Intermediate Accounting > Final Exam > Flashcards

Final Exam Flashcards

(53 cards)

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1
Q

Costs included in Inventory (Manufacturing Inventory)

A

a. Raw Materials - recorded at amount paid to acquire

b. Work in Process - MATERIALS, LABOR + OVERHEAD costs

c. Finished Goods - ready for sale

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2
Q

Costs included in Inventory (Merchandise inventory)

A

Finished goods ready for sale

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3
Q

Costs Included in Inventory (Quantity Issues)

A

a. Goods in Transit - FOB Shipping + FOB destination

b. Consignment Stock - owner of inventory reports it, not consignment store

c. Returns - actual and estimated inventory returns

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4
Q

Inventory Flow (Beginning to Ending or COGS)

A

Beginning Inventory
+ Purchases
= Goods Available for Sale
- COGS
= Ending Inventory

OR
Goods Available for Sale
-Ending Inventory
= COGS

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5
Q

Perpetual Inventory Systems

A

Accounts for how of inventory (purchases & sales) in REAL TIME

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6
Q

Perpetual Inventory (Journal Entry)

A

Purchase:
Dr. Inventory
Cr. Accounts Payable

Sale:
Dr. COGS
Cr. Inventory

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7
Q

Periodic Inventory Systems

A

Account for purchases in REAL TIME and calculates COGS at the END of the period

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8
Q

Periodic Inventory Systems (Journal Entry)

A

Purchase:
Dr. Purchases
Cr. Accounts Payable

Sale: No Entry for COGS or Inventory (Dr. A/P and Cr. Sales only)

End of Period: use Inventory Flow Equation and a physical count of inventory on hand to solve for COGS and make a journal entry to adjust ending inventory and COGS

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9
Q

FIFO (First In First Out)

A

Oldest items are sold first, newest items remain in ending inventory

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10
Q

LIFO (Last In First Out)

A

Newest items are sold first and oldest items remain in ending inventory

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11
Q

Average Cost

A

Calculate an average cost of Good Available for Sale

Average Cost = Goods Available for Sale $ / Goods Available for Sale #

*Average Cost x # of Units Sold = COGS

*Average Cost x # of Units remaining = Ending Inventory

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12
Q

(FIFO) Difference between FIFO and LIFO in terms of the accounting impact and why someone would use one versus the other ***

A

FIFO = Provides HIGHEST INVENTORY and LOWEST COGS leading to:

–Higher profits due to low COGS
–Stronger balance sheet as ending inventory reflects most recent, higher costs
–People choose LIFO because it shows higher assets and higher profit even though they pay more taxes

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13
Q

(LIFO) Difference between FIFO and LIFO in terms of the accounting impact and why someone would use one versus the other ***

A

LIFO = Provides LOWEST INVENTORY and HIGHEST COGS leading to:

–Decrease in taxable income, have to pay less taxes
–Some argue more accurate and current costs and revenues are reported
–Good for industries where inventory costs rise, like retail, automotive etc.

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14
Q

How to Adjust from FIFO to LIFO (LIFO Reserve)*

A

FIFO Inventory
-LIFO Inventory
= LIFO Reserve (contra account)

Important for financial statement readers to convert back to FIFO to compare to other companies

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15
Q

LIFO Reserve for COGS*

A

FIFO COGS
+/- Change in LIFO Reserve
= LIFO COGS

Journal Entry:
Dr./Cr. LIFO Reserve
Dr./Cr. COGS

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16
Q

LIFO Liquidation

A

If purchases are LESS than sales, older inventory items are “sold” and erodes tax benefits of LIFO

–If purchases are LESS than sales, eats away at older layers of inventory
–If purchases are GREATER than sales, add a layer of inventory from current year purchases

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17
Q

Why pooled LIFO methods (like Dollar-Value LIFO) are preferable over unit LIFO (regular LIFO)

A

Pooled LIFO methods reduce the risk of LIFO Liquidation!

