. The inventory, when acquired, is recorded at market value and a loss is recognized for the difference between the market value and the contract price. If the contract has not been executed as of the balance sheet date, the following adjusting entry is made:

The standard also requires that costs including idle facility expense, excessive spoilage, double freight, wasted materials, and rehandling costs be treated as current-period costs rather than allocated to inventory and carried over to future periods. This is an example of invoking the conceptual framework definition of an asset rather than the ________

matching principle.

In assessing the relative attributes of FIFO, it is important to remember three important points of emphasis. If FIFO is employed by a business entity, the flow of costs is the same as the physical flow of goods for most firms. If FIFO is employed by a business entity, the balance sheet valuation of inventory is an approximation to current cost, which is considered more relevant than historical cost. If FIFO is employed by a business entity, however, the matching of revenues and expenses on the income statement is not considered ideal. Frequently, a company will be _____-

matching the revenues of the current year with the cost of merchandise acquired in a prior accounting period.

If LIFO is employed by a business entity, there are usually income tax advantages associated with that choice. In periods of rising prices, LIFO will result in a higher cost of goods sold and a lower tax burden for the business enterprise. However, due to the LIFO conformity rule, if LIFO is chosen for tax purposes, the firm must also use it for the books. Thus, the firm cannot reduce its taxes with LIFO and at the same time use FIFO for financial reporting purposes in the quest to

maximize reported income.

Ownership of goods in transit is determined by the test of title: FOB (free-on-board). FOB destination means that title to the goods transfers to the buyer when the goods_________ Therefore, shipping terms of FOB destination Chicago means that the buyer owns the goods when they reach Chicago. FOB shipping point means title passes at the shipping point (the selling company's warehouse), therefore the goods belong to the purchaser as soon as it is loaded on a common carrier. In general, FOB shipping point means title passes at the shipping point and FOB destination means title passes at the destination. The test of title is important for the year-end cut-off because goods in transit can be included in only one firm's inventory: the buyer or seller.

reach the destination.

Inventories Carried at LIFO or RIM Use LC-M. Lower of cost or market is applied when the cost is assigned using LIFO or retail inventory method. Determine Market Value Market is generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value. The ceiling value is net ______ That is, the ceiling value is calculated by reducing the sales price by the estimated cost to complete and sell the inventory. The floor value is _____

realizable value. net realizable value reduced by the normal profit margin.

Inventories NOT Carried at LIFO or RIM (i.e., Carried at FIFO or Weighted Average) use LC-NRV Subsequent valuation of inventories carried at FIFO or weighted average are measured at the lower of the cost basis or net realizable value. Net realizable value is defined in the Master Glossary in the FASB's Accounting Standards Codification as the "estimated selling prices in the ordinary course of business, less _______

reasonably predictable cost of completion, disposal, and transportation."

Other Types of Transactions Involving Transfers of Receivables—Factoring Transferor to factor—In a factoring, the transferor (original creditor) transfers the ____- to a factor (transferee, a financial institution) immediately as a normal part of business. The transferor prefers to pay the factor a fee in return for the factor's administration of the receivables. The factor often performs credit checks and collects the payments.

receivables

Limitation on Recorded Value—Fair value at completion In general, GAAP prohibits the recording of assets in excess of their fair values. Recording a constructed asset at an amount exceeding its fair value carries forward losses due to inefficient construction to later. If the total cost of construction exceeds fair value, a loss is ______

recognized for the difference and the asset is recorded at fair value.

The Allowance Method—The allowance method is the method of choice and is required under GAAP. This method records an estimate of the allowance and bad debt expense in an adjusting entry. The allowance is a contra account and reduces accounts receivable. Thus, both income and net accounts receivable are ____-

reduced in the year of sale by the estimate of uncollectible accounts on the year's sales.

Capitalized Interest—Under IFRS, the interest earned on the funds received for a construction loan can reduce interest cost. U.S. GAAP does not allow ______-

reduction of interest cost for the interest earned on the construction loans.

