...Case 1: Merrimack Tractors and Mowers, Inc: LIFO or FIFO? 1. Study the financial information for reel mower units that James Colburn prepared for Rick Martino. (Assume that reel mower units are typical of all classes of inventory at Merrimack.) Prepare a pro-forma income statement assuming no changes in accounting policy for 2008 assuming that the company sells 10,000 units each quarter at a price of $2,000 per unit with Sales General and Administration costs the same as for 2007. The cost of goods sold (COGS) is depends on the beginning inventory, purchases in the quarter and the ending inventory. Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory In this case, assuming Merrimack Tractors has generated a total revenue of $80 million by selling 40,000 units at $2,000 each. By employing the LIFO method to calculate their inventory, the most recent costs are matched with the revenue first. The table below illustrates the total cost of purchase at each quarter. The total cost of goods sold ($62 million) was derived from recording the most recent cost of purchases by adding $14 million, $15 million, $16 million and $17 million. Table 1a: Inventory record for year 2007 and 2008 with even sales pattern in LIFO | |2007 (LIFO) |2008 (LIFO) | | |(with even sales pattern) |(with even sales pattern)...
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...sale, assets in production, and assets that will be used for future production of goods. A company’s ending inventory can be calculated by adding the value of any beginning inventory with net purchases then subtracting the cost of goods sold. The equivalent mathematical representation is: Ending Inventory = Beginning Inventory + Net Purchases - Cost of Goods Sold (Inventory valuation, 2010). While there are numerous industry recognized standards for a valuation of inventory, three of the most common valuation systems include First-In, First-Out – FIFO, Last-In, First-Out – LIFO and Just-In-Time – JIT valuation systems. First-In, First-Out Goods processed or received by an organization are placed in holding as First-In, First-Out; this inventory system is used to track product for use and revenue gained. In the FIFO inventory valuation system, assets or inventory received first are the first ones to be used (Basu, 2013). FIFO regards the first unit arriveing in inventory as the first one sold. According to Wikipedia, inventory (n.d.) is commonly used to describe the goods and materials that a business holds for the ultimate purpose of resale. Additionally, the raw materials, work-in-process goods, and completely...
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...Acct 3511 Chapter 8 Concepts – Inventory & Cost of Goods Sold Professor Marco J. Malandra, CPA 1. State 4 characteristics of Inventory & Cost of Goods Sold (CGS)? Is Inventory initially capitalized or expensed? What concept determines when it’s expensed? Inventory: 1) Asset (current) 2) Balance Sheet 3) real 4) debit NAB CGS: 1) Expense 2) Income Statement 3) nominal 4) debit NAB Matching: Any expenses associated with revenue are recorded in the same period as the revenue. Inventory is not expensed until period sold, when Sales revenue is also recorded. 2. What is a Merchandiser and how do their FS’s differ from a Manufacturer or a Service Co? Retail & Wholesale: Buy Inventory or Merchandise, appears on BS until sold, then IS CGS. Manufacturer: Makes inventory appearing on BS or Notes in 3 stages, until sold, then IS CGS. 1) Raw Materials: Major resources to be used in manufacturing products. 2) Work-in-Process: Costs of materials, labor & overhead needed to make products. 3) Finished Goods: Completed WIP costs, ready to be sold. Service Co: No Inventory or CGS accounts (of course, many companies are hybrids, > 1 type). 3. Know the CGS Formula used to determine CGS on the IS: + Beginning Inventory (BI: Costs of inventory not sold from last period’s BS) + Purchases (All costs to buy including Transportation-in, less any Purchase Discount...
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...ExxonMobil Analysis Metra Walthour American Public University System ExxonMobil is an American established gas and oil firm that has a head office in the metropolis of Irving, Texas. Even though it is American established and holds its head office in Texas, it is additionally a multinational firm that is recognized and utilized worldwide. The Exxon Firm was instituted in the year of 1934 across the mergence of the Average Oil Firm of New Jersey and the Anglo-American Oil Company. Even though these two firms joined in 1934, the name and company of Exxon did not come about until 1972. Exxon Mobil was instituted afterward, in 1999, alongside the mergence of Exxon and Mobil. ExxonMobil is an extremely prosperous firm, generally because “it is the third biggest firm by revenue and the subsequent biggest openly traded firm by marketplace backing in the world.” (Nagurney, 2010) An example of how big and successful ExxonMobil is, is lead by its largest shareholder, which happens to be the Bill and Melinda Gates Foundation. “The company is ranked No. 5 globally in 2013. ExxonMobil’s reserves were 72 billion BOE (barrels of oil equivalent) at the end of 2007 and, at then rates of production, were expected to last over 14 years. With 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels, ExxonMobil is the largest refiner in the world, a title that was also associated with Standard Oil...
