Explain how LIFO generally results in lower income taxes payable when inventory costs are increasing. What is the LIFO conformity rule?
> Why don’t we depreciate land? What are land improvements? Why do we record land and land improvements separately?
> Little King acquires land and an old building across the street from Northwestern State University. Little King intends to remove the old building and build a new sandwich shop on the land. What costs might the firm incur to make the land ready for its i
> If University Hero initially records an expense incorrectly as an asset, how does this mistake affect the income statement and the balance sheet?
> Explain how we initially record a long-term asset.
> How do companies take a big bath? Explain the effect of a big bath on the current year’s and future years’ net income.
> What is an asset impairment? Describe the two-step process for recording impairments. How does recording an impairment loss affect the income statement and the balance sheet?
> Refer to the information in BE5–8, but now assume that the balance of Allowance for Uncollectible Accounts before adjustment is $3,000 (debit). The company still estimates future uncollectible accounts to be $15,000. What is the adjustment Dahir would re
> Provide an example of a company with a high profit margin. Provide an example of a company with a high asset turnover.
> Describe return on assets, profit margin, and asset turnover.
> What is book value? How do we compute the gain or loss on the sale of long-term assets?
> Justin Time is confident that firms amortize all intangible assets. Is he right? If amortized, are intangible assets always amortized over their legal life? Explain.
> Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?
> Assume Little King Sandwiches depreciates a building over 40 years and University Hero depreciates a similar building over 20 years, and both companies use the straight-line depreciation method. Explain the difficulties in comparing the income statements
> Assume that Little King Sandwiches uses straight-line depreciation and University Hero uses double-declining-balance depreciation. Explain the difficulties in comparing the income statements and balance sheets of the two companies.
> What are the two major categories of long-term assets? How do these two categories differ?
> Contrast the effects of the straight-line, declining-balance, and activity-based methods on annual depreciation expense.
> What is residual value? How do we use residual value in calculating depreciation under the straight-line method?
> At the end of the year, Dahir Incorporated’s balance of Allowance for Uncollectible Accounts is $3,000 (credit) before adjustment. The company estimates future uncollectible accounts to be $15,000. What adjustment would Dahir record for Allowance for Unc
> What is the service life of an asset? How do we determine service life under the straight- line and the activity-based depreciation methods?
> What factors must we estimate in allocating the cost of a long-term asset over its service life?
> How is the dictionary definition different from the accounting definition of depreciation?
> Are litigation costs to defend an intangible asset capitalized or expensed? Explain your answer.
> Explain the usual accounting treatment for repairs and maintenance, additions, and improvements.
> How do we decide whether to capitalize (record as an asset) or expense a particular cost?
> What is goodwill and how do we measure it? Can we sell goodwill separately from the business?
> What are the differences among a patent, a copyright, and a trademark?
> WorldCom committed the largest fraud in U.S. history. What was the primary method WorldCom’s management used to carry out the fraud?
> Which cost flow assumption generally results in the highest reported amount for ending inventory when inventory costs are rising? Explain.
> Refer to the information in BE5–6, but now assume that the balance of Allowance for Uncollectible Accounts before adjustment is $600 (debit). The company still estimates future uncollectible accounts to be 12% of Accounts Receivable. What is the adjustme
> What are the three primary cost flow assumptions? How does the specific identification method differ from these three primary cost flow assumptions?
> Cheryl believes that companies report cost of goods sold and ending inventory based on actual units sold and not sold. Her accounting instructor explains that most companies account for cost of goods sold and ending inventory based on assumed units sold
> What is a multiple-step income statement? What information does it provide beyond “bottom-line” net income?
> For a company like Best Buy, what does the balance of Cost of Goods Sold in the income statement represent? What does the balance of Inventory in the balance sheet represent?
> Define the cost of goods available for sale. How does it relate to cost of goods sold and ending inventory?
> What is the difference among raw materials inventory, work-in-process inventory, and finished goods inventory?
> Refer to the inventory error in Question 23. Explain what effect Jeff’s error will have on reported amounts at the end of the following year, assuming the mistake is not corrected and no further mistakes are made.
> Jeff is the new inventory manager for Alan Company. During the year-end inventory count, Jeff forgets that the company stores additional inventory in a back room, causing his final ending inventory count to be understated. Explain what effect this error
> What are the purposes of the period-end adjustment under the periodic inventory system?
> Explain how the sale of inventory on account is recorded under a periodic system. How does this differ from the recording under a perpetual system?
> At the end of the year, Mercy Cosmetics’ balance of Allowance for Uncollectible Accounts is $600 (credit) before adjustment. The balance of Accounts Receivable is $25,000. The company estimates that 12% of accounts will not be collected over the next yea
> How is gross profit calculated? What is the gross profit ratio? What is it designed to measure?
> What is the primary distinction between a service company and a manufacturing or merchandising company?
> What is the inventory turnover ratio? What is it designed to measure?
> What is meant by the assertion that an example of conservatism in accounting is recording inventory at the lower of cost and net realizable value?
> Describe the entry to adjust from cost to net realizable value for inventory write-downs. What effects does this adjustment have on (a) assets, (b) liabilities, (c) stockholders’ equity (or retained earnings), (d) revenues, (e) expenses, and (f) ne
> How is cost of inventory determined? How is net realizable value determined?