Net Markdowns—This is the net decrease in the original selling price. This amount is the net difference between markdowns, which are reductions in the original selling price, and markdown cancellations. A markdown cancellation is a __________not an increase above the original selling price. Depending on the variation being used, this amount is subtracted only from the retail column when computing the cost-to-retail ratio.

reduction of the original markdown,

Estimated Useful Life and Depreciation Method—Under IFRS, the company must review the_______- on an annual basis. Any changes in the estimated useful life, residual value, or depreciation method are accounted for prospectively.

remaining useful life, residual value, and depreciation method

After all costs are capitalized to the natural resources account, the resource begins to be r

removed and depletion is recorded.

The acquisition cost of plant assets is a cost of doing business. Because plant assets have a useful life exceeding one year, their cost is allocated to the periods they benefit. Although the amount of asset decline is not observable, depreciation expense provides at least some measure of the cost of the asset to be included in

total expenses on an annual basis.

Both U.S. GAAP and IFRS seek to determine if the arrangement is a sale of the receivables or a secured borrowing. U.S. GAAP focuses on whether control has shifted from the transferor to the transferee. IFRS focuses on whether the__________and whether substantially all the risk and rewards of ownership were transferred. Application of these criteria are quite complex. However, it is often noted that under IFRS criteria the transfer is less likely to be treated as a sale.

transferor has transferred the rights to receive the cash flows from the receivable

Direct Write-Off Method—This method records bad debt expense only when a specific account receivable is considered __________ It can be used only when the firm is unable to estimate uncollectible accounts receivable reliably. Most large firms do not use this method.

uncollectible and is written off.

Disclosure—The amount of interest capitalized and expensed must be disclosed during a period in ______-. Note that the amount of interest paid for the period to be disclosed as part of the Statement of Cash Flows—either as part of the statement, as a supplemental schedule, or in a footnote.

which interest is capitalized

Depreciation is a s_______of capitalized plant asset cost to time periods. The term systematic implies that the allocation is not random but rather is made on an orderly basis. The term rational means that by appealing to how the asset is used, the process can be supported. The process of depreciation matches the cost of the plant asset to periods in which the asset is used to generate revenue.

ystematic and rational allocation

Criteria for Sale—Criteria for determining if the transfer of receivables is a sale: The transaction is a sale of the receivable if three conditions are met. If the three conditions are met, then control has effectively passed to the third party (transferee) and a sale is implied. The three conditions are: The transferred assets have been isolated from the transferor, even in bankruptcy. The transferee is free to pledge or exchange the assets. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets. Conditions Are Met—If the above-listed conditions are met, the transaction is accounted for as a sale. The receivable is

removed from the books of the transferor and a gain or loss on the sale of the receivable will be recorded.

Under IFRS, inventory is reported at the lower of cost or net realizable value (LC-NRV). Net realizable value is defined by IAS 2 the same as in U.S. GAAP as "the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale." This definition is consistent with the IASB philosophy that an asset should not be reported on the balance sheet at more than the net cash that is expected from the sale or use of that asset. Under U.S. GAAP inventory is reported at lower of cost or net realizable value (LC-NRV) for all inventory methods that are not LIFO or Retail Method and at lower of cost or market (LC-M) for all methods that are LIFO or Retail. In the LC-M application, market is defined as____ Although U.S. GAAP defines NRV the same as IFRS, U.S. GAAP uses NRV to determine a floor and ceiling when determining LC-M.

replacement cost with a ceiling and a floor.

Once extracted, the natural resource noncurrent asset is transferred to ________a current asset.

resource inventory,

Be familiar with the following terms for capitalizable expenditures: An addition is a new major component of an asset, such as an additional room in or on a building, that did not exist before. An improvement is the replacement of a major component of an asset, such as an air conditioning system for a building. A rearrangement is a r_______

restructuring of an asset that does notextend its life but creates a new type of benefit. Relocation of an entity to another city is an example.

The dollar-value LIFO retail method (DV LIFO) is used by companies that use the LIFO cost-flow assumption when they apply the retail inventory method. The companies must use the dollar-value approach in order to determine the LIFO layers. There are two independent steps: DV LIFO is first applied to inventory at _____- only—and in the same way it was illustrated before. This results in the measurement of the current-period layer measured in current retail dollars. So, DV LIFO is restricted to retail dollar application. Then, the FIFO retail method (not LC-M; i.e., subtracting markdowns when computing C/R) cost-to-retail ratio is applied to this retail layer yielding the increase in _____ Finally, this cost layer is added to beginning inventory at DV LIFO cost to yield ending inventory at DV LIFO cost.

retail cost at current prices.

