...AICPA Functional: Reporting 2) Financial accounting prepares reports for internal purposes, whereas managerial accounting provides information to external stakeholders. Answer: FALSE Diff: 1 LO: 18-1 AACSB: Concept AICPA Functional: Reporting 3) The IMA standards of ethical practice require managerial accountants to maintain their professional competence. Answer: TRUE Diff: 1 LO: 18-1 AACSB: Ethical Understanding AICPA Functional: Reporting 4) The accountant for Myra Lido deliberately deferred cash payments for business expenses in order to record a higher operating cash flow for the company. As long as the amount was not material, this would not be considered unethical behavior. Answer: FALSE Diff: 1 LO: 18-1 AACSB: Ethical Understanding AICPA Functional: Reporting 5) Financial statements prepared for investors and creditors often include forward-looking information because they make decisions based on a company's future prospects. Answer: FALSE Diff: 1 LO: 18-1 AACSB: Concept AICPA Functional: Reporting 6) Management accounting reporting by a public firm is required to follow the rules of GAAP and guidelines of the Securities Exchange Commission. Answer: FALSE Diff: 1 LO: 18-1 AACSB: Concept AICPA Functional: Reporting 7) A budget is a managerial accounting tool used in the planning process. Answer: TRUE Diff: 1 LO: 18-1 AACSB: Concept AICPA Functional: Reporting 8) Financial reporting is typically much...
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...Thinking AICPA FN: Reporting LO: 1 Level: Easy 2. A flour manufacturer is more likely to use process costing than job-order costing whereas a manufacturer of customized leather jackets is more likely to use job-order costing than process costing. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 3. Normally a job cost sheet is not prepared for a job until after the job has been completed. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 4. Job cost sheets contain entries for actual direct material, actual direct labor, and actual manufacturing overhead cost incurred in completing a job. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 5. Multiple departmental overhead rates generally provide more accurate product costs than a single plant-wide overhead rate. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 6. If direct labor-hours is used as the allocation base in a job-order costing system, but overhead costs are not caused by direct-labor-hours, then jobs with high direct labor requirements will tend to be overcosted relative to jobs with low direct labor requirements. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy 7. The journal entry for cost of goods manufactured includes only the costs of units that are...
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...results, reported in the financial statement presentation, can be affected by the inventory reporting methods used. First-In, First-Out (FIFO), Last-In, First-Out (LIFO,) and weighted average methods each have their own implications during periods of inflation and deflation. This paper is designed to analyze and discuss the Generally Accepted Accounting Practices (GAAP) and ethical implications of each reporting method in a hypothetical company. For this paper, these discussions will be from the viewpoint of a manager. In this paper, the manager will select an inventory reporting method while taking into consideration the tax liabilities, profit levels, as well as the ethical considerations that the manager will have in choosing a particular inventory reporting method. First-In, First-Out (FIFO) The first-in, first-out method, which is also called FIFO, “assumes that the earliest goods purchased (the first ones) are the first goods sold, and the last goods purchased are left in ending inventory” (Libby, Libby, & Short 2014). When it comes to inventory, this method is best used if the company have inventory with decreasing costs due to the fact that it produces the lowest tax payments for the company. This inventory reporting method, along with cost of goods sold, will be the same whether it is computed in a periodic inventory system or a perpetual inventory system. This inventory reporting method is allowed by GAAP. Ethically, this method is the best choice if the manager’s compensation...
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...16). When reporting inventory, there are generally four inventory reporting methods used; Specific identification method, first-in, first-out method (FIFO), last-in, first out method (LIFO), and average cost method. Each method is in conformity with GAAP and the law. Also each method has their own implications during periods of inflation and deflation. They can also affect the net income results reported in the financial statement presentation. In this paper, I will assume the role of a manager and analyze the GAAP and ethical implications of three of the four reporting methods in a clothing store company. First-In, First-Out Method When FIFO is used, the goods that are purchased first are the first goods to be sold. The goods that are the newest are left in ending inventory. When a company deal with increasing inventory it provides lower cost of goods sold, and a higher income tax liability, but in the end a higher net income is acquired. For inventory with decreasing cost, this is used for both tax return and financial statements because it produces the lowest income tax payment. This is a good method if the companies good have a short shelf live. It allows the company to not have to throw away any goods assuming what is being reported is being practiced otherwise it is not only impractical but unethical as the company would be force to sell last season style at higher prices. This is also a benefit for managers because it may increase their compensation by reporting a higher...