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...AN EXAMINATION OF INVENTORY COSTING CONVERGENCE UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND INTERNATIONAL FINANCIAL REPORTING STANDARDS Casey Reineking Department of Accounting Murray State University Murray, KY 42071-3314 E-mail: casey.reineking@hotmail.com Don H. Chamberlain Department of Accounting Murray State University Murray, KY 42071-3314 Holly R. Rudolph Department of Accounting Murray State University Murray, KY 42071-3314 L. Murphy Smith* Department of Accounting Murray State University 351 Business Building Murray, KY 42071-3314 Tel: 270-809-4297 Email: msmith93@murraystate.edu *Corresponding author Forthcoming in Journal of International Business Research AN EXAMINATION OF INVENTORY COSTING CONVERGENCE UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND INTERNATIONAL FINANCIAL REPORTING STANDARDS ABSTRACT Accounting principles in the United States are converging toward international standards. If convergence continues, and there are proponents and detractors, then the U.S. system of accounting, called Generally Accepted Accounting Principles (GAAP), will eventually be replaced by International Financial Reporting Standards (IFRS). Convergence has profound implications for publicly traded companies and their many stakeholders such as investors, lenders, government agencies, and employees. A key issue facing accounting standard-setters is the treatment of inventory costing, an area in which GAAP and IFRS differ. This study addresses three...
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...[Instructor’s Name] [Writer’s Name] [Course] [Date] Week 3 - DQs 1. LIFO vs. FIFO The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods? Guided Response: Analyze several of your peers’ posts. Let at least two of your peers know if a company is better off it switches from a LIFO method to a FIFO method? Explain your reasoning. The Differences between the LIFO and FIFO Methods To account for the value of inventory once it is sold, the two common inventory valuations used by companies are LIFO and FIFO. In periods of rising prices (inflation), in LIFO method, there are higher COGS and lower value of inventory and in FIFO method, there is lower COGS and higher value of inventory (Beechy & Et.al, 2011). In periods of falling prices (Deflation), in LIFO method, there are lower COGS and higher value of inventory and in FIFO methods, there is higher COGS and lower value of inventory. The way in which the COGS are calculated is the main difference between these methods of inventory. Consider the purchase of butter at your local grocery store to understand the FIFO inventory method. You are not buying the most recent butter box, but the first...
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...TABLE (BY TOPIC) Topics 1. Inventory accounts; determining quantities, costs, and items to be included in inventory; the inventory equation; balance sheet disclosure. Perpetual vs. periodic. Recording of discounts. Inventory errors. Flow assumptions. 10, 11 7 12, 13, 16, 18, 20 4 5, 6, 7 Questions 1, 2, 3, 4, 5, 6, 8, 9 Brief Exercises 1, 3 Exercises 1, 2, 3, 4, 5, 6, 10 Problems 1, 2, 3 Concepts for Analysis 1, 2, 3, 5, 11 2. 3. 4. 5. 2 9, 13, 14, 17 7, 8 2, 3, 4, 5, 10, 11, 12 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 18 4, 5, 6 3 2 1, 4, 5, 6, 7 5, 6, 7, 8 4 6. 7. Inventory accounting changes. Dollar-value LIFO methods. 14, 15, 17, 18, 19 8, 9 7 1, 8, 9, 10, 11 6, 7, 10 8, 9 23, 24, 25, 26 8-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. 3. 4. 5. Identify major classifications of inventory. Distinguish between perpetual and periodic inventory systems. Identify the effects of inventory errors on the financial statements. Understand the items to include as inventory cost. Describe and compare the cost flow assumptions used to account for inventories. Explain the significance and use of a LIFO reserve. Understand the effect of LIFO liquidations. Explain the dollar-value LIFO method. Identify the major advantages and disadvantages of LIFO. Understand why companies select given inventory methods. 8, 9 22, 23, 24, 25, 26 1, 8, 9, 10, 11 Brief Exercises 1 2 4 1, 3 5, 6, 7 4, 9, 13, 16, 17, 18, 20 5, 10, 11, 12 1, 2...