Inventory is reassessed at each financial reporting date, and if there are further reductions the inventory is written down again. However, if the NRV of the inventory has increased, the previous write-down can be

reversed (only to the extent of the previous write-down).

Criteria for Transfer under IFRS 39 If the entity transfers substantially all the risks and rewards of ownership, the transfer is treated as a sale. If the entity retains substantially all the risks and rewards of ownership, the transfer is treated as a secured borrowing. If neither conditions 1 or 2 hold, the entity accounts for the transaction as a ________

sale if it has transferred control and as a secured borrowing if it has retained control.

Appraisal methods—These methods are used when it is impractical to depreciate assets on an individual basis. Accumulated depreciation records are not maintained on individual assets, and no gain or loss is recorded on disposal. Inventory (appraisal) method—This method is applied to groups of _______At the end of each year, the assets are appraised and recorded at market value. The appraisal is for the entire group, which saves accounting costs. The decline in market value from the previous year is depreciation expense for the year. If assets were sold during the year, the proceeds from sale ________-

smaller homogenous assets. reduce depreciation expense.

Justification The theoretical justification for using an accelerated method is related to the matching principle. It is assumed the asset will be more productive in the earlier years. Therefore, more depreciation expense is recorded during those earlier, more productive years. More expense is matched against revenue in the periods of greater benefit; less expense is matched when the asset provides less benefit.Another justification is obsolescence. Assets subject to obsolescence (high-tech equipment for example) will provide most of their benefits early in their life. Therefore, more depreciation is recognized in those years. Effect—One effect of using accelerated methods is __________Early in the asset's life, more depreciation is recognized and less maintenance is required. Later in the asset's life just the opposite occurs. But the total annual expense is fairly stable.

stable annual total amount of expense related to plant assets

However, firms often choose FIFO to maximize their reported income. This in turn improves certain financial ratios and may be helpful in meeting requirements placed on the firm by its creditors. In addition, management compensation, if tied to income, will be maximized. On the other hand, the main reason for choosing LIFO is to minimize income tax. The main advantage of choosing LIFO is tax minimization. The reporting benefit of providing the most current cost of goods sold figure is an unintended consequence for most LIFO firms. A negative consequence to LIFO that sometimes occurs is the t_______

tax effect of a LIFO liquidation.

Thus, if FIFO is chosen, the inventory value in the balance sheet is a current and relevant amount, but cost of goods sold (and, therefore, gross margin and income) are considered to be less current or relevant. FIFO favors_______-These effects hold regardless of the direction of price level changes (increase or decrease) during the period.

the balance sheet

Costs that Are Capitalized Upon Acquisition of Plant Assets The acquisition cost of property, plant, and equipment includes two components, _______- & _________

the cash equivalent price or negotiated acquisition cost and the so-called get-ready costs.

Interest-Bearing Notes Receivable—The interest element is explicitly stated. For example, the note might be identified as a three-year, 9% note receivable. The amount of cash to be collected from an interest-bearing note is ___

the face amount of the note (principal) plus interest.

During periods of rising specific inventory prices, FIFO produces the highest net income because cost of goods sold is costed with the lowest-cost (earliest) purchases in the period. Ending inventory reflects ________ Sometimes FIFO ending inventory is used as an approximation to the current cost of ending inventory.

the highest (latest) costs.

FIFO This cost-flow assumption is based on a first-in, first-out philosophy. At the end of the accounting period, it is assumed the ending inventory is composed of units of inventory most recently acquired. Conversely, the cost of goods sold is made up of the oldest merchandise. The FIFO cost-flow assumption reflects the way most firms actually move their inventory. However, GAAP does not require that firms choose _____-

the inventory cost-flow assumption that reflects the actual movement of goods.

In a period of steadily rising prices, _____-results in lower cost of goods sold than the weighted average method (periodic). The moving average method applies earlier (and, therefore, lower) costs to sales during the year relative to the overall higher weighted average cost for the entire period.

the moving average method (perpetual)

Compute Average Accumulated Expenditures—A key concept in determining the amount of interest to be capitalized is avoidable interest. This is the interest on debt that could have been retired had the construction not taken place. To quantify that amount of debt, average accumulated expenditures (AAE) must be computed. AAE is the __________ AAE = average cash (or other qualifying expenditures) investment in the project during the period. This is the amount of debt that could have been retired during the period.

measure of the amount of debt, on an annual basis, that could have been avoided.

