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85 Cards in this Set
- Front
- Back
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The term used to describe assets of a company that are intended for sale in the ordinary course of business, are in the process of being produced for sale, or are to be used currently in producing goods to be sold.
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Inventories
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The inventory for wholesalers or retailers:
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Mechandise
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The inventory for manufacturers:
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Raw Materials
Work in Process Finished Goods |
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Keeps a running record of the amount of inventory - both dollars and units
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Perpetual inventory system
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Keeps a dollar only record of the amount of inventory purchases
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Periodic Inventory System
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Whata are the three basic inventory issues?
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What PHYSICAL GOODS are included in inventory.
What COSTS are included in inventory. What COST FLOW ASSUMPTION is used? |
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What are the three types of physical goods that can be included in inventory?
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Goods in Transit
Consignments Special sales arrangements |
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What are the two costs that can be included in inventory?
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Product Costs
Period Costs |
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What are the two methods of Purchase Discounts?
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Gross Method
Net Method |
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Represtents the aggregate historical cost of beginning inventory and inventory puchases during the period
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Goods Available for Sale
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What are the Cost Flow Assumptions?
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Specific Identification
Average Cost First in First Out (FIFO) Last in First Out (LIFO) |
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What are the steps to solve inventory problems?
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Calculate Goods Available for Sale
Calculate Ending Inventory Cost of Goods Sold = Goods Available for Sale less Ending Inventory |
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When does a profit distortion occur?
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Occurs when a firm dips into LIFO layers, as inventory holding gains ignored in previous years are shifted to the income statement.
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What is a LIFO layer Liquidation?
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When a firm dips into LIFO layers and creates a profit distortion occurs as inventory holding gains ignored in previous years are shifted to the income statement.
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Specifies that if a company uses LIFO for tax purposes, it must also use LIFO for financial reporting purposes.
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US Tax Laws
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Managers may be motivated into undesirable purchasing decisions in order to avoid LIFO layer liquidations because of this
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Because of the short term cash flow tax benefits of LIFO
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What are the steps in figuring Dollar Value LIFO?
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1. Determine inventory value at year end prices
2.Determine the price Index 3.Determine Inventory at base year price 4. Determine layers 5. Multiply each layer by respective index (to find year end dollar value ending inventory. |
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What is the ceiling in the lower of cost or market equation?
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Net Realizable Value
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What is the floor in the lower of cost or market equation?
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Net Realizable Value less normal profit
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What is the Lower of Cost or Market equation?
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Inventory Sales Price
- Cost to complete and transfer = Net Realizable Value (Ceiling) - Normal profit = Net Realizable Value less normal profit (floor) |
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An agreement to buy a specified quantity of inventory at a specified price at a future date
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A purchase commitment
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How do we handle purchase commitments in the books?
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Disclosure of material purchase commitments are made in the footnotes
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This estimate is used either to get a quick estimate of inventory on hand or to estimate loss when inventory has been destroyed or records have been lost.
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Gross Profit Method
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Historical gross margin rates are applied to known sales to estimate what?
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Cost of Goods Sold
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Used primarily as a means of valuing inventory when there is an observable pattern between the cost and selling price.
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Retail Methods
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Under this approach you include net mark ups but not net markdowns in the computation of the cost percentage
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Conventional retail method approach
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In this approach you exclude beginning inventory in the calculation of the cost percentage. But you include both net markups and markdowns in the calculation of the cost percentage.
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In the LIFO retail stable price assumption retail method approach
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This estimate is used either to get a quick estimate of inventory on hand or to estimate loss when inventory has been destroyed or records have been lost.
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Gross Profit Method
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Historical gross margin rates are applied to known sales to estimate what?
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Cost of Goods Sold
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Used primarily as a means of valuing inventory when there is an observable pattern between the cost and selling price.
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Retail Methods
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Under this approach you include net mark ups but not net markdowns in the computation of the cost percentage
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Conventional retail method approach
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In this approach you exclude beginning inventory in the calculation of the cost percentage. But you include both net markups and markdowns in the calculation of the cost percentage.
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In the LIFO retail stable price assumption retail method approach
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In this equation you take the cost percentage and multiply it by the LIFO layer at retail to get the LIFO layer at cost.
You then take the LIFO layer at cost and add it to the beginning inventory at cost to get the LIFO ending inventory at cost. |
LIFO Retail Stable Price Assumption
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This method assumes fluctuating prices and you compute the cost percentage as under the stable price assumption
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LIFO retail dollar value
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In this method you deflate ending inventory at retail to base year prices using the applicable index
Then you deflate beginning inventory at retail to base year prices using the applicable index The difference is the LIFO layer at retail Inflate the LIFO layer to end of year prices using the applicable price index Convert the layer to cost using the cost percentage Add the LIFO layer at cost to the beginning inventory at cost to get ending inventory at cost to get ending inventory at LIFO |
LIFO Retail Dollar Value
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These are acquired for use in operations.
Long term in nature and usually subject to depreciation Possesses a physical substance from which the asset derives its value |
Property, Plant and Equipment characteristics
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With the acquisition of property plant and equipment all costs are included that are considered normal and necessary to get the asset what?
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Ready for its intended use.
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The amounts that are considered normal and necessary to get the asset ready for its intended constitute what?
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The historical cost of the asset
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What costs are are included in the acquisition of land?
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Puchase price
Closing costs Cost of preparing the land Assumptions of liens or mortgages Land improvements with indefinite lives |
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What costs are included in the acquisition of buildings?
