ACCT 110 Lecture Notes - Lecture 14: Santa Barbara City College, Financial Statement, Book Value

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2 Dec 2020

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Accounting standards limit the choice of cost formula. Specific identification is required when goods are not normally interchangeable. Companies must apply the same cost formula to all inventories of a similar nature and use. Should choose the best method that: 1. Corresponds as closely as possible to the physical flow of goods: 2. Reports inventory cost at its most recent cost: 3. Uses the same method for all inventory assets with similar characteristics. Method chosen can impact the amount of income reported and the amount of income tax paid. Measurement and the lower of cost and net realizable value (lc&nrv) principle. Under both ifrs and aspe market is strictly defined as net realizable value. Need to determine the most likely nrv at the end of each accounting period given the specific circumstances. A new estimate is required for each set of financial statements.

Related Questions

1. How should the balances of Progress Billings and Constructionin Progress be shown at reporting dates prior to completion of along-term contract

a. Progress billings as income, construciton in progress asinventory

b. Net , as income from construction if credit balance, and lossfrom construction if debit balance

c. Progress Billings as deferred income, Construction inProgress as a current asset

d. Net, as a current asset if debit balance and currentliability if credit balance

3. the competed-contract method of accounting for long-termconstruction-type contracts is preferable when

a. a contractor is involved in numerous projects

b. the contracts are of a relatively long duration

c. estimates of costs to complete and extent of progress towardcompletion are reasonably dependable

d. there are inherent uncertainties in the contract beyondnormal business risks

4. C & J Construction has consistently used the percentageof completion method of recognizing income. Last year C & Jstarted work on a $4,500,000 constuction contract, which wascompleted this year, the accounting records desclosed the followingdata for the last year

Progress billings - $1,650,000

Costs incurred - 1,350,000

Collections - 1,050,000

Estimated cost to complete - 2,700,000

How much income should C & J have recognized on thiscontract last year?

a. 105,000

b. 150,000

c. 300,000

d. 350,000

6. The use of the gross profit assumes

a. the amount of gross profit is the same as in prior years

b. sales and cost of goods sold have not changed from previousyears

c. inventory values have not increased from previous years

d. the relationship between selling price and cost of goods soldis similar to prior years

7. the gross profit method of inventory valuation is not validwhen

a. there is substantial increase in the quantity of inventoryduring the year

b. there is substantial increase in the cost of inventory duringthe year

c. the gross margin percentage changes significantly during theyear

d. all ending inventory is destroyed by dire before it can becounted

8. When the current year's ending inventory amount isoverstated,

a. the current year's cost of goods sold is overstated

b. the current year's total assets are understated

c. the current year's net income is overstated

d. the next year's income is overstated

9. If the ending inventory balance is understated, net income ofthe same period

a. will be overstated

b. will be understated

c. will be unaffected

d. cannot be determined from the above information

10. An overstatement of ending inventory in Period 1 wouldresult in income of Period 2 being

a. overstated

b. understated

c. correctly stated

d. the answer cannot be determined from the informationgiven

11. what is the maximum amount at which inventory can be valuedwhen the goods have experienced a permanent decline in value

a. historical cost

b. sales price

c. net realizable value

d. net realizable value reduced by a normal profit margin

12. Net realizable value can be defined as

a. selling price

b. selling price less costs to complete and sell

c. selling price plus costs to complete and sell

d. acquisition cost plus costs to complete and sell

13. Miller company needs an estimate of its ending inventorybalance. The following information is available

Cost Retail

sales revenue - 180,000

beginning inventory - 35,000 62,000

net purchases - 100,000 135,000

gross margin percentage - 30%

Given this information, when using the gross margin estimationmethod, ending inventory is approx

a. 1,000

b. 9,000

c. 19,000

d. 11,650

14. Which of the following would not be reported asinventory?

a. land acquired for resale by a real estate firm

b. stocks and bonds held for resale by a brokerage firm

c. partially completed goods held by a manufacturing company

d. machinery acquired by a manufacturing company for use in theproduction process