> Explain the method of reporting inventory at lower of cost and net realizable value.
> Explain how freight charges, purchase returns, and purchase discounts affect the cost of inventory.
> What is the difference between the timing of recording inventory transactions under the perpetual and periodic inventory systems?
> Barnes Books allows for possible bad debts. On May 7, Barnes writes off a customer account of $7,000. On September 9, the customer unexpectedly pays the $7,000 balance. Record the cash collection on September 9.
> What does it mean that FIFO has a balance-sheet focus and LIFO has an income-statement focus?
> Which cost flow assumption generally results in the highest reported amount of net income when inventory costs are rising? Explain.
> What is inventory? Where in the financial statements is inventory reported?
> What are the financial statement effects of establishing an allowance for uncollectible accounts?
> How does accounting for uncollectible accounts affect the amount reported for net accounts receivable?
> What two purposes do firms achieve by estimating future uncollectible accounts?
> Explain the correct way companies should account for uncollectible accounts receivable (bad debts).
> Revenue can be recognized at one point or over a period. Provide an example of each.
> Briefly explain the accounting treatment for sales returns and allowances. Where are these accounts reported in the income statement?
> Explain the difference between a trade discount and a sales discount. Where are sales discounts reported in the income statement?
> At the beginning of the year, Mitchum Enterprises allows for estimated uncollectible accounts of $15,000. By the end of the year, actual bad debts total $17,000. Record the write- off to uncollectible accounts. Following the write-off, what is the balanc
> Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method.
> What is the difference between a trade receivable and a nontrade receivable?
> Which method, the percentage-of-receivables method or the percentage-of-credit-sales method, is typically used in practice? Why?
> How can effectively managing receivables benefit a company?
> How is the average collection period of receivables measured? What does this ratio indicate? Is a higher or lower average collection period preferable?
> How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?
> Interest on a note receivable typically is due along with the face value at the note’s maturity date. If the end of the accounting period occurs before the maturity date, how do we record interest earned but not yet collected?
> What will be the total interest earned on a 6%, $2,000 note receivable that is due in nine months?
> With respect to notes receivable, explain what each of these represent: (a) face value, (b) annual interest rate, and (c) fraction of the year.
> Notes receivable differ from accounts receivable in that notes receivable represent written debt instruments. What is one other common difference between notes receivable and accounts receivable?
> At the end of the first year of operations, Mayberry Advertising had accounts receivable of $20,000. Management of the company estimates that 10% of the accounts will not be collected. What adjustment would Mayberry Advertising record to establish Allowa
> Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable under financial accounting rules?
> Describe the year-end adjustment to the allowance for uncollectible accounts in the year subsequent to establishing it.
> What does the age of accounts receivable refer to? How can we use an aging method to estimate uncollectible accounts receivable?
> If at the end of the year Allowance for Uncollectible Accounts has a credit balance before any adjustment, what might that tell us about last year’s ending balance of the account?
> Allowance for Uncollectible Accounts is a contra asset account, which means that its normal balance is a credit. However, it is possible for the account to have a debit balance before year-end adjustments are recorded. Explain how this could happen.
> When we have established an allowance for uncollectible accounts, how do we write off an account receivable as uncollectible? What effect does this write-off have on the reported amount of total assets and net income at the time of the write-off?
> We report accounts receivable in the balance sheet at the amount expected to be collected. Explain what this term means.
> When recording a credit sale, what account do we debit? Describe where this account is reported in the financial statements.
> What is meant by separation of duties?
> Describe the difference between preventive controls and detective controls. What are examples of each?
> Kelly’s Jewelry has the following transactions during the year: total jewelry sales = $750,000; sales discounts = $20,000; sales returns = $50,000; sales allowances = $30,000. In addition, at the end of the year the company estimates the following transa
> Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO).
> What are some of the major provisions of the Sarbanes-Oxley Act?
> What is meant by the fraud triangle, and what can companies do to help prevent fraud?
> Why are some managers motivated to manipulate amounts reported in the financial statements?
> We compared Regal Entertainment and Cinemark at the end of this chapter. What reasons were given for the differences in their cash balances?
> “Managers are stewards of the company’s assets.” Discuss what this means.
> Why is an analysis of the company’s cash balance important?
> Describe the operating, investing, and financing sections of the statement of cash flows.
> The change in cash for the year can be calculated by comparing the balance of cash reported in this year’s and last year’s balance sheet. Why is the statement of cash flows needed?
> Describe how management maintains control over employee purchases with credit cards and the petty cash fund.
> Match each of the following terms with its definition.
> Financial information for American Eagle is presented in Appendix A at the end of the book, and financial information for Buckle is presented in Appendix B at the end of the book. Required: 1. Determine which company maintains a higher ratio of current a
> What are purchase cards and a petty cash fund?
> After preparing a bank reconciliation, what adjustments does the company need to make to its records?
> Give some examples of timing differences in cash transactions that firms need to account for in a bank reconciliation.
> What are two primary reasons that the company’s balance of cash will differ between its own records and those of the bank?
> What is a bank reconciliation? How can it help in determining whether proper control of cash has been maintained?
