Financial Accounting & Reporting
Exam With 100% Correct Solutions
Unit of Measure
Financial data should be measured using a common, stable, monetary unit
Periodicity
The life of business is divided into artificial time periods
Modifying Conventions
Conservatism
Industry Practices
Conservatism
The practice of prudence when there is uncertainty
Examples:
Expenses and liabilities should be recognized as soon as possible when there is uncertainty about
the outcome
Revenues and assets should be recognized when they are assured of being received
Lower of cost or market theory should be applied to inventory and certain
securities
,Industry Practices
It may be necessary for an entity to depart from strict compliance with GAAP due to the unique
nature of the industry in which an entity operates
Substance Over Form
Report the economic substance of an event over its legal form
Materiality
Items are material if they could influence the economic decisions of users, taken on the basis of financial
statements
Determining Cost of Inventory
Includes all costs incurred to bring the inventory to purchaser and get it ready for sale
Purchase price (net)
Shipping (freight-in, FOB shipping point)
Handling
Insurance
Warehousing
Inventory Ownership—In Transit
Record inventory when significant risks of ownership have passed from seller to buyer
FOB Destination
Seller retains ownership until goods reach their destination (delivered to buyer)
FOB Shipping Point
,Seller retains ownership until goods leave the shipping point; buyer owns once the goods depart the
seller's warehouse
Which inventory valuations methods are acceptable under U.S. GAAP?
− Specific Identification
− FIFO
− LIFO
− Average Cost IFRS
Which inventory valuations methods are acceptable under IFRS?
FIFO and Average Cost are the only cost flow assumptions permitted under IFRS
IFRS prohibits the use of LIFO
Specific Identification
Each item of inventory is identified for cost
− Time consuming
− Expensive
FIFO
First In First Out
Balance Sheet method (favors the Balance Sheet)
Recent prices are on the balance sheet
− Ending inventory contains most recent prices
Old prices are on the income statement as COGS
− Causes distortion in matching current revenue with current expenses
, LIFO
Last In First Out
LIFO is an Income Statement method (favors the income statement)
Recent prices are in the income statement
− No distortion in matching current revenue with current expenses
Old prices are on the balance sheet -LIFO but First In Still Here
-Inventory base is made up of old prices; does not reflect true value of inventory
Effect of Inflation
During periods of rising prices (i.e., inflation)
Under LIFO
− Last unit purchased -> First unit sold higher COGS -> Lower Net Income
Under FIFO
− First unit purchased -> First unit sold lower COGS -> Higher Net Income
US companies like LIFO and don't want to give it up because a lower net income means lower tax
ability
...
Perpetual Versus Periodic FIFO and LIFO
When FIFO is used, inventory and cost of goods sold will be the same value at the end of the month
whether a perpetual or periodic system is used
When LIFO is used, inventory and cost of goods sold may not be the same value at the end of the month
under the perpetual and periodic methods
Exam With 100% Correct Solutions
Unit of Measure
Financial data should be measured using a common, stable, monetary unit
Periodicity
The life of business is divided into artificial time periods
Modifying Conventions
Conservatism
Industry Practices
Conservatism
The practice of prudence when there is uncertainty
Examples:
Expenses and liabilities should be recognized as soon as possible when there is uncertainty about
the outcome
Revenues and assets should be recognized when they are assured of being received
Lower of cost or market theory should be applied to inventory and certain
securities
,Industry Practices
It may be necessary for an entity to depart from strict compliance with GAAP due to the unique
nature of the industry in which an entity operates
Substance Over Form
Report the economic substance of an event over its legal form
Materiality
Items are material if they could influence the economic decisions of users, taken on the basis of financial
statements
Determining Cost of Inventory
Includes all costs incurred to bring the inventory to purchaser and get it ready for sale
Purchase price (net)
Shipping (freight-in, FOB shipping point)
Handling
Insurance
Warehousing
Inventory Ownership—In Transit
Record inventory when significant risks of ownership have passed from seller to buyer
FOB Destination
Seller retains ownership until goods reach their destination (delivered to buyer)
FOB Shipping Point
,Seller retains ownership until goods leave the shipping point; buyer owns once the goods depart the
seller's warehouse
Which inventory valuations methods are acceptable under U.S. GAAP?
− Specific Identification
− FIFO
− LIFO
− Average Cost IFRS
Which inventory valuations methods are acceptable under IFRS?
FIFO and Average Cost are the only cost flow assumptions permitted under IFRS
IFRS prohibits the use of LIFO
Specific Identification
Each item of inventory is identified for cost
− Time consuming
− Expensive
FIFO
First In First Out
Balance Sheet method (favors the Balance Sheet)
Recent prices are on the balance sheet
− Ending inventory contains most recent prices
Old prices are on the income statement as COGS
− Causes distortion in matching current revenue with current expenses
, LIFO
Last In First Out
LIFO is an Income Statement method (favors the income statement)
Recent prices are in the income statement
− No distortion in matching current revenue with current expenses
Old prices are on the balance sheet -LIFO but First In Still Here
-Inventory base is made up of old prices; does not reflect true value of inventory
Effect of Inflation
During periods of rising prices (i.e., inflation)
Under LIFO
− Last unit purchased -> First unit sold higher COGS -> Lower Net Income
Under FIFO
− First unit purchased -> First unit sold lower COGS -> Higher Net Income
US companies like LIFO and don't want to give it up because a lower net income means lower tax
ability
...
Perpetual Versus Periodic FIFO and LIFO
When FIFO is used, inventory and cost of goods sold will be the same value at the end of the month
whether a perpetual or periodic system is used
When LIFO is used, inventory and cost of goods sold may not be the same value at the end of the month
under the perpetual and periodic methods