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...Assignment: Cost Accounting Applied By George T. Neale Professor Bryan Womack Course Title ACC 350012VA016-1122-001 Cost Accounting February 26, 2012 Companies that are successful financially know what their costs are and how those costs are being spent. The company I have chosen wants to change from a general accounting system where costs are put in general categories and they currently do not have any allocation of costs. I would like to explain the success my company could have when they implement using cost accounting in their operations. Artis is a research and development company as well as a manufacturing company. Artis designs Active Protection Systems (APS) for vehicles. Their main purpose is to design and engineer a product that will protect vehicles from the threat of missiles. These Active Protection Systems are constantly being engineered and re-engineered as new threats and potential threats arise. Artis has to research, design and engineer the product continuously. There developed different models version that can then be manufactured and sold based on the customer’s demand on the sale contracts. The major costs associated with the engineering of the Active Protection System are the costs of the labor (both labor spent on their facility and labor spent at government sites), the costs of the various specialized subcontractors, the costs of the materials...
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...IFRS vs GAAP: Concerns about LIFO General accepted accounting principles (GAAP) allows the use of LIFO (Last-in First-out) under ASC 330-10-30-9 to determine inventory costs. However, IFRS (International Financial Reporting Standards) does not allow the use. Many companies choose to use the LIFO method because it allows the higher value inventory to be included into the cost of sales. This results in a smaller profit margin that further results in less tax. IFRS doesn’t allow the use of LIFO for the same reason. The financial statements will be less true to the current market value. In the efforts to converge with international standards, LIFO has become a major issue. First it must Although GAAP currently allows the use of LIFO, entities must still abide to the Sec. 472(c) – LIFO conformity rule – in which the same inventory cost method must be used on financial statements and on income tax returns. This can be a problem for multinational companies since LIFO is not allowed under IFRS. Multinational businesses would need to provide reporting information that follows both GAAP and IFRS. This could be a very costly process. What would happen if LIFO were no longer allowed? This is an even more important issue among many companies since it is estimated that about 36% of U.S. companies use LIFO (“Georgia Tech Financial Analysis Lab Releases LIFO Study,”IFRS.com). In the a study performed by Georgia Tech, they found that out of 30 sample companies, they estimated “that the...
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...Apple case questions: 1. Explain GAAP, non-GAAP numbers and their impact on financial statements GAAP vs. IFRS affects financial statements in many different areas and must be adjusted accordingly. Revenue Recognition, extraordinary items, receivables, inventory, long-lived assets, and debt and equity would all have to be altered when switching between the two. For example, LIFO inventory valuation is not permitted under IFRS. Because of this, a company would have to recalculate under the FIFO method as well as adjust COGS and tax expenses. 2. Which method best reflects the economic reality? For investors, IFRS may present more approachable and comprehensive financial statements making them easier to analyze and understand. However when IFRS is applied, balance sheet differences in inventory, PPE, goodwill and other areas may pose shareholders in a better or worse position depending on what you are looking at. 3. Should Apple lobby for their non-GAAP numbers to be sanctioned by FASB? Yes; the impact of subscription accounting and deferred revenue under GAAP skews the company’s numbers to reflect a small portion of the company’s sales and net income making it a less accurate predictor of overall performance. Any company would obviously highlight on the method that shows the most favorable performance. 4. Does it matter if the revenue recognition rule for smartphones changes? Yes; the deferred revenues from the use of subscription accounting are adding...
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...Disclosure requirements for a change in principle. T 7. Indirect effect of an accounting change. T 8. Retrospective application impracticality. F 9. Reporting changes in accounting estimates. T 10. Change in principle vs. change in estimate. F 11. Accounting for change in depreciation method. F 12. Accounting for change in reporting entities. T 13. Example of a change in reporting entities. F 14. Accounting error vs. change in estimate. T 15. Accounting for corrections of errors. T 16. New principle created by FASB standard. T 17. Correcting entries for noncounterbalancing errors. F 18. Definition of counterbalancing errors. T 19. Accounting for counterbalancing errors. F *20. Changing from equity method. Multiple Choice—Conceptual Answer No. Description b 21. Accounting changes and consistency concept. b 22. Identify changes in accounting principle. c 23. Identify a non-retrospective change. d 24. Identify a change in accounting principle. a 25. Entry to record a change in depreciation methods. c 26. Disclosures required for a change in depreciation methods. c 27. Change from percentage-of-completion to completed-contracts. d 28. Disclosures required for a change from LIFO to FIFO. b 29. Change from FIFO to LIFO. c 30. Change in accounting estimate. a 31. Change in accounting estimate. b 32. Identify a change in accounting estimate. b 33. Change in accounting estimate. c 34. Identify a change in accounting estimate. ...
