...called Certified public accounts. (Horngren, Harrison, Bamber, Accounting, 5th edition pg. 7). The four points that will be address to you is Adjusting lower cost of market inventory on valuation, Capitalizing interest on building construction, Recording gain or loss on asset disposal, and Adjusting goodwill for impairment. Inventory Valuation Methods are First-in-Last-out (FIFO), Last-in-First out (LIFO) and Average Cost Method. These method are designed to calculate the cost of goods sold and cost of ending inventory. An explanation of the inventories valuation method are as follow: FIFO is assumed that items from the inventory are sold in the order in which they are purchased or produced. Purchase is of an out let as a store (Item) Produced is of a manufactory (Raw Material) With LIFO method inventory is sold first and older remains in inventory. The newer higher prices is are goods and ending inventory cost consists of older low priced items this is when prices of goods increase, cost of goods sold in LIFO method is relatively higher and ending inventory balance is relatively lower. Average Cost Method (AVCO) weighing of units cost per is calculated for the entire inventory on hand which is used to record...
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...Receipts Cost Issue FIFO LIFO Jan 300 4.5 1,350 1,350 Feb 200 4.5 150 1,575 1,575 Mar 400 4.5 3,375 3,375 Apr 4.5 250 2,250 2,250 May 400 4.5 100 3,600 3,600 Jun 300 5 5,100 5,100 Jul 150 4,425 4,350 Aug 400 5 6,425 6,350 Sep 300 5 7,925 7,850 Oct 400 6,125 5,850 Nov 400 6 8,525 8,250 Dec 6 250 7,400 6,750 Total 2,700 1,300 Closing stock (FIFO) = £7,400 Closing stock (LIFO) = £6,750 The closing stock value according to AVCO is done below for THETA 5. Average cost of receipt (£) 4.91 Stock Left 1,400 Closing stock valuation (£) 6,870 Product 2: AXIS 34 Month Receipts Cost Issue FIFO LIFO Jan 200 6 1,200 1,200 Feb 400 6 200 2,400 2,400 Mar 300 6 4,200 4,200 Apr 300 6 150 5,100 5,100 May 500 6 8,100 8,100 Jun 500 6 350 9,000 9,000 Jul 6 150 8,100 8,100 Aug 400 7 10,900 10,900 Sep 300 7 300 11,200 10,900 Oct 300 7 200 12,100 11,600 Nov 200 7 300 11,700 10,900 Dec 350 7 14,150 13,350 Total 3,750 1,650 Closing stock value (FIFO) = £14,150 Closing stock value (LIFO) = £13,350 The closing inventory stock according to AVCO is done below for AXIS 34. Average cost of receipt (£) 6.41 Inventory Left 2,100 Closing stock valuation (£) 13,468 As the price of the purchase of the stock is continuously on the increase during the months given, LIFO is the best stock...
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...affected by the increased in cost in Asia. The income of Merrimack of 2008 was below that of 2007 and earlier years and there was a pressure on Rick Martino to keep earning growing. Company's controller had idea to maintain the trend in income growth by changing the method of accounting for inventories of Tractors, mowers and parts. The controller suggested Rick to change the accounting method from LIFO to FIFO which would report to higher income figure in 2008 which subsequently would increase the taxes payable. Inference: After comparing income statements of year 2008 based on LIFO and FIFO methods we can observe a drastic impact it had on NET INCOME. NETINCOME is positive when FIFO method is used and negative when LIFO is used. • As per Colburn’s report,...
