WSP ACCOUNTING actual final ANSWERS AND
QUESTIONS SET A+
✔✔Average Cost - ✔✔-COGS and ending inventory are calculated as: COGS / total
number of goods
✔✔Rising prices of Inventory - ✔✔-COGS were higher using LIFO than FIFO. This
accounting choice leads to lower net income under LIFO and thus lower taxes. The
average cost lies in between.
✔✔Falling Prices of Inventory - ✔✔-COGS were higher using FIFO than LIFO. This
accounting choice leads to lower net income under FIFO and thus lower taxes. The
average cost lies in between.
✔✔LIFO reserve - ✔✔-For a company using LIFO, the difference between inventory
reported using LIFO and inventory using FIFO.
-All companies must report this
= FIFO inv. -LIFO inv.
✔✔The link between FIFO and LIFO inventory methods - ✔✔The LIFO Reserve allows
comparison of inventories and COGS across both methods:
1. LIFO inventory + LIFO Reserve = FIFO inventory
2. FIFO COGS + LIFO Reserve = LIFO COGS
-When comparing a LIFO company against a FIFO company, the LIFO reserve must be
subtracted from the LIFO company's COGS to arrive at apples-to-apples profits
comparisons
✔✔lower of cost-or-market (LCM) rule - ✔✔-dictates that if the market value of inventory
falls below historical cost, they must be written down to market value
-The loss must be recognized immediately on the income statement. The loss can be
presented in COGS, in 'Other operating (or non operating) expenses' or - if it is a big
write down, as a separate line item
, ✔✔Property, Plant & Equipment (PPE) - ✔✔-represent land, buildings, and machinery
used in the manufacture of the company's services and products plus all costs
(transportation, installation, other) necessary to prepare those fixed assets for their
service
-PP&E cycles out of the B/S and into the I/S as depreciation, either in COGS, SG&A or
elsewhere
-is reported net of accumulated depreciation on the balance sheet, such that: Net PP&E
= Gross PP&E - accumulated depreciation
✔✔Accumulated Depreciation - ✔✔-the total amount of depreciation expense that has
been recorded since the purchase of a plant asset
-offsets Gross PP&E account, and the 2 accounts are aggregated together on the
balance sheet as Net PP&E
-If value declines needs to be written down to market value
-The loss must be recognized immediately on the income statement. The loss can be
presented in COGS, SG&A, 'Other operating (or non operating) expenses' or - if it is a
big write down, as a separate line item.
-When a company sells assets, if it receives more than the net book value it recognizes
on the B/S at the time of sale, a gain is recorded on the I/S - usually as "other" operating
or non operating income, or within the expense category through which the asset was
being depreciated (COGS or SG&A)
✔✔intangible assets - ✔✔-are comprised of non-physical acquired assets
-are items that have value based on the rights belonging to that company
Ex. Customer Lists, Franchises, Memberships, Licenses, Patents and Technology,
Trademarks and goodwill are considered to have indefinite useful life so they are not
amortized
✔✔Goodwill - ✔✔-is the amount by which the purchase price for a company exceeds its
fair market value (FMV), representing the "intangible" value stemming from the acquired
company's business name, customer relations, employee morale
-is effectively an accounting plug, created only if the purchase price exceeds the FMV of
all the assets acquired
-is not amortized, but is tested annually for loss of value
-If the value of the previously acquired company declines, THIS is reduced, with a
corresponding reduction to RE via the income statement, by the amount of the
impairment
✔✔ Historical Cost - ✔✔-Financial statements report companies' resources and
obligations at an initial historical cost. This conservative measure precludes constant
appraisal and revaluation
✔✔Revenue Recognition Principle - ✔✔-requires that companies recognize revenue in
the accounting period in which the performance obligation is satisfied
-Revenues must be recorded when earned and measurable
-Does not matter when cash transfers occur
QUESTIONS SET A+
✔✔Average Cost - ✔✔-COGS and ending inventory are calculated as: COGS / total
number of goods
✔✔Rising prices of Inventory - ✔✔-COGS were higher using LIFO than FIFO. This
accounting choice leads to lower net income under LIFO and thus lower taxes. The
average cost lies in between.
✔✔Falling Prices of Inventory - ✔✔-COGS were higher using FIFO than LIFO. This
accounting choice leads to lower net income under FIFO and thus lower taxes. The
average cost lies in between.
✔✔LIFO reserve - ✔✔-For a company using LIFO, the difference between inventory
reported using LIFO and inventory using FIFO.
-All companies must report this
= FIFO inv. -LIFO inv.
✔✔The link between FIFO and LIFO inventory methods - ✔✔The LIFO Reserve allows
comparison of inventories and COGS across both methods:
1. LIFO inventory + LIFO Reserve = FIFO inventory
2. FIFO COGS + LIFO Reserve = LIFO COGS
-When comparing a LIFO company against a FIFO company, the LIFO reserve must be
subtracted from the LIFO company's COGS to arrive at apples-to-apples profits
comparisons
✔✔lower of cost-or-market (LCM) rule - ✔✔-dictates that if the market value of inventory
falls below historical cost, they must be written down to market value
-The loss must be recognized immediately on the income statement. The loss can be
presented in COGS, in 'Other operating (or non operating) expenses' or - if it is a big
write down, as a separate line item
, ✔✔Property, Plant & Equipment (PPE) - ✔✔-represent land, buildings, and machinery
used in the manufacture of the company's services and products plus all costs
(transportation, installation, other) necessary to prepare those fixed assets for their
service
-PP&E cycles out of the B/S and into the I/S as depreciation, either in COGS, SG&A or
elsewhere
-is reported net of accumulated depreciation on the balance sheet, such that: Net PP&E
= Gross PP&E - accumulated depreciation
✔✔Accumulated Depreciation - ✔✔-the total amount of depreciation expense that has
been recorded since the purchase of a plant asset
-offsets Gross PP&E account, and the 2 accounts are aggregated together on the
balance sheet as Net PP&E
-If value declines needs to be written down to market value
-The loss must be recognized immediately on the income statement. The loss can be
presented in COGS, SG&A, 'Other operating (or non operating) expenses' or - if it is a
big write down, as a separate line item.
-When a company sells assets, if it receives more than the net book value it recognizes
on the B/S at the time of sale, a gain is recorded on the I/S - usually as "other" operating
or non operating income, or within the expense category through which the asset was
being depreciated (COGS or SG&A)
✔✔intangible assets - ✔✔-are comprised of non-physical acquired assets
-are items that have value based on the rights belonging to that company
Ex. Customer Lists, Franchises, Memberships, Licenses, Patents and Technology,
Trademarks and goodwill are considered to have indefinite useful life so they are not
amortized
✔✔Goodwill - ✔✔-is the amount by which the purchase price for a company exceeds its
fair market value (FMV), representing the "intangible" value stemming from the acquired
company's business name, customer relations, employee morale
-is effectively an accounting plug, created only if the purchase price exceeds the FMV of
all the assets acquired
-is not amortized, but is tested annually for loss of value
-If the value of the previously acquired company declines, THIS is reduced, with a
corresponding reduction to RE via the income statement, by the amount of the
impairment
✔✔ Historical Cost - ✔✔-Financial statements report companies' resources and
obligations at an initial historical cost. This conservative measure precludes constant
appraisal and revaluation
✔✔Revenue Recognition Principle - ✔✔-requires that companies recognize revenue in
the accounting period in which the performance obligation is satisfied
-Revenues must be recorded when earned and measurable
-Does not matter when cash transfers occur
