Archive for June 2018

What does the net profit ratio tell us?

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What does the net profit ratio tell us?



Answer: It shows how much of each dollar of sales is represented as profit, with a high percentage it means the business is succeeding whereas if it is low steps need to be taken to increase sales or decrease expenses.

What is a balance sheet?

Naim 02:41 Add Comment

What is a balance sheet?



Answer: Shows all the assets the business owns (this is divided into current and non-current assets), the liabilities of a business (divided into current and no-current assets) and the owner's equity (A-L)

Disadvantages of a sole trader?

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Disadvantages of a sole trader?





  • one input means there are no other ideas to be considered
  • debts are all reliable of the owner 
  • hard to get a loan as the bank sees it as risky
  • can lead to overworking

What are properties of a partnership business?

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What are properties of a partnership business?



Answer:

  • 2-20 people jointly own the business.
  • They are jointly liable for all the business debts- unlimited liability.
  • Partnership agreement is signed by all parties.

What are the properties of a sole trader business?

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What are the properties of a sole trader business?



Answer:


  • Operates under own name or registered business name.
  • Owner makes all decisions and runs business alone.
  • All profit and capital are owner by owner.
  • Owner responsible for all of the business debts- unlimited liability.

Examples of the Gross Profit Method Include.

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Examples of the Gross Profit Method Include.



- When inventory has been lost, stolen or destroyed.
- Interim reporting to avoid the expense of a physical count.
- Auditor testing of overall reasonableness of amounts reported by clients .
- Budgeting and forecasting.

Disadvantages of GPM

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Disadvantages of GPM



-An estimate of inventory since not validated by physical count and not acceptable under GAAP for annual financial statements.

-Uses past percentages to determine markup.

-Must be careful in applying a blanket % as a company may have different types of merchandise with a wide range of actual profit %'s.

Assume that at the end of 20X1, a company's ending inventory balance is overstated by $3,000. If the company has a 20% average tax rate, how will its income statement and balance sheet be affected in 20X2?

Naim 23:01 Add Comment

Assume that at the end of 20X1, a company's ending inventory balance is overstated by $3,000. If the company has a 20% average tax rate, how will its income statement and balance sheet be affected in 20X2?




20X2:

 - BI: n/e
- NP: n/e
- EI: n/e
- COGS: overstated by 3K
- GP: understated by $3K
- Income Tax Exp.: understated by $600 ($3K x 0.2)
- NI: understated by $2.4K ($3K - 600)
- Cash: understated by $600
- Inventory: n/e
- Income Tax Payable: understated by $600
- RE: n/e

Assume that at the end of 20X1, a company's ending inventory balance is overstated by $3,000. If the company has a 20% average tax rate, how will its income statement and balance sheet be affected in 20X1?

Naim 23:00 Add Comment

Assume that at the end of 20X1, a company's ending inventory balance is overstated by $3,000. If the company has a 20% average tax rate, how will its income statement and balance sheet be affected in 20X1?



20X1:

- BI: n/e
- NP: n/e
- EI: overstated by $3K
- COGS: understated by 3K
- GP: overstated by $3K
- Income Tax Exp.: overstated by $600 ($3K x 0.2)
- NI: overstated by $2.4K ($3K - 600)
- Cash: n/e
- Inventory: overstated by $3K
- Income Tax Payable: overstated by $600
- RE: overstated by $2.4K

If an error has been made causing the a physical inventory count at the end of 20X4 to be incorrect, causing inventory to be understated, how does it affect the following accounts in 20X4?

Naim 23:00 Add Comment

If an error has been made causing the a physical inventory count at the end of 20X4 to be incorrect, causing inventory to be understated, how does it affect the following accounts in 20X4?




- BI:
- NP:
- EI:
- COGS:
- NI:
- Inventory
- RE:
- AP:


20X4:


- BI: n/e
- NP: n/e
- EI: understated
- COGS: overstated
- NI: understated
- Inventory: understated
- RE: understated
- AP: n/e

If a company discovers an error in the same accounting period that the error was made, what do you do? What about if a company discovers the accounting error after books closed?

Naim 23:00 Add Comment

If a company discovers an error in the same accounting period that the error was made, what do you do? What about if a company discovers the accounting error after books closed?



