Accounting for Decision Makers Exam 2

Inventory Cost Flow Assumptions: - correct answer FIFO LIFO Lower of Costs or Market Weighted Average Specific Identification FIFO - correct answer First in First Out used in Production Lines. Transfers inventory cost to the COGS account the oldest incurred and to leave in the inventory asset account the most recent costs of merchandise purchased. Leads to higher assets & net income What Financial Statement does FIFO show up on? - correct answer Balance Sheet LIFO - correct answer Last in First Out used in production lines. Most recent costs incurred for merchandise purchased are transferred to the income statement (COGS) when items are sold and the inventory on hand at the balance sheet date is costed the oldest cost. Tax Savings What Financial Statement doe LIFO show up on? - correct answer Income Statement Lower of Cost or Market - correct answer inventory must be reported at market value when market is LOWER than cost 3 ways Lower of Cost or Market Method can be applied? - correct answer 1. separately to each individual 2. broad categories of inventory 3. whole inventory Weighted- Average - correct answer Take the total cost and find the average, used in Production line. Total cost of goods available / Units available for sale Specific Identification - correct answer When a unit is sold, the specific cost go the unit sold is added to COGS. Useful for unique items Effects of Cost Flow Assumptions on COGS - correct answer LIFO = highest, Weighted Avg. = middle, FIFO = lowest Effects of Cost Flow Assumptions on Inventory - correct answer FIFO = highest, Weighted Avg. = middle, LIFO = lowest Higher LIFO effect on net income? - correct answer increases net income Higher FIFO effect on inventory? - correct answer makes company more valuable Benefits of a company changing to LIFO from FIFO? - correct answer 1. higher COGS 2. lower profits 3. lower taxes 4. more realistic reporting of net income Under LIFO the balance sheet? - correct answer will not reflect current costs for items in inventory and delays the recognition of inventory profits Inventory Accounts: - correct answer Retail Firms, Manufacturing Firms, Service Firms Retail Firms Inventory Accounts? - correct answer Merchandise Inventory Manufacturing Firms Inventory Accounts? - correct answer Raw Materials Work In Process (WIP) Finished Goods Service Firm Inventory Accounts? - correct answer NONE Merchandise Inventory: - correct answer retail firms used to describe inventory ready for sale to customers Finished Goods Inventory: - correct answer manufacturing firm, inventory account applicable to goods available for sale to customers Raw Materials Inventory: - correct answer account is used to hold the costs of raw materials until the materials are released to the factory floor Work In Process Inventory: - correct answer inventory account for the costs of items that are in the process of being manufactured: -Direct Labor Costs - Factory Overhead: *utilities * machine costs * depreciation Prepaid Expense: - correct answer expense that have been paid for but not yet received Prepaid Expense adjusting entry? - correct answer Assest decrease Expenses increased How are expenses that have not been paid for in the current fiscal period handled? - correct answer they are not subtracted from revenue until a subsequent fiscal period Examples of Prepaid Expenses: - correct answer Insurance Period Noncurrent Assets: - correct answer Land Building Equipment Intangible Assets Natural Resources Primary Issues for noncurrent Assets? - correct answer Decline in asset usefulness over its useful life Steps of measuring a concurrent assets useful life: - correct answer Acquisition (Purchase) Use (Maintenance and Repair) Disposal Land - correct answer non-depreciable asset al costs incurred to get land ready for use are CAPITALIZED Acquisition Stage of Land: Capitalize - correct answer Debit Land, Credit Cash Net income Same Decrease Current Asset Increase Long Term Asset Disposal Stage of Land: Capitalize - correct answer Debit Cash Credit Land Credit Gain/Loss Asset increase, Equity increase (if gain) no effect on liabilities Calculate Gain or Loss? - correct answer Proceeds - Book Value Building & Equipment: - correct answer all costs incurred to get an asset ready for use are capitalized Depreciation: - correct answer Acquisition cost on Balance Sheet Expense on Income Statement Depreciation recorded: - correct answer debit Depreciation Expense credit Accumulated Depreciation Balance Sheet = - accumulated depreciation Income Statement = - depreciation expense What kind of account is Accumulated Depreciation? - correct answer Contra-asset account Is cash involved in the depreciation expense entry? - correct answer no Depreciation Methods: - correct answer Straight Line Method Accelerated Methods Straight Line Methods are: - correct answer Straight Line & Units of Production Most Common Straight Line Calculation: - correct answer Annual Dep. Expense = (cost - estimated salvage value)/ estimated useful life What effect does earnings per share have on useful life? - correct answer increases Units of Production Depreciation: - correct answer (cost- estimated salvage value)/ estimated total units to be made Depreciation stops when? - correct answer Net Book Value = Salvage Value Net Book Value: - correct answer cost of asset - accumulated depreciation Accelerated Depreciation Methods: - correct answer Double Declining Balance Sum of years Double Declining Balance Calculation: - correct answer Annual Dep. Exp. = Double the Straight line Dep. Rate x Book value at Beg. of year