A merchandising company typically holds the inventory item that is best described as property held for resale. That is, a merchandising company has a single type of inventory item, usually referred to as_____

merchandise inventory.

This cost-flow assumption is based on a last-in, first-out philosophy. At the end of the accounting period, it is assumed the ending inventory is composed of the oldest inventory layers, while the cost of goods sold is composed of

the units of inventory most recently acquired.

If beginning inventory is understated, then cost of goods sold is also understated, everything else being the same, because the equation must balance. If ending inventory is understated, cost of goods sold _______, again because the equation must balance. The journal entry and reporting for error corrections depend on both the error and the period of discovery.

must be overstated

Variations—The variations of the retail inventory method are directly related to the calculation of the cost ratio. There are five variations, four of which are summarized below. The fifth is covered in the "Dollar-Value LIFO Retail" lesson. Average, LC-M—The cost ratio includes beginning inventory, along with current-period purchases, in both the numerator and the denominator, but excludes _____ from the cost ratio calculation.

net markdowns

Valuation of Inventory—The acquisition cost of inventory includes all costs incurred in getting the merchandise to the seller's premises and ready for sale. A good general rule is: Capitalize in Inventory All Costs Necessary to Bring the Item of Inventory to Salable Condition.These costs include freight and insurance in transit paid to the seller firm, any taxes paid on acquisition of inventory, material handling costs, and packaging costs. Interest on the purchase or construction of inventory is______ inventory. Purchases discounts, and returns and allowances reduce the total cost allocated to inventory. Promotional costs such as advertising are not included in inventory because these costs do not help prepare the inventory for sale.Also not included are interest costs.

never included in

Moving Average—The term moving average always implies the perpetual inventory system. Rather than having a single weighted average cost per unit for the accounting period, the company computes a_________That moving average is used for costing all subsequent sales until another purchase takes place, at which time the moving average is modified by the new purchase. When merchandise is sold, the current weighted average cost per unit is multiplied by the number of units sold to determine the amount of the cost-of-goods-sold entry.

new weighted average cost per unit after each purchase of inventory.

In addition to the normal valuation of inventory at cost and choice of inventory cost-flow assumption (FIFO, LIFO), GAAP requires that firms recognize an end-of-period loss on inventory if its utility has declined. If market is below cost, then inventory must be written down to market. The loss cannot be postponed until the period of sale. If cost < market, there is _______ If cost > market, a _____-

no loss recognition and the inventory is reported at cost. loss is recognized and the inventory is written down to market.

Interest Is Capitalized During Periods in Which All Three of the Following Conditions Are Met Qualifying expenditures have been made. Cash payments, transfers of other assets, or the incurrence of interest-bearing debt all qualify. The incurrence of short-term non-interest-bearing debt (e.g., accounts payable) does not qualify because the firm has

no opportunity cost on such debt.

Compensating Balance—This is a minimum balance that must be maintained by the firm in relation to a borrowing. Such a balance increases the effective rate of interest on the borrowing and reduces the risk to the lender. With respect to compensating balances, if the balance is related to a short-term liability, the compensating balance is shown as a current asset (as in the example below), but is not considered a part of the unrestricted cash balance. If the compensating balance is related to a long-term liability, the compensating balance is a ________

non-current asset.

Inventories also include land (if the firm is a real-estate development company), and partially completed buildings and bridges (if the firm is a construction company). Inventories are always current assets to the seller even though they may be ______

noncurrent assets to the buyer.

Depreciation is no longer recognized on the asset. The results of operating the asset during the holding period are recognized in period of occurrence—that is, estimated future operating losses or gains are not recognized until _______- Note that although these assets are held for disposal, they may require maintenance and other cash expenditures. These are expensed as incurred. The asset can be written up or down if held for another period; gains are limited to the amount of the i______- (BV cannot exceed the amount immediately before recording the initial impairment loss.)

they actually occur. initial impairment loss.