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...share. Profits will improve. 3.) Also these changes resulted in the change of the depreciation lives on US plants, machinery and equipment. This had an effect on the residual values on certain machinery and equipment that increased net income for 1984 by $3.2 million or $0.27 per share. No income tax effect was applied to the change. Harnischfeger fixed assets useful life will increase as such profits will improve. 4.) The reduction in sales and the underutilization of plants, machinery, and equipment would have a prolonged effect on the assets useful life. 5.) The effect of LIFO inventory liquidation on its reported profits in 1984 are an increase in net income by $2.4 million or $0.20 per common share and a reduction in the net loss by $15.6 million. If a company performs LIFO liquidation, the old costs will be matched with the current higher sales prices. A company uses LIFO liquidation assuming that when it needs to replace inventory its repurchasing cost will increase. 6.) 1984 – 0.0673 or 6.73% 1983 – 0.1004 or 10.04%, the doubtful accounts allowance at 1983 levels would have been $8.8 million. The resulting change equates to roughly 500K increase in pre-tax...
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...Chapter 07 Reporting and Interpreting Cost of Goods Sold and Inventory ANSWERS TO QUESTIONS 1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the income statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the balance sheet and the income statement, it is of particular interest to all statement users. 2. Fundamentally, inventory should include those items, and only those items, legally owned by the business. That is, inventory should include all goods that the company owns, regardless of their particular location at the time. 3. The cost principle governs the measurement of the ending inventory amount. The ending inventory is determined in units and the cost of each unit is applied to that number. Under the cost principle, the unit cost is the sum of all costs incurred in obtaining one unit of the inventory item in its present state. 4. Goods available for sale is the sum of the beginning inventory and the amount of goods purchased during...
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...Will there be one set of accounting standards in use throughout the world in the next five years? Although there has been much talk about the eventual standardization of all accounting methods into one complete set of accounting principles, the truth is that there are several obstacles that currently prevent one full compilation. US GAAP and IFRS are two of the leading accounting methods in the world and the majority of their pronouncements are very similar when compared by concept. However there are several treatments upon which they differ. When it comes to the treatment of inventory US GAAP allows for both the FIFO and LIFO methods to be used provided that they are accounted for consistently or provide sufficient reason for change. IFRS however strictly prohibits the use of LIFO and only recognizes the accounting for cost of goods sold on the FIFO or weighted average cost basis. This really is a very big stumbling block on the path to convergence because of the immense tax advantages enjoyed by US GAAP adhering companies. There is also the matter of asset impairment which under IFRS allows companies to write down the value of an impaired asset in one period and then write up its value in a future period given that it meets certain criteria. US GAAP on the other hand only allows for the write down of an asset and prohibits its revaluation in the future. Although the majority of the world uses IFRS it is still a relatively new accounting method and therefore lacks much of...
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...Operating expenses = 8,500 (38,000-29,500) F) Net income = 63,400 (109,600-46,200) Brief Exercise 5-2 Pocras Company Inventory 900 Accounts Payable 900 Wedell Company Accounts Receivable 900 Sales 900 Cost of Goods Sold 590 Inventory 590 Brief Exercise 6-5 Cost of goods sold under: | LIFO | | FIFO | | | | | Purchases | $6 X 100 | | $6 X 100 | | $7 X 200 | | $7 X 200 | | $8 X 140 | | $8 X 140 | Cost of goods available for sale | $ 3,120 | | $ 3,120 | Less: Ending inventory | $ 1,160 | | $ 1,400 | Cost of goods sold | $ 1,960 | | $ 1,720 | Since the cost of goods sold is $240 less under FIFO that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches current selling prices with old inventory costs. To replace the units sold the company will have to pay the current price of $8 per unit, rather than the $6 per unit which some of the units were priced at under FIFO. Profit under LIFO is more accurate of what the company can expect to earn in future periods. Brief Exercise 6-7 Inventory Categories Cost Market LCM Cameras $12,500 $13,400 $12,500 Camcorders 9,000 9,500 9,000 DVDs 13,000 12,200 12,200 Total valuation $33,700 The lower-of-cost-of-market value is $33,700. Brief Exercise 7-4 ...
