Chapter 7: Advanced Accounting Topics

Question 1

1. What is LIFO?

Answer 1

LIFO (Last In, First Out) is an inventory valuation method where the most recently purchased items are sold or used first. For example, if a company bought 100 units of inventory at $10 each and later bought another 100 units at $12 each, under LIFO, the $12 items would be sold first.

Question 2

2. What is FIFO?

Answer 2

FIFO (First In, First Out) is an inventory valuation method where the oldest items are sold or used first. For example, in a grocery store, FIFO ensures that older products are sold before newer ones to reduce waste.

Question 3

3. What is weighted average cost?

Answer 3

Weighted average cost values inventory based on the average cost of all units. For example, if a company buys 100 units at $10 and another 100 units at $12, the weighted average cost per unit is:
Weighted Average=(100×10)+(100×12)/200=11 per unit.

Question 4

4. What is variance analysis?

Answer 4

Variance analysis compares actual financial performance to expected (budgeted) performance. For example:
* Favorable variance: When actual profit exceeds expectations.
* Unfavorable variance: When actual costs are higher than budgeted costs.
Variance analysis helps identify areas needing improvement, like controlling expenses.

Question 5

5. What is a capital lease vs. an operating lease?

Answer 5

• Capital lease: Treated as an asset purchase and recorded on the balance sheet.
• Operating lease: Treated as a rental expense and not recorded as an asset.
  For example, leasing a building long-term might be a capital lease, while leasing equipment for a short term is usually an operating lease.

Question 6

6. What is EBITDA?

Answer 6

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company’s profitability by focusing on core operations and excluding non-operational expenses. For example, if a company earns $500,000, spends $50,000 on taxes, $30,000 on interest, and $20,000 on depreciation, its EBITDA is:
500,000+50,000+30,000+20,000=600,000.

Question 7

7. What is goodwill impairment?

Answer 7

Goodwill impairment occurs when the value of goodwill (an intangible asset) decreases due to factors like declining brand reputation or poor performance. For example, if a company’s goodwill is recorded at $1 million but its brand loses value, it must adjust (impair) the goodwill on its financial statements.

Question 8

8. What is consolidated accounting?

Answer 8

Consolidated accounting combines the financial statements of a parent company and its subsidiaries into one report. For instance, if Company A owns Company B, their revenues, expenses, and assets are combined into a single statement.

Question 9

9. What is a deferred tax asset?

Answer 9

A deferred tax asset arises when a company pays more taxes upfront and expects to recover them in the future. For example, if a company overpays taxes due to temporary differences in accounting methods, it records this as a deferred tax asset.

Question 10

10. Why are advanced accounting topics important?

Answer 10

These topics help businesses make informed decisions, optimize financial performance, and comply with regulations. For example, understanding LIFO and FIFO can affect tax liability and inventory valuation, while EBITDA gives investors insight into operational profitability.