A cash equivalent is a security with a fixed maturity amount and an original maturity to the purchaser of -________ months or less.

three

Notes Receivable—Often related to ________although many larger consumer items and transactions between businesses require a promissory note. Examples of transactions that relate to a note receivable include the sale of noncash assets, lending transactions, and the conversion of other receivables. A note receivable is usually related to a longer time frame than an account receivable, and due to that fact, all notes have an interest element. Notes provide increased security for the seller firm, are often negotiable, and usually can be converted to cash with a third party more easily than accounts receivable.

noncustomer transactions

erms of Transaction With Recourse or Without RecourseThe transaction can be completed with recourse or without recourse. If the transaction is completed with recourse, the transferor is responsible for___________ This means that if the maker (original debtor) defaults, the original creditor must assume all the payments on the receivable.

nonpayment on the part of the original maker of the receivable.

Employee Discounts—The difference between the__________This amount is subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio.

normal retail value of merchandise sold to employees and the amount actually paid by employees.

What Items are Included in Ending Inventory? To address this question, you simply apply the ownership criteria. If the merchandise is owned by a business enterprise on the last day of the accounting year, regardless of location, the merchandise should be included in ending inventory. Most of the merchandise owned by a business enterprise on the last day of the accounting year is typically located on the premises/property of that business enterprise. However, goods awaiting shipment to customers are ________firm's inventory if the customer has paid for the goods. Merchandise owned and located off-site

not included in the

Notification or Non-Notification Basis—The transaction can be completed on a notification basis or on a non-notification basis. If the transaction is completed on a notification basis, the maker of the receivable is informed of the transaction and typically is instructed to make payments to the third party. If the transaction is completed on a non-notification basis, the maker of the receivable is _______

not informed of the transaction and continues to make payments to the original creditor.

If the decision to dispose precedes the period of disposal, an estimated loss is recorded if it is probable and estimable. Estimated gains are _______

not recognized.

The maker of a note is the buyer or borrower (the debtor firm or individual). This party is making an unconditional promise to pay principal and interest over the note term. The holder of the note (seller or lender) is the creditor and is the firm recording the

note receivable on its books.

The Retail Inventory Method—This method is used by retailers to estimate ending inventory at cost. Most retailers know the markup on the inventory items and are able to count ending inventory at retail prices (ever see the store employees counting items on a shelf?). This method is used both for i_______ &______cost of goods sold and ending inventory.

nternal decision purposes and for financial reporting of

The ending inventory valuation is equal to the number of units in ending inventory multiplied by the weighted average cost per unit. Likewise, the cost of goods sold for the period is equal to the _______

number of units sold multiplied by the weighted average cost per unit.

Base-year dollars refers to the specific price level for the pool in effect at the beginning of the year in which the firm adopted LIFO. When this index is multiplied by the increase in i________--year dollars, the result is the increase in inventory in current costs—the layer added to DV LIFO ending inventory.

nventory for the year as measured in base

Assignment of Accounts Receivable—When accounts receivable are assigned, the borrower assigns rights to specific accounts receivable as collateral for a loan. The lender has the right to seek payment from these receivables should the borrower (original creditor for the accounts receivable) default on the loan. The borrower reclassifies the receivables as accounts receivable assigned, a subcategory of total accounts receivable. The borrower maintains the receivable records, and as cash is received, it is remitted to the lender in payment of the loan. The loan and the receivables are not _______When the loan is repaid, any remaining accounts receivable assigned are returned to ordinary accounts receivable status.

offset on the borrower's balance sheet.

Accounting Approaches Substitution—Remove the accumulated depreciation and original cost of the old component, recognize the loss, and capitalize the post-acquisition expenditure to the larger asset. This alternative is available only if the accounting system maintained records of the

old component cost and accumulated depreciation.

Cash—The current asset, represents unrestricted cash. This is cash that is available to meet current_______ Included in cash—The components of cash include coin and currency, petty cash, cash in bank, and negotiable instruments such as ordinary checks, cashier's checks, certified checks, and money orders. Current liability—An overdraft of a bank account occurs when checks honored by the bank exceed the balance in the account. An overdraft may be offset against other cash accounts with the same bank, but not against cash accounts with other banks. In the latter case, the overdraft is listed as a _______

operating expenses and obligations as they arise. current liability

Depreciation is not a process of valuation. The amount of depreciation recognized in a period is not necessarily the decline in the market value of the asset, nor is it a measure of the amount of the asset used up. If depreciation expense is $10,000, this does not mean that $10,000 of the cost of the asset was used in generating revenue. The $10,000 amount is simply the amount allocated to the period based on the method chosen by the firm. The book value of a depreciable plant asset (original cost less accumulated depreciation to date), is the amount of ______Only coincidentally does book value equal market value.

original cost yet to be depreciated.