Before books closed:

- Reverses the erroneous entry and records a correct entry.


After books closed:

- Treats the correction like a prior period adjustment.

Can Inventory Be Valued Above Cost? If so, how?

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Can Inventory Be Valued Above Cost? If so, how?




Yes; This exception must be justified by:

- An inability to determine appropriate costs
- Immediate marketability of the inventory at a quoted market price
- The interchangeability of the units of inventory

What is a major criticism of the LCM method? What principle does it follow?

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What is a major criticism of the LCM method? What principle does it follow?



Answer:

- Major criticism of LCM is that it is applied only in one direction—inventory value declines are recognized, but value increases are not.

- While this is obviously inconsistent, it is often justified as being a conservative approach to the valuation of inventory.

When the cost of the inventory exceeds the expected benefits, between the LCM & LCNRV method, which one is better and why? What financial statement does it reflect?

Naim 22:58 Add Comment

When the cost of the inventory exceeds the expected benefits, between the LCM & LCNRV method, which one is better and why? What financial statement does it reflect?




Answer: When the cost of the inventory exceeds the expected benefits, the lower market value is a better measure of the expected benefits because an unrecoverable cost is not an asset. Should be applied to the income statement.

Assume a company recorded the purchase of inventory on account twice instead of once in its accounting system. Assuming its ending inventory is correctly stated, what will be the effect, if any, on net income in the year the error first occurred?

Naim 22:57 Add Comment

Assume a company recorded the purchase of inventory on account twice instead of once in its accounting system. Assuming its ending inventory is correctly stated, what will be the effect, if any, on net income in the year the error first occurred?





a. Net income will be understated.
b. Net income will not be affected.
c. Net income will be overstated.


Answer: a. Net income will be understated.

After applying the lower-of-cost-or-market (LCM) method, if a company writes-down its inventory, the effect on the accounting equation is:

Naim 22:56 Add Comment

After applying the lower-of-cost-or-market (LCM) method, if a company writes-down its inventory, the effect on the accounting equation is:





a. a decrease to total assets and an increase to total liabilities.
b. a increase to total assets and an increase to total liabilities.
c. a decrease to total assets and a decrease to total stockholders' equity.
d. an increase to total assets and a decrease to total stockholders' equity.
e. a decrease to total liabilities and a decrease to total stockholders' equity.
f. a decrease to total assets and a decrease to total liabilities.


Answer: c. a decrease to total assets and a decrease to total stockholders' equity.

If an error has been made causing the EI of 20X3 to be overstated, how does it affect the following accounts in 20X4?

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If an error has been made causing the EI of 20X3 to be overstated, how does it affect the following accounts in 20X4?




- BI:
- NP:
- EI:
- COGS:
- NI:
- Inventory
- RE:
- AP:

20X3:

- BI: overstated
- NP: n/e
- EI: n/e
- COGS: overstated
- NI: understated
- Inventory: n/e
- RE: n/a (has now self-corrected)
- AP: n/e

If an error has been made causing an overstatement of inventory in 20X3, how does it affect the following accounts in 20X3?

Naim 22:53 Add Comment

If an error has been made causing an overstatement of inventory in 20X3, how does it affect the following accounts in 20X3?



- BI:
- NP:
- EI:
- COGS:
- NI:
- Inventory
- RE:
- AP:

In 20X3 -

- BI: n/e
- NP: overstated
- EI: n/e
- COGS: overstated
- NI: understated
- Inventory: n/e
- RE: understated
- AP: overstated

What are reasons that inventory errors can occur?

Naim 22:53 Add Comment

What are reasons that inventory errors can occur?



Answer:

- physical inventory count is wrong
- purchases, purchase discounts, purchase returns and allowances, & freight-in cost could be either overstated or understated.

Assuming the FIFO method is used, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, "market value" is referring to:

Naim 22:49 Add Comment

Assuming the FIFO method is used, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, "market value" is referring to:





a. the net realizable value of the inventory.
b. the current replacement cost of the inventory.
c. the estimated selling price of the inventory.


Answer: a. the net realizable value of the inventory.

Under IFRS, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, "market value" is referring to:

Naim 22:49 Add Comment

Under IFRS, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, "market value" is referring to:





a. the current replacement cost of the inventory.
b. the net realizable value of the inventory.
c. the estimated selling price of the inventory.


