Chapter 2 Flashcards
What are the three different methods we learnt in afm 191 for costing inventory?
Special Identification Method
FIFO
Weighted -average cost
What can a company not do with ‘inventory methods’
They can’t switch back with these methods , they have to be consistent with one
What are they permitted to do with inventory methods
They are allowed to change if its deemed more ‘relavant and reliable”. They have to change everything even pereivous financial statements.
What if what we recorded for inventory is inaccurate? or The inventory is worth less than the cost it was purchased? What do we do
We use the lower of cost and net realizable value (we wite it down)
What is LCNRV?
Lower of cost and net realizable value basically requires the inventory to be measured and presented in two ways:
a) Historical cost
b) Net realizable value
Whichever is lower
What is net realizable value?
The effective price of inventory minus the costs required to make the sale (its how much we expect to get when selling inventory minus costs incurred)
If the NRV is less than the historical cost what do we do?
We do an inventory write-down to show its realistic value
What is the journal entry to write down inventory when NRV is less than the historical cost?
DR. Cost of goods sold $X
CR. Inventory $X
To record an inventory write-down.
Remember its the change in the difference between the NRV and Histroical cost
What if the NRV increases after the write down, whats the journal entry for that?
DR. Inventory $X
CR. COGS $X
To record an inventory write-up.
(19-16) = 3
What is something we’re limited to do when making the reversal
We’re only limited to the change we made previously nothing higher, and also limited to the historical cost we cannot make that higher
Ex: Went up by 2$
(18-16)
What are the errors tht show up when inventory is counted incorrectly and how do they fix the mistake
1) ending inventory can be either understated or overstated
2) ending inventory errors resolve themselves over the span of two periods.
What does over and understated mean?
Understated- Less than what actually there is
Overstated- More than what we actually there is
How is this resolution possible?
This self-resolution is a result of the relationship between inventory (on the balance sheet) and cost of goods sold (on the income statement).
What happens if iventory is overstated
Ending inventory is overstated
Which for tha period COGS –> Understated (you said you sold more toys than what you actually did)
GP –> Overstated
BEG INVENTORY (next period) –> Overstated
COGS –> Overstated
GP –> understated
What happens if inventory is understated
end inventory- understated
Cogs –> overstated
Gp- understated
beg - understated
cogs - understated
gp-overstated
Acronym for ‘overstated’ inventory
uo ou
Acronym for ‘understated’ inventory
ou uo
When we discard PP&E and theres no residual value whats the journal entry?
DR. Accumulated depreciation -lawnmower $5,000
CR. PP&E – lawnmower $5,000
To recognize disposition ($0 residual value) of lawnmower no longer in use.
What are the four proper steps in writing odd an asset where there’s residual value + gain/losses on the sale of asset disposal.
- Ensure the accumulated depreciation up to the date of time of disposal (book any required depreciation expense)
- Straight line depreciaiton and subtract the residual value - Calculate the asset’s carrying value immediately before the sale/disposal. (asset - accumulated depreciation)
- Calculate any gain or loss by comparing the carrying value to the proceeds of sale/disposal.
(Proceeds from the sale of disposal - carrying value)
- Record the disposal in the accounting information system (AIS).
What is imapirement?
its when an assets carrying value might exceed its recoverable amount
What are some signs of imapirement?
A decline in market value
Major advances in technology (i.e., asset obsolescence)
Physical damage
Asset idling (i.e., not being actively used)
what happens if there are signs of imapirement
We have to write down this asset: when the carrying value exceeds recoverable amount
What is the recoverable amount
(whichever is higher)
a) Fair value misus costs of disposal (how much the asset would be sold at)
b) Value in use –> How much the asset will generate for the company
What is the journal entry if there is an impairment
DR. Loss on asset impairment $X
CR. PP&E asset $X
To record impairment of asset.
(we write what value the asset lost)
Can we reverse the journal entry of an ‘impairement’?
yes we can but we’re limited to what we had done previously and the assets worth.
How do you do the “double-declining balance method”?
- Calculate the total acquisition cost of the asset (this becomes the beginning balance in Year 1)
(its the costs and asset) - Calculate straight-line (SL) depreciation rate: 1 ÷ estimated useful life in years
- Calculate DDB rate: SL rate (from Step 2) x 2
- Calculate depreciation: DDB rate X beginning of period book value (aka carrying value)
- Exception: In the last year we must calculate depreciation to ensure the ending book value = residual value
What is ‘income tax”
Its an expense charged by govy on income generated by individuals and companies
What is income tax expense a % of
Pre-tax earnings
How does corporations pay their ‘income tax”
through tax installments
What are ‘tax installments’
These are periodic payments that are made to the government to avoid a large bill at the end
What is the journal entry when a company records its tax installments
Dr. Income tax expense
Cr. Income tax payable
When they pay their tax installments
Dr. Income tax payable
Cr. Cash
what is HST
its a tax imposed on many things
What is HST in canada
13%
How do we know if HST is “debited” and is called “”
If the corporation buys products they can receive a refundable amount which is why its debited and called HST recievable
How do we know if HST is “credited” and is called “”
When a company collects HST form customrs and pays that to the government. This is a credit and is payable.
What happens if HST payable exceeds HST recievable
They owe money to govy and vise versa
What are deferred tax assets and liabilities?
There is a differece in calculating income for accounting and tax purposes so what we record for CRA might be different than what we record on our financial statemets
Why do they differ?
Most commonly deepreciation as they might have a difference in calculating depreciation which may be higher or lower usually meaning income for tax might be lower
What is a deferred tax liability
The tax that eventually needs to be paid
What is property tax?
A tax paid for non movable proerpty owned by individual or coproaation
Can they pay property tax in installemnts
YES
What is the journal entry for property tax recorded on financial statements
DR. Property tax expense $5,000
CR. Property tax payable $5,000
Property tax journal entry when paid?
DR. Property tax payable $15,000
CR. Cash $15,000