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...Assignment: Cost Accounting Applied Professor Bryan Womack Course Title ACC 350012VA016-1122-001 Cost Accounting February 26, 2012 Companies that are successful financially know what their costs are and how those costs are being spent. The company I have chosen wants to change from a general accounting system where costs are put in general categories and they currently do not have any allocation of costs. I would like to explain the success my company could have when they implement using cost accounting in their operations. Artis is a research and development company as well as a manufacturing company. Artis designs Active Protection Systems (APS) for vehicles. Their main purpose is to design and engineer a product that will protect vehicles from the threat of missiles. These Active Protection Systems are constantly being engineered and re-engineered as new threats and potential threats arise. Artis has to research, design and engineer the product continuously. There developed different models version that can then be manufactured and sold based on the customer’s demand on the sale contracts. The major costs associated with the engineering of the Active Protection System are the costs of the labor (both labor spent on their facility and labor spent at government sites), the costs of the various specialized subcontractors, the costs of the materials and the indirect...
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...CHAPTER 22 Accounting Changes and Error Analysis ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Differences between change in principle, change in estimate, change in entity, errors. Accounting changes: a. b. Comprehensive. Changes in estimate, changes in depreciation methods. Changes in accounting for long-term construction contracts. Change from FIFO to average cost. Change from FIFO to LIFO. Change from LIFO. Miscellaneous. 2, 11 8 1, 3, 4, 5, 8, 24 8, 14, 15, 17, 19 2, 18, 21 9, 16, 20 10 3 8, 9, 10 8, 9 4, 5, 9 3, 4, 6, 7, 8, 9, 10, 11, 12, 16, 17 1, 8, 13 3, 6, 7 1, 2, 4, 6, 7 1, 2, 4, 5 1, 2, 3, 4, 5, 6 Questions 2, 4, 6, 7, 8, 9, 12, 13, 15, 21, 22, 23 Brief Exercises Exercises 8 Concepts Problems for Analysis 3 1, 2, 3, 4 2. c. 2, 10 1, 2, 10 3 1, 2 d. e. f. g. 3. 2, 8, 14 9 2, 3, 5, 8, 14 2, 5 3 1, 2 1, 5 Correction of an error. a. Comprehensive. 8, 9, 10 8, 15, 16, 18, 19, 20, 21 9, 15, 17, 18 7, 17, 18 22, 23 3, 6, 7, 8, 9, 10 1, 6, 8 2, 10 11, 12 1, 2 2, 3, 4 b. c. *4. Depreciation. Inventory. 6, 7 10 11, 12 Changes between fair value and equity methods. *This material is dealt with in an Appendix to the chapter. Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 22-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. Identify the types of accounting changes. 2. Describe the accounting for changes...
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...share. Profits will improve. 3.) Also these changes resulted in the change of the depreciation lives on US plants, machinery and equipment. This had an effect on the residual values on certain machinery and equipment that increased net income for 1984 by $3.2 million or $0.27 per share. No income tax effect was applied to the change. Harnischfeger fixed assets useful life will increase as such profits will improve. 4.) The reduction in sales and the underutilization of plants, machinery, and equipment would have a prolonged effect on the assets useful life. 5.) The effect of LIFO inventory liquidation on its reported profits in 1984 are an increase in net income by $2.4 million or $0.20 per common share and a reduction in the net loss by $15.6 million. If a company performs LIFO liquidation, the old costs will be matched with the current higher sales prices. A company uses LIFO liquidation assuming that when it needs to replace inventory its repurchasing cost will increase. 6.) 1984 – 0.0673 or 6.73% 1983 – 0.1004 or 10.04%, the doubtful accounts allowance at 1983 levels would have been $8.8 million. The resulting change equates to roughly 500K increase in pre-tax...
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...Chapter 07 Reporting and Interpreting Cost of Goods Sold and Inventory ANSWERS TO QUESTIONS 1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the income statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the balance sheet and the income statement, it is of particular interest to all statement users. 2. Fundamentally, inventory should include those items, and only those items, legally owned by the business. That is, inventory should include all goods that the company owns, regardless of their particular location at the time. 3. The cost principle governs the measurement of the ending inventory amount. The ending inventory is determined in units and the cost of each unit is applied to that number. Under the cost principle, the unit cost is the sum of all costs incurred in obtaining one unit of the inventory item in its present state. 4. Goods available for sale is the sum of the beginning inventory and the amount of goods purchased during...
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