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...net realizable value and at the lower of cost. They believe that the result will cause a reporting entity to not be required to consider replacement costs. There will not be additional disclosures required in the periods after the amendments. The amendments will be applied in the annual reporting periods after December 15th, 2016 with interim reporting periods starting after December 15th, 2017. If LIFO is used for tax purposes, it must also be used for financial reporting of a company. This can cause trouble for certain companies. When prices rise, companies using LIFO minimize their tax liability, but the companies minimize their net income as well, in turn causing failure of the companies to meet the minimum level of profitability under a loan or meet what analysts have forecasted for the company. LIFO is also not used in a good portion of foreign jurisdictions. This limits the ability to expand abroad for companies valuing inventory using LIFO. If a company chose to expand internationally, they would have to keep two sets of inventory records; one for US tax law and domestic financial reporting and one for international reporting. Keeping two separate reports can become expensive for the company to maintain. With the decision of FASB excluding LIFO, CPAs will more than likely be called upon to help companies manage their changes in inventory methods. LIFO layering issues also have become a problem. As the inventory costs change, the...
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...Inventory Cost? 3. Distinguish between ‘Perpetual’ and ‘Periodic’ system for recording Inventory? Show proper examples. 4. What are the Cost Flow Formulas/Assumptions allowed in IAS-2 for maintaining Inventory? Show examples. Which one should be used in what situation? 5. Explain LIFO? Why LIFO is not permitted in IAS-2. Do you think repealing LIFO was wise decision of IASB? Discuss with its advantages & disadvantages. 6. What is NRV of an asset? When should company write down its inventories to NRV? Explain write-down processes with illustrations. * Write down the definition of ‘Inventory’ under IAS-2. What physical materials does ‘Inventory’ include? * Paragraph-6 of IAS-2 defines inventories as following- 1. Held for sale in ordinary course of business 2. In the process of production for such sale 3. in the form of materials or supplies to be consumed in the production process or in the rendering of services. This definition implies that 3 types of physical materials are to be included in ‘Inventories’- a) Raw Materials b) Work in process c) Finished Goods * According to IAS-2, what are the components of non-components of Inventory Cost? * Components of Inventory Cost: 1) Cost of Purchase Includes- purchase price, import duties, taxes and transport & handling cost etc. which are directly attributable to the acquisition of inventory Excludes- Trade discounts, rebates etc. 2) Costs of Conversion ...
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...The core problem of Molex, Inc is their failure to disclose an inventory valuation error problem thereby contravening AICPAs Statement of Position (SOP) 94-6 KPMG Report, 2008 states that the objective of such disclosures is to improve the information communicated to financial statement users and to help users assess those risks and uncertainties. SOP 94-6 focuses primarily on disclosures about risks and uncertainties that could significantly impact the amounts reported in the financial statements in the near term or the near-term functioning of the reporting entity. These risks and uncertainties may result from, among other matters, the nature of the entity’s operations, and the use of estimates in the financial statements, and significant uncertainties in the entity’s operations. Financial Implications due to delisting It is the opinion of the group after careful analysis of the Molex, Inc case that should the company not comply with regulations and allow themselves to be delisted due to delinquency, it will bring about a host of financial implication. In their paper on the Laws and Finances of the delisting process, M. O’Hara and D. Pompilio, 2004 wrote that The practice of delisting stocks that fail to meet certain financial criteria is curious for many reasons: it hurts the firms being delisted; it harms the investors holding those shares; and it removes from the exchange or stock market a security that traders wish to transact. Perhaps the most immediate impact of the...