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18
Q

Dollar-Value LIFO***

A

Using BASE-YEAR VALUE of inventory (value on day started using LIFO) and CURRENT YEAR VALUE of same inventory

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19
Q

Dollar-Value LIFO (Price Index Equation)

A

Price Index = Current Year Value / Base-Year Value

Price Index is how much prices have changed since Base-Year

Price Index is always 1 on Base-Year and Unit cost at Base-Year is always the same

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20
Q

PROBLEM 1: DOLLAR-VALUE LIFO***

A

PRACTICE

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21
Q

Lower of Cost or Net Realizable Value (LCNRV) (equations)

A

Lower of Cost = FIFO/LIFO/Average Cost

Net Realizable Value = Selling Price - Cost to Complete or Sell

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22
Q

Lower of Cost or Net Realizable Value (LCNRV)

Study These Flashcards
A

If Net Realizable Value FALLS BELOW Cost, must write Inventory down to the lower value.

Journal Entry:
Dr. COGS
Cr. Allowance for LCNRV
OR
Dr. Loss on Inventory
Cr. Allowance for LCNRV

23
Q

Lower of Cost or Net Realizable Value (calculation)

Study These Flashcards
A

Cost NRV LCNRV
A 470 450 450
B 450 430 430
C 830 640 640
D 960 1,000 960
=2,710 =2,480

*2,480-2,710 = 230

Journal Entry:
Dr. COGS or Loss 230
Cr. Allowance for LCNVR 230

24
Q

Methods of Inventory Estimation Techniques

Study These Flashcards
A
  1. Gross Profit Method
  2. Retail Inventory Method
25
Gross Profit Method (Inventory Estimation Method)
*Not GAAP* Beginning Inventory + Purchases = Goods Available for Sale - COGS *(Revenue-Gross Profit) = Ending Inventory
26
Retail Inventory Method (Inventory Estimation Method)
Cost Retail Beginning Inventory XX XX + Purchases (& freight-in) XX XX =Subtotal XX XX Add: Markups XX Subtract: Markup (XX) Cancellations =Subtotal After Markups XX XX Subtract: Markdowns (XX) Add: Markdown XX Cancellations =Subtotal "Goods XX XX Available for Sale" Less: Sales Revenue (XX) =Ending Inventory XX at Retail Value **CONVENTIONAL RETAIL = Cost/Retail @ "Subtotal After Markups" (use) COST RETAIL = Cost/Retail @ "Subtotal Goods Available for Sale"
27
Retail Inventory Method (Conventional Retail)
Example: Cost/Retail = 1,575,000 / 2,500,000 = 0.63 *Cost of inventories is 63% of its retail value
28
Initial Valuation of PP&E (Costs that can be Capitalized)
1. Purchase Price 2. Sales Tax Paid 3. Freight/Delivery 4. Installation 5. Testing/Calibration 6. Training *All costs to obtain and get ready for intended use can be capitalized*
29
Land/Buildings (Costs that can be capitalized)
1. Costs to Purchase 2. Real Estate Fees/Commissions 3. Title Fees 4. Title Insurance 5. Costs to Demolish - (less money received from selling parts/pieces for scrap/salvage)
30
3 Characteristics of PP&E
1. Acquired for Use, Not for Sale 2. Long-Term in Nature 3. Possess Physical Substance
31
Self Constructed Assets (Costs that can be capitalized)
a. Full Cost Approach (Materials, Labor, OH) b. Interest
32
Interest Capitalized Terms (under Self Constructed Assets)
a. Capitalize interest during the construction period only b. Capitalize interest on all outstanding debt during construction period c. Interest capitalized is lower of avoidable interest and actual interest
33
PROBLEM 2: CAPITALIZED INTEREST
PRACTICE
34
Acquisition of PP&E (3 ways)
1. Purchase with DEBT 2. LUMP SUM purchase 3. NON-CASH purchase
35
Purchase with DEBT (PP&E)
Value of the transaction is based on present value of the debt (discounted at reasonable rate of interest) Dr. Asset (PV of Note) Dr./Cr. Discount or Premium on Note Cr. Note Payable (Principle Value of Note)
36
LUMP SUM purchase (PP&E)
Purchasing more than one asset at a single price. Allocate purchase price based on relative fair values of each asset.
37
NON-CASH purchase (PP&E)