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If purchased - Include the purchase price plus all costs normal and necessary to get the building ready for its intended use
If constructed - All costs from excavation forward are included as part of the building |
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What are the cost included for the acquisition of equipment?
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For equipment you include the purchase price plus all costs normal and necessary to get the building ready for its intended use
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For these assets:
Direct costs are assigned to the asset: Overhead approaches: - direct cost approach - full cost approach - incremental cost approach Interest costs - capitalize if conditions are met |
Self Constructed Assets
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To do this:
Captial expenditures must be made Interest must be incurred Activities to prepare the asset for use must be ongoing |
Capitalize interest
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For this approach of capitalizing interest.
Avoidable interest is directly attributable and it is a weighted average of previous debt |
Weighted average accumulated expenditure
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Basis of assets received
less book value of assets given equals what? |
The gain or loss
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What are the four different accounting treatments for exchanges of assets?
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- Dissimilar assets
Similar assets - loss situation - Similar assets - gain situation - no boot - Similar assets - gain situation - boot |
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What is the hierarchical order of establishing basis?
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FMV of asset given - if known
FMV of asset received - if more clearly evident - BV of asset given - last resort |
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For these assets you recodrd the new asset at its basis and recovnize all gains and losses
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Dissimilar assets
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For this example you record the new asset at its basis and recognize the loss
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Similar assets loss situation
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For this asset you defer the gain by reducing the basis of the new asset
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Similar assets gain situation - no boot
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For this asset exchange you recognize only the portion of the gain attributable oto the boot recieved
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Similar assets gain situation -- Boot
Waht is the equation Gain Rec. = Tot. gain X cash recieved/ FMV of all assets received You then defer the rest of the gain |
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What do these requirements pertain to?
Costs incurred to achieve future benefits are capitalized. One of three conditions must be present: The useful life must increase The quantity produced must increase The quality of production must be enhanced One of three condition must be = |
Costs subsequent to acquistion
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What are these?
Additions Improvements and replacements Rearrangement and reinstallation Major Repairs |
Types of Capital Expenditures
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These are increases or extensions of existing assets.
Are capitalized as new, separate assets. |
Additions
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With these you use the substitution approach and capitalize the new cost.
and charge accumulated depreciation |
Improvements and extensions
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These are capitalized as new, seperate assets.
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Rearrangements and reinstallation
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These are capitalized as a new asset.
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Major Repairs
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This is a system used to allocate the costs of property, plant and equipment to accounting periods
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Depreciation
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=Rate X Base
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Depreciation
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In order to calulate depreciation using the various methods, one must know what two things?
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The depreciation rate and the depreciation base
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Rate = 1/ UL
Base = Cost - Salvage Depreciation = Rate X Base |
Straight Line Method
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Rate = (UL - YR + 1)
_____________ UL (UL + 1) / 2 Base = Cost - Salvage Depreciation = Rate X Base |
Sum - of - Years' digits method
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Rate = 2 / UL
Base = Book Value Depreciation= Rate X Base |
Double Declining Balance
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Base = number of units produced, hours flown, mile driven, etc. for the current period
Rate = straight line base ______________ estimated useful life in units Depreciation = Rate X Base |
Units - of - Production Method
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Record depreciation for number of months held divided by twelve
Include months where asset was purchased prior to the fifteenth or sold after the fifteenth These rules do not apply to production methods? |
Partial Year Depreciation
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The systematic allocation of the cost of natural resources to the periods that benefit from their use
Calculated in a manner similar to units of production depreciation |
Depletion
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What does the base equal for depletion?
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Number of units extracted during the current period
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What does the Rate equal for depletion?
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Total Cost - residual value
____________________ Estimated units available |
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Unlike depreciation increasing an expense Depletion increases?
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Increases the asset or inventory
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What are the costs to consider when it comes to depletion?
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Acquistion Costs
Exploration Costs Development Costs Restoration Costs |
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What are the two tax depreciation methods companies can use?
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Straight line method
MACRS method |
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Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of transactions or events
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Liabilities
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Obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities
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Current Liabilities
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Two examples are:
Interest bearing notes Zero interest bearing notes |
Notes Payable
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Portions of long term debt that are to be paid within the next fiscal year are reclassified as current liabilities
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Current Maturities of Long Term Debt
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These are excluded from current liabilities if two criteria are met
- the company intends to refinance on a long term basis - the company can demonstrate the ability to refinance on a long term basis |
Short term obligations expected to be refinanced
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Dividends become a liability when the board declares them
Preferred dividends in arrears are not liabilities Stock dividends are not liabilities |
Dividends Payable
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An existing condition, situation or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more events occur or fail to occur
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Contingencies
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What are the two contingencies?
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Gain Contingencies
Loss Contingencies - Probable - Reasonably Possible - Remote |
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Recognize a loss contingency if both of these criteria are met...
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The event is probable
The amount of the liability can be reasonably estimated |
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Litigation, claims, and assessments
Gurantee and warranty costs Premiums and Coupons Environmental Liabilities |
Common Loss Contingencies
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In addition to the probability and estimatability criteria,_____ must be taken into account in matters of litigation
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Timing
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What are the two basis's when dealing with gurantee and warranty costs?
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Cash Basis
Accrual Basis Expense warranty approach Sales - warranty approach |
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Offered to consumers to stimulate sales
Should be recognized as expense in the period when the sale that benefits from the plan is made |
Premiums and coupons
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Companies must recognize asset retirement obligations when there is a contractual obligation to clean up or dismantle a facility
Asset retirement obligations must be estimated at fair value as long term liabilities |
Environmental Liabilities
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