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...costing system in which the direct labor, direct materials, and fixed and variable manufacturing overhead costs are traced to every finished product. Thus, in the absorption costing system, all costs are product costs regardless of their classification of variable or fixed. Because of its characteristic of no cost discrimination, absorption costing is also known as full costing or as full absorption method (¨Absorption¨ 1). The absorption costing is the only method approved by the generally accepted accounting matching principle (GAAP). Thus, it is required by law to use this system for external financial statements (Lohrey 1). The absorption costing also provides accuracy of the calculation in taxes reporting (1). Experts say that the absorption costing method provides a complete picture of cost calculation and it is helpful to accurately track profit during an accounting period (Cunagin 1). In fact, this method is in compliance with the GAA matching principle which states that all expenses and revenues must be reported in the same period (Lohrey 1). Production Process A simplified production process starts with the purchase of direct materials and ends with the sale of the finished goods. To account this process the following steps should be made. When the direct materials are purchased, they are recorded as assets. When the direct materials are placed into production, the costs are recorded in a work-in-process account which is also an asset (1). In the manufacturing, as direct...
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...options of eliminate LIFO either for financial accounting or tax purposes, or not allowing it for financial accounting purposes but allowing it for tax purposes by removing the conformity requirement or allowing it for financial reporting and tax purposes by conforming IFRS to US standards in some way my response is “Eliminate LIFO”. So, Last-in-first-out (LIFO) is an inventory accounting technique which allocates the most recent inventory prices to cost of goods sold and the oldest inventory prices to items remaining in the inventory. In a period of increasing prices, this assumption assigns the recent and higher prices to cost of goods sold and the older lower prices to inventory. LIFO can have a significant cumulative downward effect on the inventory’s value. The cost of goods sold for any particular year equals the sum of beginning inventory, plus purchases, less ending inventory. Thus, a lower ending inventory increases cost of goods sold and reduces taxable income. Under current tax law, companies are allowed to use LIFO for tax purposes only if it also uses LIFO for financial reporting purposes. LIFO inventories means that the last stock admitted is the first to go withdrawing from the system. So at the end we will have only those stocks with an older cost. Just to put an example, just imagine this: the January 1 Buyer of 10 pants to a value of $ 22 each, while the January 10 purchases 22 pants to a value of $ 22.50 each. On January 15 a sale of 18 pants is made, as is applying...
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...Financial Accounting For Dummies From Financial Accounting For Dummies by Maire Loughran Financial accounting is the process of preparing financial statements for a business. The three key financial statements are the income statement, balance sheet, and statement of cash flows, and they serve two broad purposes: to report on the current financial position of the company, and to show how well the company performs over a period of time. Investors, creditors, and other interested parties rely on such information to find out whether a business is making or losing money, and they depend on financial accountants to help ensure that these statements are materially correct and understandable. Accounting Details in Different Kinds of Financial Statements The three key financial statements are the income statement, balance sheet, and statement of cash flows. All three record the same daily accounting transactions occurring in a business, but each presents the facts slightly differently. • Income statement: The income statement shows a company’s results of operations. Using this statement, you can see if a business has income or loss during the financial period. All the company’s revenue, expenses, gains, and losses appear on this financial statement. • Balance sheet: The balance sheet shows the health of a business from the day it started operations to the specific date of the balance sheet report.Therefore, it reflects the business’s financial position. The balance sheets lists...
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...Account Based COPA - Simplification with Simple Finance A typical pain point for most projects has been the underlying differences in Costing Based COPA and the P&L in Financial Accounting. Most of the customers used costing based COPA with one of the reasons being getting a break up of Cost of Goods Sold. Typically in Costing based COPA, the values for key figures like Revenue, cost of goods sold, variances, overheads etc get stored in value field in CE1* tables. This essentially used to map the accounts such as revenue and sales deductions to value fields in costing based COPA. Additionally there were restrictions on the no of value fields in costing based copa with around 200 fields (SAP OSS Note 1029391). The account based COPA on the other hand uses cost elements to store the same values for various attributes like revenue, cost of goods sold, and so on. However, the posting logic in traditional account based COPA was such that cost of goods sold and variances could only be mapped to a single GL Account/Cost element. This was one of the basic reasons why most SAP customers preferred using Costing based COPA over Account based COPA. Another major challenge with using Costing based COPA was the frequent reconciliation issues between COPA and GL. For eg, typically, the COGS was booked in the GL at the time of Outbound delivery and the same value flowed into Costing Based COPA at the time of billing. So if the PGI and Billing were far apart in two different posting...