Variations—The variations of the retail inventory method are directly related to the calculation of the cost ratio. There are five variations, four of which are summarized below. The fifth is covered in the "Dollar-Value LIFO Retail" lesson. FIFO, LC-M—The ________ excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Then, in an effort to arrive at a more conservative cost ratio, the calculation also excludes net markdowns from the cost ratio. This causes the denominator of C/R to be larger, because net markdowns are not subtracted, and thus the ratio itself is smaller. When C/R is multiplied by EI (retail), the resulting EI (cost) is smaller, approximating the effect of LC-M.

ost ratioc

Error in Recording Purchases—What if a purchase at year-end was not recorded in the year of purchase (Year 1), but rather was recorded in the next year (Year 2), the year of payment? Assume the goods were counted in EI in year of purchase. If the Error is Never Discovered 1st year: purchases are understated, CGS understated, net income overstated, ending retained earnings ______ 2nd year: purchases are overstated, CGS overstated, net income understated, ending retained earnings is correct (error has counterbalanced) But the errors remain in both years' statements shown comparatively with later statements.

overstated

The amount capitalized as natural resources is the sum of three different types of costs: Acquisition costs—The amount paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources. Exploration costs—The amount ________ Development costs—The amount paid after the _____-

paid to drill or excavate or any other costs of searching for natural resources. resource has been discovered but before production begins.

Definitions _______ The adjusting journal entry for depreciation on nonmanufacturing assets is: DR: Depreciation expense; CR: Accumulated depreciation

Adjusting Journal Entry:

_______—Typically related to customer transactions. That is, an account receivable is usually related to the sale of goods to customers or the provision of services to customers. The length of time related to this claim is very short, 30 to 90 days for most business enterprises. Due to this short time frame, an account receivable typically does not have an interest element.

Accounts Receivable

ntroduction—Asset Categories—ASC 360 governs the subsequent measurement and accounting for impaired assets or assets held for disposal. Assets subject to impairment fall into one of three categories:

Assets in use Assets held for disposal (sale) Assets to be disposed of other than by sale (by spin-off to shareholders, by exchange for other assets, or by abandonment)

Justifications—There are two justifications for depreciation:

Assets wear out over time.Assets become obsolete.

________Original cost less accumulated depreciation to date.

Book Value

Cash Equivalent Price or Negotiated Acquisition Cost Methods of Acquiring Plant Assets Cash purchase—The cash equivalent price is simply the ________ Deferred payment plan (credit purchase)—The cash equivalent price for an asset acquired through a deferred payment plan is the present value of ____________ Issuance of securities—The acquisition cost of an asset acquired through the issuance of stocks or bonds is the fair value of the security or the fair value of the asset acquired, whichever can be most clearly determined. When a significant number of shares is issued, care must be taken to ensure that the issuance did not affect the share price. Donated assets—Assets received in donation are recorded at their fair value. A revenue or gain is also recorded. Group purchases—If a group of fixed assets is acquired in a single transaction, the total negotiated price is allocated to the individual assets acquired. This allocation is based on the respective fair values of the individual assets acquired.

Cash purchase—The cash equivalent price is simply the amount of cash paid for the asset on acquisition date. Deferred payment plan (credit purchase)—The cash equivalent price for an asset acquired through a deferred payment plan is the present value of future cash payments using the market rate of interest for similar debt instruments.

There are six criteria for determining when an asset is considered held for sale. All six must be met for the accounting provisions to apply. Otherwise, the asset is considered in use. Management commits to a plan to sell the asset or group of assets. The asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for such sales. This criterion does not preclude a firm from using the asset while it is held for sale nor does it require a binding agreement for future sale. An active program to locate a buyer has been initiated. The sale is expected to take place within one year. In limited cases, the one-year rule is waived for circumstances beyond the firm's control (e.g., due to a new regulation or law, environmental remediation, or deteriorating market). _______ ______

The asset is being actively marketed for sale at a price that is reasonable in relation to its current value. Sale of the asset must be probable.