15. Cost of goods sold is equal to

a. the cost of inventory on hand at the end of a period plus netpurchases minus the cost of inventory on hand at the beginning

b. the cost of inventory on hand at the beginning of a periodminus net purchases plus the cost of inventory on hand at the endof a period

c. the cost of inventory on hand at the beginning of a periodplus net sales minus the cost of inventory on hand at the end of aperiod

d. the cost of inventory on hand at the beginning of a periodplus net purchases minus the cost of inventory on hand at the endof a period

17. In a period of falling prices, the use of which of thefolliwng inventory cost flow methods would typically result inhighest cost of goods sold?

a. FIFO

b. LIFO

c. Weighted average cost

d. Specific identification

18. In a period of rising prices, the inventory cost allocationmethod that tends to result in the lowest reported net incomeis

a. LIFO

b. FIFO

c. Moving average

d. Weighted average

19. The LIFO inventory cost flow method may be applied to whichof the following inventory systems?

Periodic Perpetual

a. no no

b. no yes

c. yes yes

d. yes no

tanrabbit20

1. To determine the value of a LIFO layer,using dollar-value LIFO retail: (Points : 1)

Divide the LIFO layer bythe layer year price index and multiply by the layer yearcost-to-retail percentage.
Multiply the LIFO layerby the base year price index and the current year cost-to-retailpercentage.
Multiply the LIFO layerby the layer year price index and by the layer year cost-to-retailpercentage.
Divide the LIFO layer bythe layer year cost-to-retail percentage and multiply by the layeryear price index.

Question 2.2. To determine if an increase inthe dollar value of inventory is due to increased quantities, usingdollar-value LIFO retail: (Points : 1)

Compare beginning andending inventory amounts at current year prices.
Compare beginning andending inventory amounts after adjusting both amounts to theaverage price level for the year.
Inflate beginninginventory amount to end of year prices and compare to endinginventory amount.
Deflate the endinginventory amount to beginning of year prices and compare to thebeginning inventory amount.

Question 3.3. So. California Inc., through nofault of its own, lost an entire plant due to an earthquake on May1, 2006. In preparing their insurance claim on the inventory loss,they developed the following data: Inventory January 1, 2006,$300,000; sales and purchases from January 1, 2006, to May 1, 2006,$1,300,000 and $875,000, respectively. So. California consistentlyreports a 40% gross profit. The estimated inventory on May 1, 2006,is: (Points : 1)

$302,500.
$360,000.
$395,000.
$455,000.

Question 4.4. Using the dollar-value LIFOretail method for inventory,: (Points : 1)

Is the same asdollar-value LIFO, except that the inventory is measured at retail,rather than at cost.
Combines retail LIFOaccounting with dollar-value LIFO accounting
Allows companies toreport inventory on the balance sheet at retail prices.
All of the above arecorrect.

Question 5.5. Under the gross method, purchasediscounts taken are: (Points : 1)

Deducted from interestexpense.
Added to netpurchases.
Added to interestincome.
Deducted frompurchases.

Question 6.6. The inventory method that willalways produce the same amount for cost of goods sold in a periodicinventory system as in a perpetual inventory system would be:(Points : 1)

FIFO.
LIFO.
Weighted average.
None of the above.

Question 7.7. Cost of goods sold is given by:(Points : 1)

Beginning inventory - netpurchases + ending inventory.
Beginning inventory +accounts payable - net purchases.
Net purchases + endinginventory - beginning inventory.
Net Purchases + beginninginventory - ending inventory.

Question 8.8. An argument against the use ofLCM is its lack of: (Points : 1)

Relevance.
Reliability.
Consistency.
Objectivity.

Question 9.9. The primary reason for thepopularity of LIFO is that it gives: (Points : 1)

Better matching ofphysical flow and cost flow.
A deferral of incometax.
Simplifiedrecordkeeping.
A permanent reduction ofincome taxes.

Question 10.10. Inventory does not include:(Points : 1)

Materials used in theproduction of goods to be sold.
Assets intended to besold in the normal course of business.
Equipment used in themanufacturing of assets for sale.
Assets currently inproduction for normal sales.

Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLMâs intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-yearsâ-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an âother non-current income and expensesâ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities

ACCT 110 Lecture Notes - Lecture 14: Santa Barbara City College, Financial Statement, Book Value

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