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...E5-11 a) Compute Payton's gross profit. GROSS PROFIT = 900,00 - 540,000 = $ 360,000 ______________________________________ b) Compute the gross profit rate. Why is this rate computed by financial statement users? (360,000/900,000)/100 = 4/10of 100 = 40% This is known as the GROSS PROFIT MARGIN. ______________________________________ c) What is Payton's income from operations and net income? 1)Income from Operations = 360,000 - 230,000 = $130,000. 2)Net Income = 130,000 - 11,000 = $119,000 ______________________________________ d) If Payton prepared a single-step income statement, what amount would it report for net income? NET INCOME = $119,000. _____________________________________ e) In what section of its classified balance sheet should Payton report merchandise inventory? Inventory is reported as part of the CURRENT ASSETS. Comment on ROLCAM's Answer: 1000 characters remaining Submit Comment E6-2 Unadjusted Ending inventory $732,570 1. Included in the company's count were goods with a cost of $257,200 that the company is holding on consignment. The goods belong to Superior Corporation. ($257,200) 2. The physical count did not include goods purchased by Strawser with a cost of $45,030 that were shipped FOB destination on December 28 and did not arrive at Strawser's warehouse until January 3. + $45,030 3. Included in the inventory account was $17,880 of office supplies that were stored in the warehouse and were to be used...
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...potential loss of market shares to its main competitor-Golden Gates due to its rising renewal loss rate and expanding turnaround time. In our analysis, we dig into several issues that were possible causes for the problem and tend to provide readers with feasible solutions that may resolve the issues on hand. Examples of such issues as we have identified in the case include, but not limited to, various departments’ deviation from FIFO system, potential capacity and staffing problems, uneven workload among three underwriting teams, outdated SCT for computing TAT, and inaccurate computation process for TAT. In order to lower the number of late renewals and reduce turnaround time, our recommendations include, but not limited to, the following: 1) Making it mandatory for all departments to comply with the FIFO system and implementing monitoring plans for overseeing the entire underwriting process to ensure FIFO is strictly implemented; 2) Revising the incentive scheme for Fruitvale Branch employees to further assist with the successful implementation of FIFO system; 3) Expanding the number of days RERUNs are released to DCs prior to the due dates to ensure that there is sufficient time for relevant departments to complete the requests on or before due dates; 4)Revising and updating the SCT used for deriving TAT; 5) Modifying the computation process for deriving TAT as the process being used is inaccurate and provides an exaggerated figure for TAT. Current Situation The main...
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...Directions Read the “Harnischfeger Corp” case study and answer the following questions. Submit your completed assignment no later than the last day of Week 2. 1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. After reviewing the accounting policies of other corporations in similar industries, Harnischfeger decided to adjust their depreciation method. Instead of continuing to use the accelerated method for depreciating their US Operating Plans, Harnischfeger decided to use the straight-line method. The new method was applied to past periods which resulted in an overall increase of net income. However, looking soley at the current period, the adjustment did not have a significant imapact; it seems as if the majority of the depreciation with the accelerated method had already been expensed in previous periods. Regardless of whether or not the change was made, Note 2 is informing the public that the current year depreciation would have been in the same range. In addition to changing the depreciation method, the Corporation also updated the useful lives and residual value for some of their property, plant, and equipment. Some other changes the Corporation made were in regards to their sales with Kobe, and including the financial statements of some of their foreign subsidaries. The inclusion from the subsidaries did not have a significant impact in the current period. However, the adjustment with Kobe did have...
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...1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. The following summarize the accounting changes made and noted by Harnischfeger: a. Included equipment purchased and resold from Kobe LTD in net sales (full sales amount) as opposed to disclosing only margin. Since the purchase of equipment from Kobe Steel, Ltd. was for the purpose of resale (vs. use or lease), this change more accurately reflects net sales. b. Financial Statements of some foreign (consolidated) subsidiaries are included on the basis of fiscal year end (July 31) vs. previous of (Sept 30 as described in Note 1). c. Changed depreciation method from Declining Balance (accelerated) to Straight-line. Declining Balance method is good for assets that quickly lose their value and leads to higer expenses (lower revenues) in earlier years following purchase. Straight line spreads the expense over the assets useful life and results in a consistent (non-accelerated) expense year over year. During this process, the firm also changed residual values and useful lives of some of those assets. 2. What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years? The cumulative effect on the change in depreciation method resulted in an increase in net income of $11 million in 1984. Under the new method of depreciation (straight-line), depreciation...