Impairment and IFRS Under IFRS, a long-lived asset is impaired when its carrying value exceeds the recoverable amount.The recoverable amount is the higher of:

The asset's fair value less cost of disposal (the price that one would receive to sell an asset in an orderly transaction with a market participant); or The asset's value in use (which represents the entity-specific pretax cash flows discounted to present value).

If an expenditure merely maintains the asset at its anticipated level of productivity and length of life, the following occurs:

The cost is not capitalized on the balance sheet. Instead, it is recorded as a maintenance expense on the current year income statement.

Lower of Cost or Market Comparison GAAP allows flexibility in application of LC-M, but the lower of cost or market comparison must be completed on a _____-. In making the comparison, a company can employ one of three approaches. Individual item basis—If a company has 1,000 inventory items and chooses the individual item approach, a total of 1,000 comparisons will be made to determine the lower of cost or ______ Category basis—If a company has 1,000 inventory items grouped into 10 categories, a total of 10 comparisons will be made to determine the lower of cost or market for ending inventory. Total basis—If a company wishes, it can make a single comparison to determine the lower of cost or ______

consistent basis from year to year market for ending inventory. market for ending inventory.

Capitalization of interest applies only to the construction of qualifying assets, such as assets constructed for an enterprise's own use or assets intended for sale or lease that are

constructed as discrete projects (ships, real estate developments, etc.).

Interest cost is capitalized only during the____-Prior to the construction period, interest cost was expensed. Any interest cost incurred subsequent to the construction period will likewise be expensed.

construction period.

Recording Acquisitions—For companies employing the periodic inventory system, acquisitions of merchandise during the year will be recorded in the purchases and related accounts. The purchases account is used rather than the inventory account because a________

continuous record of the cost of inventory on hand at any time is not maintained under the periodic system.

Fair Value Remeasurement—Under IFRS, PPE can be remeasured to fair value if fair value can be reliably measured. If remeasurement is used, it must be applied to the entire class or components of PPE, such as land, buildings, or equipment. Increases in an assets fair value above original cost are recorded in a revaluation surplus account. Any decreases in an assets fair value below the original cost are recorded as _______. When revaluation results in an increase in the asset, a debit is made to increase the assets value and a credit is made to an equity account (part of OCI) called revaluation surplus. If the asset is subsequently decreased during revaluation, then the previously established revaluation surplus is reduced to zero and a loss is recognized for any excess. If the fair value of the asset declines below its original cost a loss is recognized. If the fair value subsequently increases, a gain can be recognized to the extent of the______

losses to the income statement loss and any additional gain is recognized in revaluation surplus.

Reduces the Effect of the Liquidation Problem—The dollar-value LIFO conversion technique takes a company's ending inventory in FIFO dollars (usually) and converts them to LIFO dollars. In doing so, the impact of the liquidation problem is reduced. Allows Companies to Use FIFO Internally—Most companies prefer to use FIFO for internal ________ &________-. dollar-value LIFO allows companies an opportunity to do so.

management reports and internal operating decisions

The specific identification assumption is not cost effective for most firms and allows firms to_______.

manipulate earnings

Pledging of Accounts Receivable—Pledging of accounts receivable is less formal than assignment. Rights to specific receivables are not noted as collateral, and accounts receivable are not reclassified. Neither the accounting for the receivables nor the loan is affected by the pledge. Receivables in bulk are transferred to a trustee and can be used for ________- in the event of default by the borrower (original creditor for the accounts receivable). The cash flows from the receivables are used to pay the loan. Footnote disclosure of the pledge is required.

payment of the loan

The gross margin method estimates cost of goods sold from sales using a _______-Then, ending inventory can be inferred from beginning inventory, purchases, and cost of goods sold. To use the gross margin method, a company must have a consistent gross margin percentage (margin as a percentage of sales or margin based on cost). If inventory is heterogeneous, the method should be applied to pools of inventory with relatively ____

percentage based on historical data. homogeneous gross margin percentages.

The FASB also reaffirmed the concept that selling, general, and administrative expenditures not be treated as manufacturing costs but rather as _______Selling costs are not production costs.

period costs.

