ACCT Final Exam

Chapter 9, 10, 11

lower of cost or market (LCM)

companies value goods at cost or cost to replace, whichever is lower

how to find net realizable value (NRV)

selling price - selling cost

how to find the market floor

NRV - a normal profit margin

order ceiling, replacement cost, and floor from lowest to highest value for the market

• floor (lowest)

• replacement cost

• ceiling (highest)

how to record LCM

debit COGS if write down is common for the company or debit loss when write down is substantial and unusual, credit inventory

what can the gross profit method be used for

• to estimate inventory loss due to a casualty

• estimating inventory and COGS for interim reports

• used by auditors to estimate the company’s inventory

• NOT normally acceptable for financial reporting, only interim reports

how to find EI int he gross profit method

• = COGAS - estimated COGS

• = COGAS - sales * (1- est. gross profit %)

the retail inventory method is appropriate for retail businesses when:

1. with high volume sales

2. different types of merchandise

3 steps of retail inventory method calculations

1. calculate current cost-to-retail percentage

2. estimate the amount of ending inventory at retail prices

3. ending inventory is multiplied by the current cost-to-retail percentage to estimate ending inventory at cost

cost-to-retail percentage equation

goods available for sale at cost / goods available for sale at retail

ending inventory (at retail) equation

goods available for sale (at retail) - sales (at retail)

ending inventory at cost equation

ending inventory (at retail) * cost-to-retail percentage

two types of retail inventory methods

1. average cost method

2. conventional method

average cost method

cost-to-retail percentage is found after both net markups and net markdowns have been applied to BI + purchases

conventional method

cost-to-retail percentage is found after net markups have been applied, but before net markdowns have been applied

does average cost method or conventional method have a higher ratio

average cost method

acquisition cost

purchase price + cost of readying the asset for use (freight and instillation cost)

what does cost of land include

• purchase price

• closing costs (title to land, attorney’s fees, and recording fees)

• cost of getting ready to use (grading, filling, draining, and clearing)

• assumption of any liens, mortgages, or encumbrances

• additional land improvements and have an indefinite life

what is included in the cost of buildings

• materials, labor, and overhead

• professional fees and building permits

what is included in the cost of equipment

• purchase price

• freight and handling charges, insurance charges

• costs of special foundation, installation, and initial testing

natural resources

includes timber tracts, mineral deposits, and oil and gas deposits

cost included in purchased natural resources

• purchase price

• any other costs necessary to bring the asset to condition and location for use

cost included in developed natural resources

• acquisition costs

• exploration costs

• development cost

• restoration costs

lump-sum purchases

• refers to the acquisition of a group of assets for a single sum

• assets have different characteristics and different useful lives

what is included in the cost of a self-constructed asset

• materials

• direct labor

• overhead can be handled in two ways

  • 1. assign no fixed overhead

  • 2. assign a portion of all overhead to the construction process (used by companies exclusively)

qualifying assets

• require a period of time to make them ready for use

• assets under construction for se in operations

• assets intended for sale or lease

capitalization period begins when:

• expenditures for the asset have been made

• activities for readying the asset are in progress

• interest costs are being incurred

capitalization period ends when:

the asset is complete and ready for its intended use

what is the amount of an asset we should capitalize

capitalize the lesser of:

• actual interest costs

• avoidable interest (the amount of interest that could have been avoided if expenditures for the asset had not been made

how should companies record PP&E

• at the fair value of what they give up

• at the fair value of the asset received

commercial substance

if future cash flows change as a result of the non-monetary exchange, then the transaction has commercial substance

in an exchange of non-monetary assets losses should always be _______

recognized immediately

in an exchange of non-monetary assets gains in exchanges with commercial substance should be ___ and gains in exchanges without commercial substance should _____ unless cash is received but ______

recognized; not be recognized; only partial gain is recognized

how to record an asset in a non-monetary exchange if the fair value is not determined

use the book value of the assets given up to record the asset acquired, no gains or losses are recognized

characteristics of intangible assets

1. represent exclusive rights that provide benefits to the owner

2. lack physical existence

3. long-term in nature

4. they are not financial instruments

common types of intangibles

• patents

• copyrights

• franchises or licenses

• trademarks or trade names

• goodwill

goodwill is only recorded when:

an entire business is purchased because goodwill cannot be separated from the business as a whole

goodwill is recorded as an excess of

• purchase price over the fair market value of the identifiable net assets acquired