Answer: b. the net realizable value of the inventory.

Under GAAP, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, net realizable value is defined as:

Naim 22:49 Add Comment

Under GAAP, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, net realizable value is defined as:





a. The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
b. The estimated selling price in the ordinary course of business.
c. The estimated selling price in the ordinary course of business divided by reasonably predictable costs of completion and disposal.
d. The estimated selling price in the ordinary course of business plus reasonably predictable costs of completion and disposal.


Answer: a. The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

Under GAAP, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, the "floor" is equal to:

Naim 22:48 Add Comment

Under GAAP, for purposes of applying the lower-of-cost-or-market (LCM) to inventory balances, the "floor" is equal to:



a. the net realizable value plus a normal profit margin.
b. the net realizable value.
c. the estimated selling price in the ordinary course of business plus reasonably predictable costs of completion and disposal.
d. the net realizable value less a normal profit margin.



Answer: d. the net realizable value less a normal profit margin.

What is the JE for indirect method?

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What is the JE for indirect method?



DEBITED - loss on write-down of inventory to market (i.e. loss on market valuation)

CREDITED - allowance to reduce inventory to market

What are the year end steps for applying the LCM method?

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What are the year end steps for applying the LCM method?



Answer:


1. perform any other necessary adjustments on inventory account (DVL must have adjusted the FIFO inventory ending to DVL to account for agreeing to physical count).

2. gather info - sales price, cost to complete and disposal costs, PM, existing costs, replacement costs, etc.

3. compute ceiling and floor

4. determine designated market value by comparing true replacement cost to ceiling and floor amounts.

5. compare designated market value to existing costs.

6. if designated market value is < existing cost = write down.

What is the ceiling and what is it defined as in terms of NRV?

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What is the ceiling and what is it defined as in terms of NRV?


Answer:

Ceiling = upper limit on designated market value.


Defined as NRV of inventory where NRV = estimated selling price in ordinary course of business - reasonably predictable cost of completion and disposal, including transportation.

What is the designated market value? What is it ultimately compared to?

Naim 22:37 Add Comment

What is the designated market value? What is it ultimately compared to?



Answer:

- often ceiling and floor, when designated as replacement cost are called this. can also use true replacement cost as designated market value if replacement cost falls b/w ceiling and floor.
- ultimately compared to inventory's cost when using LCM method

What is the Net realizable value?

Naim 22:35 Add Comment

What is the Net realizable value?




Answer: The estimated selling price of the inventory in the ordinary course of business - predictable costs of completion and disposal, including transportation costs.

Describe the LCNRV.

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Describe the LCNRV.



Answer: LCNRV requires companies to compare their inventory cost to its net realizable value AT year end. If net realizable value is lower, inventory should be written down.

The new ASU 2015 - 11 required companies with fiscal years beginning after 2016 to apply the _____________ method if they used an inventory method other than these two methods: ______ and _____.

Naim 22:28 Add Comment

The new ASU 2015 - 11 required companies with fiscal years beginning after 2016 to apply the _____________ method if they used an inventory method other than these two methods: ______ and _____.



Answer:

- LCNRV (lower of cost or net realizable value) method
- LIFO & retail inventory method

Prior to 2016, GAAP required companies to use which method? Did it matter before then what inventory costing method was used? When did this change? What changed this?

Naim 22:28 Add Comment

Prior to 2016, GAAP required companies to use which method? Did it matter before then what inventory costing method was used? When did this change? What changed this?



Answer:

- LCM (Lower of Cost/Market)
- No
- In 2015, FASB's simplification initiative issued an ASU (2015 - 11) in July 2015 regarding inventory valuation for companies which use certain inventory costs.

A high R2 measure in regression analysis is preferred because:

Naim 17:11 Add Comment

A high R2 measure in regression analysis is preferred because: 



A. it indicates a good fit of the regression line through the data points.
B. it shows that a great deal of the change in the dependent variable is explained by change in the independent variable.
C. it means that the independent variable is a good predictor of the dependent variable.
D. it means that the cost analyst can be relatively confident in his or her cost predictions.
E. all of the preceding statements are true.



Answer: E. all of the preceding statements are true.