In accounting for inventories, business entities may elect to employ a periodic inventory system. If so, the beginning inventory balance is reflected in the merchandise inventory account throughout the year. That is, the merchandise inventory account will have an unchanging balance throughout the accounting year. The firm uses other means to obtain current inventory information for internal purposes. The _______ system is much less expensive to administer than is the ______ system.

periodic perpetual

Weighted Average Cost-Flow Assumption The term weighted average always implies the _______-. If the business entity selects this cost flow assumption, the weighted average cost per unit must be calculated. This calculation is shown below.

periodic inventory system

Purchases is a holding account for inventory charges and credits and is closed to ending inventory and cost of goods sold at the end of the period. The inventory account is not used to record purchases in a ____

periodic system.

The transaction is a sale of the receivable if three conditions are met. If the three conditions are met, then control has effectively passed to the third party (transferee) and a sale is implied. The three conditions are: The transferred assets have been isolated from the transferor, even in bankruptcy. The transferee is free to pledge or exchange the assets. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets. Conditions Are not Met—If the listed conditions are not met, the transaction is actually a situation in which the transferor is borrowing funds and using the receivables as collateral for a loan. In this case, the receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction. In this case, the transferor will not record any gain or loss on sale of the receivable. Rather, the transferor will ____

record interest expense related to the borrowing transaction.

If the expenditure is immaterial, the company will account for the expenditure in the most expedient way possible. This usually means the expenditure is

recorded as an expense in the period of acquisition.

Noncash Transaction—If the transaction is a noncash transaction, such as the sale of a noncash asset and the receipt of a note receivable, the transaction will be _________ (present value of future cash flows), whichever one can be more clearly determined.

recorded at the fair value of the noncash asset or the fair value of the note receivable

Bank Reconciliations—Bank reconciliations provide a check mechanism for both the company and the financial institution. In most cases, any errors detected in a bank reconciliation are the result of honest mistakes on the part of the company's employees or on the part of the bank's employees. Bank reconciliations are necessary because cash transactions that occur near the end of a month or an accounting year may be ______--. Likewise, there may be some cash transactions that have been recorded by the financial institution but have not been recorded by the company.

recorded by the company but have not been recorded by the financial institution

Once the balance in the allowance account has been determined, the balance that is needed as an allowance is compared to the existing balance in the allowance account. The difference in these two balances is the amount of bad debt expense to be_______

recorded for the accounting period.

After resources are discovered on the property, the cost to develop the property to enable extraction of the resource is capitalized to the natural resources account. Development costs pertain to facilities that will not be removed when the project is finished. Removable assets such as drilling equipment, vehicles, and the like are_______

recorded in their own separate accounts as plant assets.

If BV ≤ RC, then the asset is not impaired and no impairment loss is recognized. In this case, the book value is _______

recoverable.

If there is any indication that the loan value has declined, an impairment loss would be taken as the difference between the carrying value and the recoverable amount. If the loan value subsequently increases, IFRS permits______-

recovery of the impairment loss.

LIFO—The results for LIFO-perpetual differ from those of LIFO-periodic. In the perpetual system, each sale is costed with the most recent purchase available preceding that sale. The periodic system uses the latest purchases for the entire period. Thus in a year of steadily rising prices, perpetual LIFO yields a lower cost-of-goods-sold figure because it uses earlier purchases. Periodic LIFO would assume the sale of the very latest purchases in the period irrespective of the

sequencing of sales and purchases.

Qualifying assets require a _________. Rather, the assets must be discrete projects individually constructed. Interest is not capitalized on the construction or manufacture of inventory items, even if the inventory requires significant time for completion (e.g., interest on the production of wine and tobacco products is not capitalized).

significant time period for construction and are not routinely produced

Positive Aspects of the Direct Write-Off Method—Aspects of the direct write-off method: Companies that use the direct write-off method justify its use for two reasons. First, the use of the direct write-off method may not be materially different in its effect on the company's financial statements relative to the allowance method. Second, the direct write-off method is _____-

simple and practical to use.

The natural resource account is presented as a noncurrent asset. The property associated with the natural resource is not classified as land because the land is not held as a building site, but, rather, to

utilize the natural resource on the land.

A note is a more formal financial instrument than an accounts receivable. The key reporting issues are

valuation of the note (at present value).

Construction Payables—Unpaid construction input costs are not included in AAE until paid in cash. Until cash is paid, debt can be considered avoidable. Payables include

wages payable, accounts payable for material, and utilities payable.