Class 6 - Cost Accumulation Flashcards
What is a Cost Accumulation Asset?
An asset whose economic benefit to the company is measured based on the cost of that asset to the company
T or F: Any post acquisition cost that increases an asset’s expected future service potential is presumed to have a clear link to future benefit?
True - and the company should capitalise this cost.
What 3 characteristics should reflect the carrying value of a cost accumulation asset?
1 - the purchase price
2 - costs incurred during acquisition and readying for use
3 - post acquisition costs that increase the expected future service potential of the asset.
What is COST ALLOCATION?
The general process of reducing the carrying value of a cost accumulation asset
What are the 3 triggers of COST ALLOCATION?
1 - Normal use allocation
2 - Impairment allocation
3 - disposal allocation
What is an Normal Use Allocation?
Allocation of costs through normal use of a company’s asset. Example - a company owns a truck with a life of a finite amount of kilometres
What is an Impairment Allocation Trigger?
This occurs when a company deems a cost accumulation asset to be impaired, which means the company’s carrying value of the asset is great than the assets recoverable value.
T of F: the carrying value of an asset measures the future service potential and is based on the cost inputs?
True
T or F: the recoverable value of an asset is the future service potential based outputs?
True
What is a Disposal Allocation Trigger?
This occurs when a company disposes of a cost accumulation asset in a way that is incidental to its ordinary business operations.
What is the breakdown of the capitalisation costs of an inventory?
A company should capitalise as the cost of inventory the purchase price of the inventory, plus all incidental, indirect costs that are necessary to get the inventory into a useable condition and/or location.
T or F: A company can capitalise sales tax or GST the company incurred when purchasing inventory?
True - but only to the extent the company does not expect the government to refund the taxes.
What are the 3 types of production costs (or Work-in-Process Inventory account)?
1 - raw material used
2 - direct labour costs
3 - manufacturing overhead (or indirect costs of the manufacturing process)
What items would you expect to see manufacturing overheads?
1 - utilities
2 - salary of plant supervisors
3 - depreciation on the manufacturing plant and equipment
What is the Specific Identification Approach?
the company matches the actual cost of a unit of inventory to that specific unit of inventory when the company first purchases the inventory unit and the company tracks the inventory unit and associated cost.
What is a major flaw/inconvenience of the Specific Identification Approach?
The cost of tracking each incremental cost - often only feasible to be used with large items such as purchasing a car off a manufacturer and selling it.
What is the Cost Flow Assumption Approach?
The most viable approach for companies to determine dollar amount of cost allocation.
Companies do not need to track individual inventory units through the company. Instead, when the company transfer inventory to customers it makes an assumption about the cost of those inventory units.
This assumption however, must be rational; it should be applied coherently and consistently.
Net Realizable Value equals?
Estimated Ordinary Selling Price of Inventory - estimated costs to complete the inventory - estimated cost to sell the inventory in ordinary course of business.
What is Inventory Mark-Up?
The degree to which the selling price of inventory exceeds the cost of the inventory.
What is the mathematical definition of Gross Profit Percentage?
Gross Profit / Net Sales, where Gross Profit = Net Sales - COGS
What is the Inventory Turnover Ratio used for?
To assess a company’s effectiveness at managing the level of its inventory, and by extension, its effectiveness at turning over inventory.
This relates to the “Asset Turnover” component of the DuPont analysis.
What is the mathematical definition of Inventory Turnover
Cost of Goods Sold (for the period) / Average Inventory balance (for the period)
What is the mathematical definition of the Inventory Holding Period?
365 / Inventory Turnover
True or False: it is often common to use the Cost of Goods Sold (COGS) as a proxy to “Credit Inventory Purchases”
True - because it is often difficult to determine the amount of inventory a company purchased on credit from its financial statement.
The Operating Cash Cycle refers to what?
The period that begins when a company acquires inventory and ends when it collects cash from having sold the inventory.
What does the Cash Conversion Cycle measure?
How the timing of receiving cash aligns relative to when the company acquired the inventory.
T of F: Property, plant and equipment, natural resources and intangible assets are long-term individual-identifiable assets?
True
What do Intangible Assets generally convey?
Legal or Contractual rights; such as patents, copyrights, and license agreements.
However, some intangible assets do not convey these rights. An example of this is customer lists or databases.
What is Goodwill?
A long-term asset that is not individually identifiable.
T or F: a company can capitalise interested paid on a loan to construct a long-term asset?
True - but it must cease capitalisation once the asset is ready for its intended use.
T or F: If a company purchases an intangible that is individually identifiable, the company can recored the intangible as an intangible asset at an amount equal to the purchase price plus all necessary additional costs, and it can also do this for costs incurred internally to develop an intangible asset?
False - it cannot capitalise the internal development costs. Self-generated intangibles cannot be capitalised due to the difference in being able to identify a clear, objectively-measurable link between the cost and expected future benefit at the time the cost in incurred.
What does Amortization mean?
to allocate in a systematic and rational way
T or F: Amortisation applied to Plant and Equipment is known as Depreciation?
True
T or F: Amortisation applied to Natural Resources is called Depletion?
True
T or F: Amortisation applied to Intangible Assets is called Amortisation?
True
T or F: The service potential of long-lived operating assets is measured based on cost inputs?
True - thus the amortisation base is the estimated unrecoverable capitalised cost; the dollar amount of the asset’s capitalised cost that the company
What is the carrying value?
The Net Book Value (total capitalised amount less the accumulated cost allocation due to amortisation and impairments.
T or F: we can capitalise a cost if we expect that cost to benefit the company in a future period.
True
T or F: maintenance or repair costs should be capitalised?
False - maintenance and repair costs should be expensed. If a cost increases the expected future service potential of the asset beyond its initial value at the time of acquisition
T or F: depreciation is used to reflect the fair value of an asset?
False - depreciation is used to reflect the useful value of an asset.
T or F - can COGS be used as a proxy for inventory purchases?
Yes