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...4. In considering the rules based approach of GAAP and the principles based approach of IFRS we looked at GAAP first. GAAP provides application clarity, low risk, and for companies in the same industry there is easy comparability. These Rules, however, must be accounted for using these rules even if the information is misleading, uneasy to compare across industries and the risk increases when rules are not followed. IFRS allows us to consider best out of multiple ways to account for transactions, comparibility among companies across multiple industries, and it is easier to defend actions and positions by using the principles that were followed. That being said, we believe that the IFRS approach is needed over the US approach. We believe that the rules are put into place by the US approach and companies then take the steps necessary to get around them. We believe that principles should be used and there should be required disclosures to guide investors and shareholders and help them understand the principles that were used and the decisions made that were based on these principles. There is still need for solid framework for larger key issues, but we feel as though principles are the right way to go. To deal with inconsistencies, there would still be a few concrete rules laid out to govern however principles will be still be used. Lessees and Lessors will also be required to show equal and opposite assets and liabilities on their balance sheets for every and all lease without...
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...EXERCISE 8-5: (a) Inventory December 31, 2014 (unadjusted) $234,890 Transaction 2 13,420 Transaction 3 12,800 Transaction 4 15,630 Transaction 5 8,540 Transaction 6 (10,438) Transaction 7 (10,520) Transaction 8 1,500 Inventory December 31, 2014 (adjusted) $171,872 (b) Transaction 3 Sales Revenue............................................... 12,800 Sale on Account........................................................................ 7,350 (To reverse sale...
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... There are different ways to calculate the cost of goods sold. The most used and the easiest would be the periodic method of inventory. This is where you take the beginning inventory and add the inventory purchases and then subtract the end inventory then you will get the cost of a goods sold. This is the one that make sense because you take the accounting period and then just use that to get the answer. The only reason this one could come up with some wrong figures is because this does not take into account any items that were lost, stolen or damaged throughout the accounting period. Another method is the first-in, first-out method, also know was FIFO. This method is very simple they assume the oldest units in the inventory are always the first sold. Then the last-in, first-out method is just the reverse also known as LIFO. This means the newest items that are in inventory are the first ones sold. These methods are not very exact. Lastly you have the average cost method which is a good idea, this is taking the average of the cost and then using that to factor in cost of goods sold. So taking the beginning inventory and adding the purchases in dollars and then dividing that by the beginning inventory plus the purchases in units. This will get you the average cost per unit. Then you take the average cost per unit and multiply that by units sold and you will get cost of goods sold. Then you would also take the average cost per unit and multiply that with the units in the...
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...Differences method between FIFO, LIFO and CWAC FIFO, which is stand for “first-in-first-out”, is an inventory costing method which assumes that the first stock bought are the first ones to be sold, and the stock bought later are sold out later. Recently-placed goods that are unsold remain in the inventory at the end of the year. With this inventory valuation approach, the company accounts for the value of inventory received first when sales are made. One of the more common reasons a company chooses FIFO is because it is a more natural straight-line approach since account for the first inventory in as the first items sold. This makes it especially useful when tracking inventory items is simple LIFO, which is stands for “last-in-first-out”, is an inventory valuation method assumes that the last inventories bought are the first one to be sold, and the inventories bought first are sold out last. The goods placed first in the inventory remain in the inventory at the end of the year. Thus, when the accounting in most recently received inventory with first items sold. This actually gives a more realistic look at the market costs of the inventory when sell since it is sold shortly after received. A main reason companies choose LIFO during periods of inflation, though, is that it helps keep current taxable income low since more recent purchases typically have a higher cost basis The weighted average method uses average costs over the reporting period to calculate the...
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