Ch 8 Flashcards
Cost for inventory purposes should be determined by the inventory cost flow method most clearly reflecting periodic income.
Describe the fundamental cost flow assumptions for the average cost method.
A position between FIFO and LIFO.
Each purchase affects both inventory valuation and cost of goods sold.
Averaging does not result in a good match of costs with revenues or a proper valuation of inventories.
Cost for inventory purposes should be determined by the inventory cost flow method most clearly reflecting periodic income.
Describe the fundamental cost flow assumptions for the FIFO inventory cost flow method.
The oldest items in the inventory are the sold first, newer inventory is sold last.
Satisfies the historical cost and matching principles.
Cost for inventory purposes should be determined by the inventory cost flow method most clearly reflecting periodic income.
Describe the fundamental cost flow assumptions for the LIFO inventory cost flow method.
Current costs should be matched against current revenues.
Most recent inventory is sold first, older inventory is sold last.
Better match of revenue and expenses.
Cost for inventory purposes should be determined by the inventory cost flow method most clearly reflecting periodic income.
Discuss the reasons for using LIFO in an inflationary economy.
Costs of goods will increase which will decrease profits and lower taxes.
Cost for inventory purposes should be determined by the inventory cost flow method most clearly reflecting periodic income.
Where there is evidence that the utility of goods, in their disposal of the ordinary course of business, will be less than cost, what is the proper accounting treatment, and under what concepts is that treatment justified?
Lower of cost or market method to value inventories.
Justified under the concept of conservatism.
If the disposal of goods is less than the cost, do not carry forward more than the net realized value.
Anth Company has significant amounts of trade accounts receivable. Anth uses the allowance method to estimate bad debts instead of the specific write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
Anth also has some interest-bearing notes receivable for which the face amount plus interest at the prevailing rate of interest is due at maturity. The notes were received on July 1, 2021, and are due on June 30, 2022.
What are the deficiencies of the direct write-off method?
Records a loss as soon as a customer account is deemed uncollectible.
Accounts receivable at the balance sheet date and net income are overstated.
Accounts receivable still includes amounts from customers that are uncollectible.
Anth Company has significant amounts of trade accounts receivable. Anth uses the allowance method to estimate bad debts instead of the specific write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
Anth also has some interest-bearing notes receivable for which the face amount plus interest at the prevailing rate of interest is due at maturity. The notes were received on July 1, 2021, and are due on June 30, 2022.
What are the two basic allowance methods used to estimate bad debts, and what is the theoretical justification for each?
Percentage of Sales - estimate bad debt and enhances the matching process because expenses are linked to revenues
Percentage of Receivables - adjusts accounts receivable to net realizable value; provides a more accurate estimate
Anth Company has significant amounts of trade accounts receivable. Anth uses the allowance method to estimate bad debts instead of the specific write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
Anth also has some interest-bearing notes receivable for which the face amount plus interest at the prevailing rate of interest is due at maturity. The notes were received on July 1, 2021, and are due on June 30, 2022.
How should Anth account for the collection of the specific accounts previously written off as uncollectible?
First, reinstate the receivable - Debit Accounts Receivable and Credit Allowance for Uncollectible Accounts
Second, record collection of the receivable - Debit Cash and Credit Accounts Receivable
Anth Company has significant amounts of trade accounts receivable. Anth uses the allowance method to estimate bad debts instead of the specific write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
Anth also has some interest-bearing notes receivable for which the face amount plus interest at the prevailing rate of interest is due at maturity. The notes were received on July 1, 2021, and are due on June 30, 2022.
How should Anth report the effects of the interest-bearing notes receivable on its December 31, 2021, balance sheet and its income statement for the year ended December 31, 2021? Why?
12/31/2021 balance sheet - the interest-bearing notes as current assets. There is no long term portion.
12/31/2021 income statement - include interest revenue from the notes receivable. Interest should be accrued interest from 7/1/2021 through 12/31/2021.
In the following debate, take the position of an investor who wants to evaluate the liquidity of a company.
Team 1: Argue for including inventory, prepaids, and deferrals in working capital.
Working capital reveals an entity’s liquidity.
Inventory - most entities are able to sell products and services quickly, turning it into cash.
Prepaids - if expenses were not paid in advance, current assets would be used to satisfy the obligations
Deferrals - if revenue will be recognized in the short-term, it will have an impact on the financial position of an entity
In the following debate, take the position of an investor who wants to evaluate the liquidity of a company.
Team 2: Argues against including inventory, prepaids, and deferrals in working capital.
Working capital reveals an entity’s liquidity.
Inventory - may take an entity an extended period of time to convert the inventory into cash.
Prepaids - are not actually converted into cash.
Deferrals - lack a claimant and do not have much impact on the overall financial statement presentation of an entity