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...incentives • Whether the cup is half-full or half-empty depends on the incentives. • “No one ever said accounting is an exact science” The role of judgment • Timing decisions that affect revenue/expense recognition • Which decision you take depends on the objective Public vs. private accounting • When reporting to the public, a firm must follow GAAP. • In resolving internal disputes this may not always be true. Inventory 7 Overview In today’s class we will cover inventories: • Understanding the Inventory Equation • LIFO and FIFO cost-flow assumptions • LIFO tax conformity rule • Inventory accounting: IFRS vs. GAAP • Disclosures regarding cost flow assumptions 8 Two Main Issues Inventory accounting has two fundamental components: 1) Product Costing Decision: What costs are included in each product's inventory account? (Product costing is discussed in depth in managerial accounting). 2) Cost Flow Decision (LIFO/FIFO): Once costs are in the inventory account (i.e., on the Balance Sheet), when are costs transferred to the Income Statement? 9 Inventory Account Beginning inventory + Additions – Cost of goods sold _________________________ Ending Inventory 10 Coke’s Financial Statements...
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...Financial Accounting Focuses on reporting to external users including investors, creditors, banks suppliers, & governmental agencies. Financial Statements must be GAAP based. Management Accounting Processes of measuring, analyzing, and reporting financial & non-financial information that help managers make decisions to fulfill the goals of an organization. Managers use management accounting information to: 1. Develop, communicate, and implement strategies 2. Coordinate product design, production, and marketing decisions and evaluate a company’s performance Cost Accounting Measures, analyzes, & reports financial & nonfinancial information related to the cost of acquiring or using resources in an organization What are costs but never an expense? Good Will & Land Inventory Is a cost until it is sold then it is an expense Value Chain (definition) The sequence of business functions by which a product is made progressively more useful to customers Six primary business functions of the Value Chain 1. Research & Development 2. Design of products & processes 3. Production 4. Marketing (including sales) 5. Distribution 6. Customer Service Research & Development Generating and experimenting with ideas related to new products, services, or processes Design of products & processes Detailed planning, engineering, and testing of products and processes Production ...
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...Internal Audit Chapter 5 Review 1. A business process is the set of connected activities linked with each other for the purpose of achieving an objective or goal. 2. Two general types of business processes are present in most organizations that deliver goods and services: the operating processes and the management and support processes. The operating processes include strategic planning, product and service design and development, marketing, production/delivery, invoicing, and collection. The management and support processes include obtaining and managing the organization’s human resources (this could include hiring, training, benefits), managing financial resources (including budgeting, financial accounting, treasury), managing the information technology resources, managing physical resources (facilities management, security, maintenance, etc.), the organization’s compliance and governance systems, and the process for managing the organization’s external stakeholders (government relations, public relations, etc.). 5. A top-down approach begins at the entity level with the organization’s objectives, and then identifies the key processes critical to the success of each of the organization’s objectives. A bottom-up approach begins by looking at all processes directly at the activity level, and then aggregates the identified processes across the organization. 7. The two common methods used to document processes are process maps and process write-ups. Process...
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...Retailors define inventory as intended sellable assets consisting of goods that are available for resale to customers. Manufacturers also maintain three components of inventory which consist of finished goods these are goods that have been completed and are awaiting sales. Manufacturers may also have work in process inventory made up goods being manufactured but not yet completed. The third category of inventory is raw material, consisting of goods that are to be used in producing products. Overall, inventory should include all cost that are both ordinary and necessary to put goods in place and in condition for their resale. There are three basis approaches to valuing inventory that are allowed by Generally Accepted Accounting Principles (GAAP). First-in, first-out (FIFO) is an inventory method that assumes that the first items produced or purchased in the inventory are the first ones sold. This inventory method is acceptable under the U.S. Generally Accepted Accounting Principles (GAAP), as well as the International Financial Reporting Standards (IFRS). FIFO is most often used in accordance with the restaurant industry or businesses that deal with perishable products. This allows them to use all of their products before they expire or go to waste, which helps to lower their food costs. “In a period of inflation, FIFO produces a higher net income because the lower unit costs of the first units purchased matched against revenues. In a period of rising prices, FIFO reports...
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