• internally created goodwill should not be capitalized

• has an indefinite life and is not amortized

what is included in the cost of research and development

• salaries, wages, and other labor costs of R&D personnel

• costs of materials consumed, equipment, facilities used in R&D projects

• cost of services performed by others

• a reasonable allocation of indirect costs related to the R&D activities

3 types of cost allocation

1. depreciation: PPE

2. depletion: natural resources

3. amortization: intangible assets

where should acquisition cost be allocated

to the periods benefited by their use

allocation base

the dollar amount to be allocated over an asset’s service life

how to find the allocation base

initial value of the asset after its acquisition - residual (salvage value) value

what are the two allocation approaches

• time based approach

• activity based approach

what are the time-based depreciation methods

• straight-line (SL) method

• accelerated methods

  • declining balance methods

  • sum-of-year’s-digits method (SYD)

straight line (SL) depreciation equation

• annual depreciation= (original cost - sv)/ useful life

• depreciation base= original cost - sv

• depreciation rate= 1/ useful life

declining balance method

• (original cost - accumulated depreciation) / (#/useful life)

• depreciation base= original cost - AD

• depreciation rate = multiple of straight rate (ex 2 for double declining balance/ useful life

sum-of-the-years’ digits

• (original cost - sv) / (remaining years of use/ sum of years)

• depreciation base= og cost - sv

• depreciation rate= years remaining of use / sum of years ((n*(n+1))/2)

activity method

• (og cost - sv) / (input or output / total estimated output)

• depreciation base= og cost - sv

• depreciation rate= input or output / total estimated output

depletion

refers to the process of recording the consumption of natural resources

costs included in depletion base for natural resources

• acquisition cost

• exploration cost

• development costs

• restoration costs

how to find depletion cost per unit and depletion

• (TC - sv) / total estimated units available

• units extracted * cost per unit

journal entry to record depletion

• dr depletion

• cr nature resource

if an asset is movable for future projects the asset’s depreciation base should be allocated over its ___, if not the asset should be depreciated over _____ or _____ which ever is ___

• useful life

• useful life

• life of the natural resource

• shorter

how to find depletion per unit

depletion base / estimated extractable units

what type of intangible assets are not subject to amortization

assets with indefinite useful life

assets with indefinite useful life

• goodwill

• trademarks

• tradenames

when do impairments occur

when the carrying amount of the asset is not recoverable, and therefore a write-off is needed

when is an impairment test conducted

whenever there has been a material change in the way an asset is used in the business environment

• decrease in market value

• chang in the manner in which an asset is used

• adverse change in legal factors or in the business climate

• an accumulation of costs in excess of the amount originally expected to acquire or construct an asset

• a projection or forecast that demonstrates continuing losses associated with an asset

how to measure loss on impairments if there is still an active market vs if not

• active market: loss= carrying amount - fair value of asset

• no active market: loss= carrying amount - present value of expected net cash flows

journal entry for loss on impairment

• dr loss on impairment

• cr accumulated depreciation

recoverability test

if the sum of expected future net cash flow is less than the carrying amount of the asset an impairment has occurred

how to know if there is an impairment to goodwill

if fair value is less than the carrying amount of the net assets (including goodwill)

how to find goodwill impairment loss

carrying amount of the unit - fair value of the unit

ways of disposing of PP&E

• sale

• exchange

• involuntary conversion

• abandonment

what are the 4 assumptions of accounting

1. economic entity

2. going concern

3. monetary unit

4. periodicity

what are the steps of the accounting cycle

1. get info about transactions

2. analyze the transaction

3. record the transaction in the journal

4. post from the journal to the general ledger

5. prepare unadjusted trial balance

6. record adjusting entries

7. prepare adjusting trial balance

8. prepare financial statements

9. close temporary accounts to retained earnings

10. prepare post-closing trial balance

what are the 4 types of adjusting entries

1. prepaid expenses

2. deferred revenues

3. accrued receivables

4. accrued liabilities

prepaid expense

cash is paid before expense is incurred

deferred revenue

cash received from customer before providing a product or service

accrued receivables

revenue is recognized (product/ service is provided) before the cash is exchanged

accrued liabilities

expenses incurred but not paid in cash

current assets

assets expected to be converted to cash (or consumed) within the coming year

cash equivalents

short-term highly liquid investments that will mature within 3 months or less

short-term investments

investments in stock and debit securities of other corporations

long-term assets

assets to be converted to cash or consumed for more than one year

property, plant, and equipment

tangible, long-lived assets used in the operations of the business

current liabilities

obligations that are expected to be satisfied within one year or operating cycle, whichever is longer

order of the income statement

1. sales

2. COGS

3. operating expenses

4. other revenue (expenses)

5. income before taxes

6. income expense

7. net income

5 steps of recognizing revenue

1. identify the contract

2. identify the performance obligations

3. determine the transaction price

4. allocate the transaction price

5. recognize revenue when performance obligation is satisfied