Fixed Assets Inventory and Investments

Question 1

How are Research and Development costs recorded?

Answer 1

They are expensed in the period incurred and are not capitalized.

Question 2

Which expenditures are included in the cost of a building?

Answer 2

All expenditures to get the building into working condition are ready for use

Question 3

Which expenditures are included in the cost of land?

Answer 3

All expenditures to get the land ready for its intended use:

Title & County Fees

Clearing of Land - Dirt work etc.

Demolition and removal of old buildings (minus any scrap or salvage)

Note: capitalized land costs are not depreciated

Question 4

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

Answer 4

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.

The new asset is recorded at the book value of the asset given up.

The only gain that can be recognized is any boot (cash) received.

Question 5

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

Answer 5

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.

The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.

Question 6

How is donated property recorded by the donee?

Answer 6

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose

Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value

Question 7

How is donation of property recorded by the donor?

Answer 7

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

Question 8

How is double-declining balance (DDB) depreciation calculated?

Answer 8

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.

Question 9

How is Sum of Year’s Digits (SYD) depreciation calculated?

Answer 9

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense

For example the depreciation factor for the third year of a 10-year asset would be:

: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%

Remaining useful life : 8 SYD : 55

Question 10

How is straight line depreciation calculated?

Answer 10

(Cost - Salvage Value) / Useful life : depreciation expense

Question 11

When is an asset considered to be impaired? How is impairment loss calculated?

Answer 11

When the un-discounted future cash flows are less than the carrying value of the asset.

Carrying Value - Fair Value : Impairment Loss

Note: impaired assets that recover their value can’t be written back up once written down

Question 12

How are legal fees to defend a patent amortized?

Answer 12

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent’s economic life.

If unsuccessful they are expensed immediately.

Question 13

What are the two steps for testing goodwill impairment?

Answer 13

Compare the CV to the FV. If FV is greater than CV no impairment exists you’re done.

If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

Question 14

How are costs for developing software recorded?

Answer 14

Expenses prior to technological feasibility are expensed as R&D.

After technological feasibility but prior to production costs are capitalized.

Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.

Question 15

What expenditures are included in the cost of equipment?

Answer 15

All expenditures to get the asset into working condition and ready for use:

Purchase price + liabilities assumed
Shipping
Taxes
Insurance
Installation
Testing
Legal fees
Construction loan interest

Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.

Question 16

Which costs are inventoriable?

Answer 16

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 17

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

Answer 17

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

Question 18

When does ownership transfer when goods are sent FOB Destination?

Answer 18

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

Question 19

Which costs are non-inventoriable?

Answer 19

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

Question 20

When are discounts recorded under the gross method?

Answer 20

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

Question 21

Under the net method, when are discounts recorded?

Answer 21

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

Unused discounts are allocated to financing expense.

Question 22

How is gross margin calculated?

Answer 22

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

Question 23

Describe the periodic inventory system.

Answer 23

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

Question 24

Describe the perpetual inventory system.

Answer 24

Inventory count continually updated

Uses a moving-average cost flow method

Question 25

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

Answer 25

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

Question 26

How is inventory turnover calculated?

Answer 26

COGS / Average Inventory

Question 27

How is Average Day’s Sales in inventory calculated?

Answer 27

365 / Inventory Turnover

Question 28

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

Answer 28

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

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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 31

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 31

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

Question 32

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

Answer 32

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 33

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

Answer 33

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 34

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

Answer 34

COGAS / Total Units : Weighted Average Cost Per Unit

Question 35

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

Answer 35

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

Question 36

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

Answer 36

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 37

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

Answer 37

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 38

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

Answer 38

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

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

Question 39

How are Available-For-Sale securities recorded on the Balance Sheet?

Answer 39

At Fair value as either Current or Non-current assets.

Question 40

How are Available-For-Sale security Unrealized G/L treated?

Answer 40

Included in OCI (Other Comprehensive Income)

Question 41

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

Answer 41

HTM - Stockholder’s Equity
/ Trading Securities - Current Period.

Question 42

How are Held-to-Maturity securities recorded on the Balance Sheet?

Answer 42

Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder’s Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

Question 43

How are Held-to-Maturity securities Unrealized G/L treated?

Answer 43

Trick question - Unrealized gains or losses are not applicable because they are HTM

Question 44

How are Trading Securities recorded on the Balance Sheet?

Answer 44

At Fair Value as a Current Asset

Unrealized gains/losses are recorded on the Income Statement

If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

Question 45

How are Trading Securities Unrealized G/L treated?

Answer 45

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.