FAR

Question 1

How are changes in accounting principle applied?

Answer 1

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

Question 2

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

Answer 2

A change of principle.

Applied retrospectively.

Question 3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

Answer 3

A change in accounting principle.

Applied retrospectively.

Question 4

How is a change in accounting estimate applied?

Answer 4

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

Question 5

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Answer 5

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

Question 6

How is a correction of an accounting error made?

Answer 6

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

Question 7

What are the requirements for a prior period adjustment?

Answer 7

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

Question 8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 8

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

Question 9

How does an inventory error effect the financial statements?

Answer 9

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

Question 10

How is a change in entity recorded?

Answer 10

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

Question 11

Which costs are inventoriable?

Answer 11

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 12

When does ownership of goods transfer when shipped FOB Shipping Point?

Answer 12

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Question 13

When does ownership transfer when goods are sent FOB Destination?

Answer 13

FOB Destination keeps the items in the seller’s inventory until it reaches the buyer

Question 14

Which costs are non-inventoriable?

Answer 14

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

Question 15

When are discounts recorded under the gross method?

Answer 15

Under the gross method, discounts are recorded only when used.

Question 16

Under the net method, when are discounts recorded?

Answer 16

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

Question 17

How is gross margin calculated?

Answer 17

Gross Margin : Sales - COGS (BI + P - EI)

Question 18

Describe the periodic inventory system.

Answer 18

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

Question 19

Describe the perpetual inventory system.

Answer 19

Inventory count continually updated

Uses a moving-average cost flow method

Question 20

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Answer 20

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Question 21

How is inventory turnover calculated?

Answer 21

COGS / Average Inventory

Question 22

How is Average Day’s Sales in inventory calculated?

Answer 22

365 / Inventory Turnover

Question 23

Under a consignment system, who holds the consigned goods in inventory?

Answer 23

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Question 24

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

Answer 24

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Question 25

What effect does overstatement or understatement of inventory have on ending retained earnings?

Answer 25

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.

Question 26

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 26

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

Question 27

Which costs are included in COGS first under the FIFO (first in first out) system?

Answer 27

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

Question 28

Which costs are included in COGS under the LIFO (last in first out) system?

Answer 28

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Question 29

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

Answer 29

COGAS / Total Units : Weighted Average Cost Per Unit

Question 30

How does FIFO’s COGS relate to LIFO’s in a time of changing prices?

Answer 30

FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.

Question 31

How do FIFO and LIFO change in a period of rising prices?

Answer 31

FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High

Question 32

How do FIFO and LIFO change in a period of falling prices?

Answer 32

FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low

Question 33

Under a Lower of Cost or Market, how are the benchmarks calculated?

Answer 33

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit