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ACCOUNTG 221 Lecture Notes - Lecture 5: Income Statement, Historical Cost, Accounts Receivable

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School
UMASS-Amherst
Department
Accounting
Course
ACCOUNTG 221
Professor
Catherine West Lowry

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Document Summary

Lower of cost or market (lcm): you have 10 lm with a cost of /unit and 5 xs with a cost of /unit. The market value of lm is and xs is. What is your adjustment at the end of the year: decrease (credit) to inventory, increase (debit) to cogs. Historical cost principal put inventory on the books for what they cost, not the market value. Cogs and income statement, oldest costs are in ending inventory/balance sheet. Lower cogs = higher net income = paying more taxes. Higher cogs = lower net income = paying less taxes. Do you think a company will collect the full amount of accounts receivable on their books: no because of bankruptcy. Credit terms and bad debt: some customers may be unwilling or unable to pay their accounts receivable. Because we do not want to overstate assets, we must show accounts receivable at its net realizable value on the balance sheet.

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Related Questions

Many companies use the lower-of-cost-or-market to value inventory. They compare the current value of their inventory with its historical cost and adjust the value, if necessary, to ensure the inventory is booked at the lower of the two values. Argue why inventories are valued using the "lower of cost or market" method. Evaluate at least two arguments

Inventory - ASC 330

Instructions- fill in the blanks by searching the answer in thestandard, or answer the question (MC or TF)


Inventory
Tangible personal property of the following:
1. held for sale --> merchandise, finished goods
2. in the course of production --> work in process
3. to be consumed in the production --> raw materials

1. Initial measurement
Inventories are measured at _______ when first recognized

2. Cost flow assumptions
One of the following assumptions is made to determine the cost ofinventory:
1. First-in First-out (FIFO): Items that came in first are soldfirst
2. Last-in First-out (LIFO): Items that came in last are soldfirst
3. Average method: Weighted average cost is applied as unitcost

T

F


3. Subsequent measurement
If the market is lower than the cost
--> inventory is measured at the market
--> "Lower of Cost or Market" (LCM)

T

F



4. Market
a. The market refers to current replacement cost
b. If net realizable value (NRV) is lower that current replacementcost
--> NRV is ___________

c. If current replacement cost is lower than (a)
--> (a) is the __________

5. Lower of Cost or Market (LCM) summary
(a) current replacement cost
(b) net realizable value
(c) net realizable value - normal profit margin

If (c) < (a) < (b) --> market = (_a)
If (c) < (b) < (a) --> market = (_b)
If (a) < (c) < (b) --> market = (_c)

PartA

Adria Lopez of Success Systems is evaluating her inventory todetermine whether it must be adjusted based on lower of cost ormarket rules. Her company has three different types of software inits inventory and the following information is available foreach.

Per Unit
Inventory Items Units Cost Market
Officeproductivity 3 $ 76 $ 74
Desktoppublishing 2 103 100
Accounting 3 90 96
Required:
1(a).

Compute the lower of cost or market for ending inventoryassuming Lopez applies the lower of cost or market rule toinventory as a whole.

1(b).

Must Lopez adjust the reported inventory value?
No
Yes
2(a).

Compute the lower of cost or market rule to each product ininventory.

2(b).

Must Lopez adjust the reported inventory value?
No
Yes
PartB

Selected accounts and balances for the three months ended March31, 2014, for Success Systems follow.

January 1 beginninginventory $ 0
Cost of goodssold 14,052
March 31 endinginventory 704
Required:
1.

Compute inventory turnover and days’ sales in inventory for thethree months ended March 31, 2014. (Use 365 days a year. Donot round intermediate calculations. Round your days' sales answerto 1 decimal place and turnover answer to the nearest wholenumber.)