MGAB02H3 Study Guide - Final Guide: Weighted Arithmetic Mean, Matching Principle, Return Period

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peachturtle345

6 Jan 2016

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Utsc limited (utsc) currently imitates a contest among its franchised stores and calgary store is the winner. They have engaged you to prepare a report to determine the appropriateness of the accounting methods that the calgary store uses and ensure that the accounting methods used were. Fair in the context of the contest: users and objectives, management of utsc ensure accurate financial reporting by the calgary store and that the contest results and assessments are fair. Their objective is to remain as the winner of this contest and receive the prize of ,000. They also want to make sure that everything reported is ethical: owner of vancouver store their objective is to win the contest. Since they are the close second, they would likely want to see that there are errors in calgary"s reporting of financial results: other users can include the rest of the franchised stores and cra, etc.

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Can someone please summarize this from "the top 10 reasons to fix the FASB's conceptual framework"

9. Costs and Benefits

The FASB and IASB would do everyone a good turn by abandoning the timeworn notion that only statement preparers incur reporting costs and that only users reap the benefits. This chestnut isnât true and never has been.

The costs of reporting arenât borne by preparers but by their entitiesâ owners, who are also among the reportsâ pri- mary users. Furthermore, managers benefit greatly from better public information that enables capital markets to establish more efficient security prices that reflect real risks.

There are no reasonable grounds for believing that markets respond to todayâs inferior public information by bidding prices higher and accepting returns that are too low for their risk. In fact, the only rational response to incomplete and untrustworthy financial reports is lower security prices and higher capital costs.

The Boardsâ discussions must articulate the point that management policies intended to reduce preparation costs diminish information quality and thus lead to higher information-gathering and processing costs. The seem- ingly economical practice of reporting only the bare min- imum is actually much more costly than just reporting what management already knows (or ought to know).

If users want to know assetsâ market values not dis- closed by management, then all users must make deci- sions under uncertainty or elect to go through their own expensive estimation process. Adding to the total cost is the fact that the usersâ self-generated data has question- able reliability and limited capacity to reduce uncertainty. If so, they demand higher returns, which, in turn, increase the reporting companyâs cost of capital.

A decision to reduce accounting costs unavoidably caus- es total costs to go higher. Considered within the context that the highest objective of financial reporting is promot- ing economic productivity, itâs clear that overall savings can be achieved by mandating additional disclosures of useful information. (In fact, weâre confident that managers and owners can reap even greater savings by voluntarily disclos- ing useful information that isnât required.)

These points are controversial, but we encourage the Boards to expand their discussion to include all costs and benefits, not just the simplistic idea that managers bear all costs and gain no benefits while users gain all benefits and bear no costs. In fact, both sides incur costs and gain benefits; once that relationship is clear, constructive progress is sure to follow.

olivegiraffe668

KLM purchased some shares of one of its suppliers, XYZ Co., asan investment. KLM paid $140,186 for the shares. Althoughmanagement plans to hold this investment for the long-term, thecompany may need to sell it in the future for liquidity purposes.Jack and Jim also think that making investments in some of theirother suppliers can be a good way to ensure quality and consistencyin the components they buy from these suppliers. Because many ofits suppliers are public companies, it should be fairly easy forKLM to buy shares on the open market.

Jack and Jim mention that they might go so far as to buy 10â15%of the common stock of one of their main suppliers and up to 30%-80% of the common stock of another supplier of routers, which are acritical piece in the KLM system. They want you to help themunderstand whether it makes a difference if they buy just 10â15% orif they buy 30%-80% of these suppliersâ shares. Both thesesuppliers have been around for a while, and with very fewexceptions, the parts ordered from them have been of high qualityand delivered on time; Jack and Jim tell you that if they do buythese stocks, they anticipate holding them for a long time.

Instructions

â¢ Use the investment in XYZ Co. to illustratethe accounting and financial reporting implications of an equityinvestment in a supplier. While the growth prospects for XYZ arequite good, in the current year it reported a net loss of $120,000and paid cash dividends of $24,000. The fair value of the XYZshares is $150,000 at year-end. Prepare journal entries for the XYZinvestment, assuming:

1. KLMâs investment represents 10% of XYZ shares.

2. KLMâs investment represents 30% of XYZ shares.

3. KLMâs investment represents 80% of XYZ shares.

â¢ Indicate the differential effect on income and balance sheetbetween the accounting for the conditions under assumptions 1,2 and3.

â¢ Indicate Is it better for the company KLM toinvest 10% or 30% or 80% in short- time orlong time and why?

II. Jack and Jim have heard that as long as they do not holdmore than 20% of the shares of one of these suppliers, they areable to recognize the unrealized gains on these equity investmentsin income. Prepare a memorandum to Jack and Jim with references tothe authoritative literature on the accounting for equityinvestments of less than 20% ownership. Discuss otherfactors beyond the percentage of shares owned that should beconsidered in determining the accounting for investments ifthey hold at least 20% but less than or equal toor greater than 50% of the stock ofanother company.

Support your answer from FASBstatement(s), List all URL used and follow APA style.

Gide for part one solution

(a)

1. Stock investment in XYZ of 10% of the outstanding votingstock:

	DR	CR

For investment 1, Is any effect on income statement or not

For investment 2, above, there would be any effect on net income.

Etcâ¦

lilacprairie-dog729

The student is required to critique, analyze, and evaluate thearticles as they relate to what was learned in class by writing afour to six-page paper (12 font, double spaced, APA format). Theobjective of this activity is for you to be aware of what ishappening in the real world as it relates to financial accountingissues to make the study of accounting more meaningful, and tobridge the gap between theory and practice

LIFO vs FIFO Inventory Accounting at HomeDepot

Last Updated Dec 28, 2008 12:16 AM EST

Home Depot, Inc. announced a key change inaccounting principals in its third quarter filing with the SEC.After adopting a new enterprise resource planning system, otherwiseknown in the wholesale-retail world as an "ERP" system, Home Depotis now keeping track of inventory values in its Canada retailoperations using a weighted-average cost method. Previously Canadainventory values had been determined using a method based on whenthe items were bought called "first-in, first-out."

For some shareholders inventory accounting changes raise red flagsas such moves suggest the company is trying to manage its balancesheet values or profit margins. If price changes are nominal,inventory accounting methods typically render the same balancesheet values and profit levels. That is, First-in, First-out (FIFO)yields the same results as "Last-in, Last-Out" (LIFO) as the pricesare basically the same. However, when prices are rising fast, LIFOleads to falling inventory values on the balance sheet as theolder, lower priced items remain on the balance sheet. If thecompany is unable to pass along rising wholesale or materialsprices to their customers, margins also fall. Ergo, A change toFIFO is tempting.

Apparently, Home Depot management expects the change to aweighted-average cost (WAC) to provide a better match of the costof sales with the revenue generated. The more sophisticatedcalculation is made possible by the new ERP system. As it turnsout, the new accounting method produced an inventory value verynear what would have been reported had Home Depot Canada stuck withthe old FIFO method.

Home Deport operates about 165 stores in Canada. Managementindicates the Canada operation is profitable and same-store salesare positive, but the company does not disclose sales by geography.Total merchandize inventory was $11.9 billion at the end of thefiscal third quarter 2008 compared to $11.7 billion a year-ago.However, as Home Depot's sales in 2008 are off approximately 4%from 2007, going forward the 1.7% increase in total inventory couldbe a source of concern -- should sales continue to fall.

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MGAB02H3 Study Guide - Final Guide: Weighted Arithmetic Mean, Matching Principle, Return Period

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