BUS Ch 7 COGS, LIFO, FIFO and Ch 8 reporting PPE and Intangibles

units of production depreciation method

((cost-residual value) / estimated total production)) * actual production = dep expense

why we need to add dep expense back to cahs flows

(a) Using the indirect method of determining cash from operating activities, reported net income is adjusted for noncash expenses and revenues and any gains and losses associated with selling long-lived assets which are investing activities, not operating activities. As a noncash expense, annual depreciation has no overall effect on cash provided by operating activities; however, because it is originally subtracted to arrive at net income, an adjustment needs to be made to reverse this effect for cash flows. Hence, $22,500 (the annual straight-line depreciation expense) must be added back to net income in the operating section of the statement of cash flows.

double declining depreciation method

(cost - acc dep) * (2/useful life) = dep expense ignores residual value in computation 0 in acc dep if its the first year

facts about goodwill

-not reported unless purchased in an exchange - must be reviewed annually for possible impairment -impairment of goodwill results in a decrease in net income

average days to sell inventory

365/inventory turnover ratio

is fifo or lifo more accurate indicator of efficiency of inventory management

The FIFO inventory turnover ratio is normally thought to be a more accurate indicator when prices are changing because LIFO can include very old inventory prices in ending inventory balances.

inventory turnover ratio

how many times on avg during the period inventory was produced and sold = COGS/avg inventory

understating and overstating inventory balances

Understatement of the prior year ending inventory by $50,000 caused prior year cost of goods sold to be overstated and pretax income to be understated. Thus, current year beginning inventory would be understated, causing an understatement of cost of goods sold and an overstatement of pretax income by the same amount. Overstatement of the prior year ending inventory would have the opposite effect; that is, prior year cost of goods sold would be understated and pretax income would be overstated by $50,000; and current year pretax income would be understated by $50,000. if the prior year ending inventory was undertstated by $50k the prior year's cogs is overstated by $50k prior year's gross profit/pretax income would be understated current year's beginning inventory will be understated current year's cogs would be understated current year's gross profit/pretax income would be overstated if the prior year ending inventory was overestated prior year cogs was understated prior year pretax and gross profit would be overstated current year beginning balance overstated current year cogs overstated current year gross profit/pretax income understated

journal entry for sale of equipment

cash: debit acc dep: debit flight equipment: credit (THE ORIGINAL COST, NOT NET VALUE) gain on sale of equip: credit but before this remember to record dep expense and acc depreciation since you need to update dep expense through the date of disposal

net book value

cost - accum. depreciation

straight line method depreciation

dep expense constant every year acc dep increases by the same amount net book value decreases by same amount until it equals estimated residual value (cost-residual value) / useful life = dep expense per year

LIFO vs FIFO

if decreasing prices: LIFO will bring in lower COGS, higher gross profit, but higher income taxes, yet maybe still higher net income if increasing prices: LIFO will bring in lower gross profit, but lower income taxes, but still maybe lower net income

acquisition cost

includes purchase price, sales taxes, legal fees, transport. costs, installation/prep costs all capitalized when they are recorded as asset, meaning these costs are not recorded as expenses small repairs and maintenance are recorded as expenses whereas purchases to improve the efficiency are capitalized and recorded as assets

interpreting industry turnover ratio and average days to sell inventory

industry turnover ratio: how many times in a year it takes company to produce and sell its average inventory. if 22.47 - dell produced and sold its average inventory about 22.47 times during the year average days to sell inventory. is = 365/industry turnover ratio. if 16.2, it takes Dell about 16.2 days to produce and sell it inventory to customers (22.47 x 16.2 = about 365)

how to calculate inventory costs

invoice price - purchase returns/discounts-purchase discounts = total inventory costs

favorable cash flow when it comes to increasing inventory prices

lifo, avg cost, fifo Ranking in order of favorable cash flow: The higher rankings are given to the methods that produce the lower income tax expense because the lower the income tax expense the higher the cash savings. (1) LIFO-produces the lowest pretax income, hence the lowest amount of cash to be paid for income tax. (2) Average cost-produces the next lowest pretax income. (3) FIFO-produces the highest pretax income, and as a result, the highest income tax. This result causes the lowest cash savings on income tax. opposite ranking if prices were falling

high inventory turnover ratio

means a shorter time span between the purchase and sale of inventory

fixed asset turnover

net sales (operating revenue, which doesn't include cogs) / avg net fixed assets measures the sales dollars generated by each dollar of fixed assets used higher the ratio = better management

about net realizable value (NRV)

when the net realizable value of inventory drops below the cost shown in the financial records, net income is reduced when the net realizable value of inventory drops below the cost shown in the financial records, total assets are reduced