FAR - Inventory, PPE, and Non-monetary exchange Flashcards
A perpetual inventory system would result in the same ending inventory value as a periodic inventory system for the following inventory valuation methods:
FIFO - will be the same
LIFO and Average - will be different
When prices are rising, what impact would FIFO and LIFO have on profit and on the balance sheet?
When prices are rising, what impact would FIFO and LIFO have on profit and on the balance sheet?
What is a periodic inventory system? What is a perpetual inventory system?
periodic - the quantity of inventory is determined only by a physical count (at least one annually); therefore, units of inventory and the associated costs are counted and valued at the end of the accounting period and cost of inventory sold and inventory shortages cannot be easily distinguished.
perpetual inventory system - the inventory record for each item of inventory is updated for each purchase and each sale as they occur. the actual COGS is determined and recorded with each sale.
How to measure inventory subsequent to initial recognition?
- Lower of cost or market (LCM) - this is used for LIFO
- market is is the current cost to replace inventory. market cannot be higher than the ceiling which is Selling Price minus Cost of Disposal and lower than the Selling Price minus Cost of Disposal and profit margin - Lower of cost or net realizable value - all other methods.
- compares the inventory book value to the NRV, if lower than an impairment is recorded (to COGS)
Relating to Inventory Valuation, what is the marketing ceiling and what is the market floor?
- Market Ceiling - is the NRV. This is the sales price minus the cost to complete the inventory.
- Market Floor - is the NRV minus the normal profit margin
In a non-monetary exchange, what is the difference between an exchange having commercial substance vs non commercial substance?
When there is commercial substance, the asset given up or received uses the fair value approach,
When there is no commercial substance, the asset given up or received uses the book value approach
What depreciation method does not subtract the salvage value?
double declining balance method
How are losses recorded in a non-monetary exchange when the book value exceeds the fair value of the asset given up?
Losses are recognized immediately. This will be the difference between the FV and BV of the asset GIVEN UP. To record the asset RECEIVED, you add the BV of the asset given up, add any cash paid, minus any cash received, and minus any loss recognized.
If Greg Inc needs to pay to ship inventory that is being consigned at Leigh Inc, is the shipping costs expensed or capitalized in inventory?
The shipping costs are capitalized in inventory on Greg’s books.
Relating to non monetary exchanges, how do you know if an exchange lacks commercial substance or not?
An exchange will lack commercial substance if:
- the question states it lacks commercial substance
- there is no changes in future cash flows
- no changes in the economic position of the two parties
Relating to non monetary exchanges, how do you calculate gain on exchanges that have commercial substance and that do not have commercial substance
- If the transaction has commercial substance. It is related as a monetary exchange for gains and losses. The gain is calculated = FV of Old Asset - BV of Old Asset (Cost - A.D)
- If the transaction does not have commercial substance. A gain may not be recognized:
- no cash paid/received - no gain
- if cash is received and cash is less than 25% of total asset - gain recognized proportionally
- if cash is received and cash is greater than 25% - gain is recognized as if a monetary transaction for BOTH SIDES
***Losses are always recognized!
What inventory methods use the lower of cost or market?
LIFO and Retail Method
If beginning inventory is understated, what is the impact on COGS for the year?
This will result in COGS being understated for the year
Can you reverse an impairment of PPE for:
- Held for use?
- Held for Sale?
you can only reverse impairment for held for sale PPE
Are inflows and outflows for PPE (and other investments) shown net or separately?
They should be reported separately at their gross amounts.
What of the following costs can be capitalized for equipment?
- Sales tax paid on the machine
- Installation cost
- Finance charges on purchase loan
- Sales tax can be capitalized
- Installation cost can be capitalized
- Finance charges are expenses
Are excavation costs included in the cost of the land or building?
The building
What is the accounting treatment for fixed asset replacements & improvements?
- if the carrying value of the old asset is known
- if the carrying value of the old asset is unknown
if the carrying value of the old asset is known:
-remove the old asset, record a gain or loss. Capitalize the new asset/cost of improvement.
if the carrying value of the old asset is unknown:
debit A/D and credit cash/AP
What should the total cost of inventory be?
Direct Labor $1
Indirect Labor $2
Insurance on machine equipment $3
Advertising $4
Direct Labor, Indirect Labor, and Insurance on machine equipment = $6
Advertising is excluded
What is considered cost for the following two methods:
- Lower of cost or market
- Lower of cost and net receivable value
Current cost on books
If a FOR profit company donates property to a NFP, how is it recorded by the FOR profit company?
it is recorded as an expense at fair value (NOT book value)
a company is manufacturing equipment for it’s own use and equipment which it is going to sell, how should the interest be treated by the company?
the interest on the machine being built for the company will be capitalized during the construction period, and then will be expensed post construction period.
interest on equipment being built to be sold will be expensed as incurred
