Inflation Accounting & Financial Statement Analysis Flashcards
HOW would you calculate the (increase) in the current cost of inventory?
BY subtracting the increase expressed in constant dollars from the increase expressed in nominal dollars
Equation: (Increase) in current cost (constant dollars) minus (Increase) in current cost (nominal dollars)
THIS will give you the amount of Inflation that MUST have occured
Under current cost accounting, the holding gain or loss on inventory:
IS the difference between its replacement cost and its purchase price
WHERE should a company disclose the effects of changing prices in accordance with ASC 255 Financial Accounting and Changing Prices?
Supplementary information to the financial statements
WHY? - Because information about changing prices is voluntary, not required
Therefore it would be presented in Supplementary information if it was presented
HOW are Monetary assets and liabilities defined?
AS financial instruments that are fixed in amount and do not vary in dollar amount as a result of inflation.
HOW are Cost of Goods Sold (COGS) calculated on a current cost financial statement?
NUMBER of units sold multiplied by the average current cost during the period.
NOTE: Any difference between the average current cost and the original cost will result in a holding gain or loss
True or False.
Inventory is reported at “Market” cost on a current cost financial statement
FALSE.
Inventory is reported at “Replacement” cost on a current cost financial statement
NOTE: The difference between replacement cost and original cost will result in a holding gain or loss.
WHAT happens to a liability account balance that remains constant during periods of Inflation?
A Purchasing Power Gain IF the item is a monetary liability
True or False.
During a period of rising prices, a purchasing power loss is incurred on monetary liabilities.
FALSE.
During a period of rising prices, a purchasing power loss is incurred on monetary assets.
WHAT “approach” includes adjustments for both specific price changes and general price-level changes?
THE “Current cost/Constant dollar” approach
HOW do you calculate the operating cycle?
BY taking the sum of the Average days to collect accounts receivable plus the Average days sales in inventory
IF the current ratio is greater than 1:1 and the quick ratio is less than 1:1 -
IT means that the total of quick assets (cash and receivables) is less than current liabilities; but that all current assets (quick assets plus inventory) is greater than current liabilities.
E.g. A payment of accounts payable will increase the current ratio since it was greater than 1:1 and decrease the quick ratio since it was lower than 1:1.
HOW would you calculate your Net credit sales?
BY multiplying the Average Receivables by the Receivables Turnover
HOW are average total assets calculated?
Net Credit Sales divided by Total Assets Turnover
If Accounts Receivable (A/R) was $1,200 in 20X2 and this represents a $400 increase from 20X1, what would your A/R have been for 20X1?
800
HOW? - $1,200 A/R from 20X2 - 400 Increase = $800
THE Times Preferred Dividends Earned Ratio is:
THE ratio of Total Earnings to total Preferred Dividends
i.e. Total Earnings divided by Total Preferred Dividends
