1 Flashcards
The completed-contract method of accounting for long-term construction-type contracts is preferable when
This answer is correct because the completed contract method for long-term contracts is preferable over the percentage-of-completion method when lack of dependable estimates or inherent hazards cause forecasts to be doubtful (ASC Topic 605)
Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year-end?
This answer is correct. Goods shipped FOB shipping point should be included in Garson’s ending inventory because title passed to Garson when the goods were shipped. Therefore, ending inventory (an asset) is understated. If ending inventory is understated, cost of goods sold is overstated for the period (Beginning inventory + Purchases − Ending inventory = Cost of goods sold), which results in net income being understated. If net income is understated for the period, the error causes retained earnings to be understated for the period.
Theoretically, cash discounts permitted on purchased raw materials should be
This answer is correct. There are two methods of accounting for cash discounts: the gross method and the net method. The gross method records purchases before any discounts, and records cash discounts only when taken. The net method records purchases net of cash discounts whether taken or not, and any discounts foregone are considered to be financing expenses. Theoretically, purchases and accounts payable should be shown net of cash discounts whether taken or not because this net method allows for a more correct reporting of the related asset and liability, and it allows for a measure of the inefficiency of financial management if the discount is not taken.
Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
This answer is correct because most manufacturing operations process and sell inventory in the order it is received, that is the first items in are the first to be sold, which is FIFO.
Under IFRS, specific identification accounting for inventory is required for
This answer is correct because specific identification is required for inventory that is not interchangeable or goods that are produced and segregated for specific projects.
The double extension method and the link-chain method are two variations of which of the following inventory cost flow methods?
This answer is correct. Dollar-value LIFO bases inventory on “dollars” in inventory rather than “units” in inventory. Inventory layers are identified with the price index in the year in which the layer was added. ’Double extension’ and ’link-chain” are two variations of dollar-value LIFO. Link-chain differs from double extension in that inventory values are extended at beginning of the year prices for link-chain and at base year prices for double extension. Because of this difference, link-chain is more appropriate for situations in which inventory is going through rapid technological changes. The two variations are not alternatives and use of the link-chain method should be restricted to situations in which the double extension method is impractical.
Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?
The inventory turnover ratio equals cost of goods sold divided by the average of beginning and ending inventory. Under FIFO, ending inventory is assumed to contain the most recently purchased items, and cost of goods sold is assumed to contain the costs of the earliest purchased items. Under LIFO, the opposite assumptions are made. In an inflationary economy, costs are increasing. Thus, FIFO cost of goods sold is lower, and FIFO ending or average inventory is higher than under LIFO. The inventory methods based on average costs produce results that lie between those of FIFO and LIFO. Accordingly, inventory turnover is lowest under FIFO because the numerator is lower and the denominator is higher than under other methods.
The lower-of-cost-or-market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?
Applying the LCM rule to each item of inventory produces the lowest amount for each item and therefore the lowest and most conservative measurement for the total inventory. The reason is that aggregating items results in the inclusion of some items at amounts greater than LCM. For example, if item A (cost $2, market $1) and item B (cost $3, market $4) are aggregated for LCM purposes, the inventory measurement is $5. If the rule is applied separately to A and B, the LCM measurement is $4.