Waller Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Waller should use:

Naim 17:11 Add Comment

Waller Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Waller should use: 



A. simple regression.
B. multiple regression.
C. a scatter diagram.
D. complex regression.
E. the high-low method.



Answer: B. multiple regression.

Checkers Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours?

Naim 17:10 Add Comment

Checkers Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours? 




A. Total manufacturing overhead is represented by the variable "X."
B. The company anticipates $495,000 of fixed manufacturing overhead.
C. "X" is commonly known as the dependent variable.
D. "X" represents the number of machine hours.
E. Both "B" and "D" are true.



Answer: E. Both "B" and "D" are true.

Which of the following statements about the visual-fit method is (are) true?

Naim 17:09 Add Comment

Which of the following statements about the visual-fit method is (are) true?


The method results in the creation of a scatter diagram.
The method is not totally objective because of the manner in which the cost line is determined.
The method is especially helpful in the determination of outliers.



A. I only.
B. II only.
C. I and II.
D. I and III.
E. I, II, and III.



Answer: E. I, II, and III.

High-tech automation combined with a downsizing of a company's hourly labor force often results in:

Naim 17:09 Add Comment

High-tech automation combined with a downsizing of a company's hourly labor force often results in: 




A. increased fixed costs and increased variable costs.
B. increased fixed costs and reduced variable costs.
C. reduced fixed costs and increased variable costs.
D. reduced fixed costs and reduced variable costs.
E. increased discretionary fixed costs and reduced committed fixed costs.



Answer: B. increased fixed costs and reduced variable costs.

Committed fixed costs would include:

Naim 17:08 Add Comment

Committed fixed costs would include: 




A. advertising.
B. research and development.
C. depreciation on buildings and equipment.
D. contributions to charitable organizations.
E. expenditures for direct labor.



Answer: C. depreciation on buildings and equipment.

Property taxes are an example of a(n):

Naim 17:08 1 Comment

Property taxes are an example of a(n): 



A. committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.



Answer: A. committed fixed cost.

Within the relevant range of activity, costs:

Naim 17:07 Add Comment

Within the relevant range of activity, costs: 




A. can be estimated with reasonable accuracy.
B. can be expected to change radically.
C. exhibit decreasing marginal cost patterns.
D. exhibit increasing marginal cost patterns.
E. cannot be estimated satisfactorily.


Answer: A. can be estimated with reasonable accuracy.

The relevant range is that range of activity:

Naim 17:07 Add Comment

The relevant range is that range of activity: 




A. where a company achieves its maximum efficiency.
B. where units produced equal units sold.
C. where management expects the firm to operate.
D. where the firm will earn a profit.
E. where expected results are abnormally high.



Answer: C. where management expects the firm to operate.

A mixed cost is often known as a:

Naim 17:06 Add Comment

A mixed cost is often known as a: 




A. semivariable cost.
B. step-fixed cost.
C. variable cost.
D. curvilinear cost.
E. discretionary cost.



Answer: A. semi variable cost.

Each of Davidson's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Davidson's salary cost can best be described as a:

Naim 17:05 Add Comment

Each of Davidson's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Davidson's salary cost can best be described as a: 




A. variable cost.
B. semivariable cost.
C. step-variable cost.
D. fixed cost.
E. step-fixed cost.



Answer: E. step-fixed cost.

A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parry anticipate at a volume of 85,000 units?

Naim 17:05 Add Comment

A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parry anticipate at a volume of 85,000 units? 




A. $1,020,000.
B. $1,040,000.
C. $1,060,000.
D. $1,080,000.
E. Some other amount not listed above



Answer: B. $1,040,000.

Net realizable value is the general rule for valuing which inventory?

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Net realizable value is the general rule for valuing which inventory?





