FAR Deck 3 Flashcards
Through Ch 7: PPE
Construction in Progress (CIP) Formula/Calculation
CIP = Construction expenses + Gross Profit/loss
GP = CIP - Construction expenses
Construction in progress
Construction in progress is costs (incurred to date) plus the profit for the year.
If construction in progress exceeds billings on long-term contracts, a current asset is reported.
If construction in progress is less than billings on long-term contracts, a current liability is reported.
Progress billing
Progress billings are not used in calculating income from construction contracts.
Billings do not trigger income recognition because they are not dependent on when the performance obligation is satisfied.
The Lower of Cost or Market
Use for LIFO or retail inventory method
The lower of cost or market (LCM) rule applies only to inventory accounted for under the LIFO or retail inventory method.
LMC compares the cost with the current marekt value.
Although market value is usually replacement cost, it is subjected to a ceiling and floor limitation.
Market value is subject to a ceiling (NRV) and floor (NRV - Profit Margin) liminationl
Ceilng and Floor Calcuations for Inventory
Ceilng : is NRV (sales price - cost required to complete the inventory and disposal costs), which is the maximum amount that may be reported as market.
Floor : (NRV - Profit Margin) is the lowest amount that may be reported as market.
**A shortcut to determine market value is to arrange the replacement cost, ceiling and floor in numercial order and select the value in the middle.
Weighted Average Cost Calculations
Step 1:
Average cost per unit = Cost of beg inventory + Cost of purchaeses /
Beginning inventory units + Units purchased
(Periodic purchases includes all purchases in the period and Perpetual only includes purchases since the last calculation)
Step 2:
Cost of goods sold = # of units sold x Average cost per unit
Ending inventory = # of units remaining at end of period X Average cost
per unit
Lower of Cost or NRV (LCNRV)
Use for FIFO, Weighted Average and Moving Average
This method compares COST (purchase price) with NRV (sales price less costs to complete the inventory and disposal costs).
If cost exceeds the replacement costs and replacment costs exceeds NRV (sales price less disposal costs), then cost is greater than NRV.
Calculation of new moving average unit cost
Cost of the units purchases + Cost of units in inventory /
New total # of units
Two Systems for keeping track of inventory
- Periodic : The ending inventory is determined at the end of the accounting period
- Perpetual : The inventory is updated each time there is a sale or purchase
Under FIFO, the earliest goods purchased are considered the first goods sold. EI will made up of the most recent purchases.
- If prices are increases (inflation)
a) Periodic FIFO determines EI in reverse chronological order, starting
with the most recent, higher costs. This will result in higher EI costs
b) Perpetual FIFO updates the EI continuoulsy, resulting in EI comprosing the most recent, highter costs each time Therefore EI will be thesame amount whether a perpetual or period system is used.
Under LIFO, the most recent purchaes are the first good sold. EI will be made up of the oldest purchases (sometimes including beginning inventory).
- If prices are increases (inflation)
a) Periodic LIFO determines EI in chronological order, starting with the older, lower costs.
b) Perpetual LIFO updates EI continuously. As a result, some of the earlier purchases (at lower costs) could be sold. Therefore perpetual LIFO will result in different EI.
Impact of inventory errors on COGS and net income
Under the periodic system, COGS has an inverse relationship to COGS.
If ending inventory is understated by an amount, COGS will be overstated by that amount.
Therefore if COGS is overstated by an amount, net income will be understated.
Ultimately if expenses are overstated, net income will be understated.
Net carrying value of an Accounts Receivable
Accounts Receivable
Less: Allowance for credit losses (increases on credit side, write-off or decreases on the debt side).
=
Net carrying value
Solvency Ratios
Long-term debt-equity ratio :
Total L/T debt / Total Equity
Debt-to-equity :
Total Debt / Total equity
Total Debt Ratio
Total debt / Total Assets
Financial Leverage Ratio :
Total Assets / Total equity
Purchased financial asset with credit deterioration (PCD)
If purchase price is GREATER THAN OR EQUAL TO Face Value, no allocation required
If Purchase Price is LESS THAN Face Value
- If insiginificant amount of PCD, record at amortized cost
- If more than insignificant amount of PCD, allocate between credit and market risk
Inital cost equals : Purchase Price + Credit Risk
or
Face Value - Discount
Effects of ending inventory errors
Ending inventory
Dollar-Value LIFO (DVL)
STEP 1 : Convert (deflate) current ending inventory to base year dollars
Current year ending inventory / Current Price Index
*If index is not given, it can be calculated as :
Current Ending Inventory / Current ending inventory in base year dollars
SETP 2 : Determine new LIFO layer
Step 1 - Prior year inventory in base year dollars
STEP 3 : Restate (inflate) new layer from base year dollars to current year dollars
Step 2 X Current Price Index
SETP 4 : Determine new DVL ending inventory
Prior DVL Layers + Step 3