Exchanges. Fair value of what is given will determine value of transaction and asset received. Does the transaction have commercial substance (in a different financial position after)? --If YES, account for gains/losses normally --If NO, recognize losses immediately but DEFER recognizing gains -----> Reduce amount of asset by the amount of gain differed. -----> If any cash is exchanged, can recognize gain to extent of cash received ((Cash Received / Total Value Received) x Gain = Gain Recognized) -----> If cash is 25% of transaction, total gain can be recognized
38
Costs Subsequent to Acquisition (accounting for costs incurred after acquisition)
Repairs, Maintenance, Additions, Improvements, Replacements Capitalize ONLY if it increases future benefit of asset (NEEDS ONE): --- Increases Life of Asset --- Increases Efficiency of Asset --- Increases Quality of Goods Produced If NOT, must expense
39
Disposal of PP&E (example)
Sale of PP&E - company sells an asset with a cost of $35,000 and accumulated depreciation of $17,000 1) If Sold for $21,000 Dr. Cash 21,000 Dr. Accumulated Dep. 17,000 Cr. Asset 35,000 Cr. Gain on Sale 3,000 2) If Sold for $12,000 Dr. Cash 12,000 Dr. Accumulated Dep. 17,000 Dr. Loss on Sale 6,000 Cr. Asset 35,000
40
Depreciation (definition) + (Service Life/Useful Life and Depreciable Base)
Process of cost allocation, not valuation. Done to accurately match expenses with revenues and help companies with replacement planning. Service Life/Useful Life = economic life of an asset, how long will it provide benefit Depreciable Base = residual value (or salvage value)
41
Depreciation Methods (3 types)
1. Straight-Line 2. Accelerated Methods 3. Activity Based Methods
42
Straight-Line Method
*Equal amounts of depreciation each year Cost - Residual Value / Useful Life = Annual Depreciation
43
Accelerated Methods (2 types)
a. Double Declining Balance b. Sum of Years Digits
44
Double Declining Balance (Accelerated Methods)
2 x (1 / Useful Life) x Net Book Value = Annual Depreciation
45
Sum of Years Digits (Accelerated Methods)
(Cost - Residual Value) x (# of Years Remaining / Sum of Years Digits) = Annual Depreciation *Sum of Years Digits = (n x (n + 1) / 2)
46
Activity Based Methods
a. Units of Activity
47
Units of Activity (Activity Based Method)
Cost - Residual Value / Total Expected Activity = Depreciation Rate x Actual Activity = Annual Depreciation
48
To depreciate assets for partial periods
Must find how many months out of year it is being depreciated, for example: 5/12 or 7/12 etc. and multiply that by the annual depreciation expense found
49
Depreciation Change in Estimate
Do so prospectively (adjust in current period and going forward) Net Book Value at time of change is depreciated using new estimates going forward
50
Impairment (defintion)
When an PPE assets value has declined
51
Impairment Steps
1) Is there some indication that our PPE assets have decline in value? --(if YES, move to step 2) 2) Is there an impairment? (Recoverability Test) --Does net book value exceed undiscounted future cash flows? ------If YES, impairment (go to step 3) ------If NO, no impairment and stop 3) Amount of Impairment Loss: Net Book Value - Fair Value = Impairment Loss Dr. Loss on Impairment Cr. PPE Asset ***remember cannot reserve impairment, once it goes down if the value of the asset goes up in a new year it still stays the same, but if it goes down more then lower it more
52
Depletion (definition)
Relates to companies extorting resources for sale
53
Depletion Calculation
Cost of Land: Purchase Price 1,190,000 + Developmental Costs 200,000 + Restoration Obligation 90,000 = Cost of Land = 1,480,000 *Cash = Purchase price + Developmental costs (1,190,000+200,000 =1,390,000) Dr. Land 1,480,000 Cr. Cash 1,390,000 Cr. Restoration 90,000 Obligation Cost - Salvage Value / Total Units = Depletion Rate OR Material Cost Per Unit (1,480,000 - 100,000) / 60,000 tons = $23 / tons 2028: 30,000 tons * $23 = $690,000 Dr. Inventory 690,000 Cr. Land. 690,000 *company sold 22,000 tons* 2028: 22,000 tons * $23 = $506,000 Dr. COGS 506,000 Cr. Inventory 506,000 690,000 - 506,000 = 184,000 in Inventory
Intermediate Accounting
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