A. Commodities held by broker-traders
B. Computer components held for sale
C. Invenrories priced on an item by item basis
D. All of these inventories are measured at net realizable value



Answer: A. Commodities held by broker-traders

Commodity broker-traders

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Commodity broker-traders




A. Produce commodities such as rice, corn or precious metals
B. Hold inventory primarily to sell in the near term and generate a profit from price fluctuation
C. Measure inventories at the lower of cost and net realizable value
D. All of the choices are correct regarding broker-traders


Answer: B. Hold inventory primarily to sell in the near term and generate a profit from price fluctuation

An example of an inventory accounting policy that should be disclosed is

Naim 16:57 Add Comment

An example of an inventory accounting policy that should be disclosed is 




A. Effect of inventory profit caused by inflation
B. Classification of inventory into raw materials, goods in process and finished goods
C. Identification of major suppliers
D. Method used for inventory costing



Answer: D. Method used for inventory costing

When portion of inventory has been pledge as security for s loan

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When portion of inventory has been pledge as security for s loan





A. The value of the inventory pledged should be deducted from the debt
B. An equal amount of retained earnings should be appropriated
C. The fact should be disclosed but the amount if current assets shoukd nit be affected
D. The cost of the pledge inventory should be transferred from current asset to noncurrent asset



Answer: C. The fact should be disclosed but the amount if current assets shoukd nit be affected

If a material amount of inventory has been ordered through a formal purchase contract at the end of reporting period for future delivery at firm prices

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If a material amount of inventory has been ordered through a formal purchase contract at the end of reporting period for future delivery at firm prices




A. This fact must be disclosed
B. Disclosure is required only if prices have declined since the date of the order
C. Disclosure is required only if prices have since risen substantially
D. An appropriation of the retained earnings is necessary



Answer: A. This fact must be disclosed

When the cost of goods sold method is used to record inventory at net realizable value

Naim 16:56 Add Comment

When the cost of goods sold method is used to record inventory at net realizable value




A. There is a direct reduction in the selling price
B. A loss is recorded directly in the inventory account by debiting loss
C. Only the portion of the loss attributable to inventory sold is recorded
D. The net realizable value for ending inventory is substituted for cost and the loss is buried in the cost of goods sold



Answer: D. The net realizable value for ending inventory is substituted for cost and the loss is buried in the cost of goods sold

Lower of cost and net realizable value as it applies to inventory is best describes as the

Naim 16:55 Add Comment

Lower of cost and net realizable value as it applies to inventory is best describes as the




A. Reporting of a loss when there is a decrease in the future utility below the original cost
B. Method of determining cost of goods sold
C. Assumption to determine inventory flow
D. Change in inventory value to net realizable value



Answer: A. Reporting of a loss when there is a decrease in the future utility below the original cost

Lower of cost and net realizable value

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Lower of cost and net realizable value




A. Gives the lowest valuation if applied to the total inventory
B. Gives the lowest valuation if applied to major group of inventory
C. Gives the lowest valuationif applied to indivudual item of inventory
D. Must be applied to major group



Answer: C. Gives the lowest valuation if applied to individual item of inventory

LCNRV of inventory

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LCNRV of inventory




A. Is always either the net realizable value or cost
B. Should always be equal to net ralizable value
C. May sometimes be less than net realizable value
D. Should always be equal to estimated selling price less cost to complete



Answer: A. Is always either the net realizable value or cost

Which of the following statements is true regarding inventory write down and reversal of write down?

Naim 16:55 Add Comment

Which of the following statements is true regarding inventory write down and reversal of write down?





A. Rversal of inventory writedown is prohibited
B. Separate reporting of reversal of inventory writedown is required
C. Entities are required to record writedown in a separate loss account
D. All of the choices are correct



Answer: B. Separate reporting of reversal of inventory write down is required

Which statement is incorrect regarding LCNRV?

Naim 16:54 Add Comment

Which statement is incorrect regarding LCNRV?




A. Net realizable value is the selling price kess estimated cost to complete and estimated cost of disposal
B. In most situations, entities measure inventory on a total inventory basis
C. One of two methods may be used to record the income effect of valuing inventory at net realizable value
D. Entities use an allowance account to reduce inventory to net realizable value



Answer: B. In most situations, entities measure inventory on a total inventory basis

Net realizable value is

Naim 16:53 Add Comment

Net realizable value is





A. Current replacement cost
B. Estimated selling price
C. Estimated selling price less estimated cost to complete
D. Estimated selling price less estimated cost to complete and estimated cost of disposal



Answer: D. Estimated selling price less estimated cost to complete and estimated cost of disposal

Inventory should be measured at

Naim 16:53 Add Comment

Inventory should be measured at




A. Lower of cost and fair value
B. Lower of cost and net ralizable value
C. Lower of cost and net selling price
D. All of these are used in measuring inventory



Answer: B. Lower of cost and net realizable value
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