FAR Misc. 2 Flashcards
Which U.S. GAAP inventory costing method would a company that wishes to maximize profits in a period of rising prices use
FIFO
In a period of rising prices, FIFO results in the lowest cost of goods sold and the highest net income
How do you account for a purchase commitment when the market value of the inventory is less than the purchase price?
When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.
Define FOB shipping point
F.O.B. means free on board, and it requires the seller to deliver goods to the location indicated at the seller’s expense. F.O.B. shipping point means title will revert to the buyer when the seller delivers goods to a common carrier. The buyer should include the goods in his/her inventory upon shipment.
What are the consequences of understating inventory?
An understatement of ending inventory results in an overstatement of cost of goods sold, which results in an understatement of net income and retained earnings.
Define FOB destination
title goes to the buyer when the buyer receives the goods from the common carrier
What is the appropriate treatment for goods held on consignment?
The goods should be included in ending inventory of the consignor.
How does FIFO affect ending inv?
Under FIFO, our COGS would be lower, and our ending inventory would be higher, causing our average inventory to be higher as well. Therefore, FIFO will result in a lowest inventory turnover in an inflationary environment assuming constant inventory quantities.
How is interest treated for fixed assets (ch. 4)
Interest incurred during the construction period should be capitalized, based on the weighted average of accumulated expenditures, as part of the cruise ship cost. Interest cost incurred before or after the construction period should be expensed as well as interest cost incurred during intentional delays in construction.
How do you treat leasehold improvements?
Leasehold improvements are capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease
What are some examples of inventoriable costs?
merchandise purchased plus freight-in, insurance, and warehousing costs (net of purchase returns and cash discounts) are inventoriable costs.
How do you calculate goodwill under the full goodwill and partial goodwill method?
Full goodwill= FV of sub’s net assets- CV of sub’sliabilities
Partial Goodwill = Acquisition cost - (FV of sub’s net assets- CV of sub’sliabilities x controlling interest)
What is the present value formula?
Present value = Future amount × Present value factor
How are gains recognized in a sale-leaseback transaction?
When the seller-lessee transfers substantially all the risks of ownership (as in a true sale), any gain resulting from the sale should be recognized immediately.
Recognition of a gain resulting from the sale in a sale-leaseback should be deferred when the seller-lessee retains the right to substantially all of the remaining use of the property (as in a capital lease).
How are lease bonuses accounted for?
deferred and amortized over the life of the lease and recognized as income by the lessor.
capitalized and amortized as an expense by the lessee.
How are refundable deposits treated?
lessee-refundable until refunded by the lessor
Lessor- liability by the lessor until deposit is refunded
