Question: Why are LIFO and average cost more

> Ryan Company wishes to prepare a forecasted income statement, balance sheet, and statement of cash flows for 2014. Ryan’s balance sheet and income statement for 2013 follow: Balance Sheet ____________________________________________2013 Cash . . . . . .

> Romney and Associates wishes to forecast its net income for the year 2014. Romney has assembled balance sheet and income statement data for 2013 and has also done a forecast of the balance sheet for 2014. In addition, Romney has estimated that its sales

> Romney and Associates wishes to forecast its net income for the year 2014. In addition, for planning purposes Romney intends to construct a forecasted statement of cash flows for 2014. Romney has assembled balance sheet and income statement data for 2013

> Svedin Incorporated provides the following information relating to 2013: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,200 Unrealized losses on available-fo

> Following are data from the financial statements for Houma Company. Compute the following for both 2012 and 2013: 1. Cash-flow-to-net-income ratio 2. Cash flow adequacy ratio 3. Cash times interest earned ratio

> J. Mair has been employed as a bookkeeper at Problems Inc. for a number of years. With the assistance of a clerk, Mair handles all accounting duties, including the preparation of financial statements. The following is a statement of earned surplus prepar

> The following information is available for Santiago Inc.: Compute the following for 2013: 1. Net income 2. Cash from operating activities

> Jacksonville Window Co. reports the following for 2013: Retained earnings, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $335,200 Selling expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .

> The company reported the following information for the year: Ending work-in-process inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 Depreciation on factory building . . . . . . . . . . . . . . .

> The following information is available for Kelsey Inc. (All inventory is purchased on account, and Accounts Payable relates only to the purchase of inventory.) Compute the following for 2013: 1. The ending balance in accounts receivable 2. The amount o

> From the following list of accounts, prepare a multiple-step income statement in good form showing all appropriate items properly classified, including disclosure of earnings-per-share data. (No monetary amounts are to be reported.) Accounts Payable Accu

> Following is information for Goulding Manufacturing Company: (a) Long-term debt of $500,000 was retired at face value. (b) New machinery was purchased for $62,000. (c) Common stock with a par value of $100,000 was issued for $160,000. (d) Dividends of $2

> Under what classification would you report each of the following items on the financial statements? (a) Revenue from sale of obsolete inventory. (b) Loss on sale of the fertilizer production division of a lawn supplies manufacturer. (c) Loss stemming fro

> A comparative balance sheet, income statement, and additional information for Shillig Doors Inc. follow. Additional information for Shillig: (a) All accounts receivable and accounts payable relate to trade merchandise. (b) The proceeds from the notes

> In 2013, Compliance Industries changed its method of inventory valuation. The summary effect of those changes is as follows: Net income was $128,000, $119,000, and $98,000 for 2013, 2012, and 2011, respectively. The income tax rate is 30%. 1. Compute t

> Based on the information given in Exercise 5-31 and using the direct method, compute the net amount of cash provided by (used in) operating activities for the year. In Exercise 5-31 The following information was taken from the comparative financial stat

> Jason Bond Company operates two restaurants, one in Valencia and one in Saugus. The operations and cash flows of each of the two restaurants are clearly distinguishable. During 2013, Jason Bond decided to close the restaurant in Saugus and sell the prope

> The Intercontinental Publishing Company follows the procedure of debiting Bad Debt Expense for 2% of all new sales. Sales for four consecutive years and year-end allowance account balances were as follows: 1. Compute the amount of accounts written off

> On May 31, 2013, top management of Stafford Manufacturing Co. decided to dispose of an unprofitable business component. An operating loss of $210,000 associated with the component was incurred during the year. The plant facilities associated with the bus

> The company purchased a piece of equipment. Terms of the purchase were as follows: $10,000 in cash immediately, followed by note payments of $20,000 at the end of each year for the next eight years. The market rate of interest is 9%. Make the journal ent

> A summary of revenues and expenses for Norwalk Company for 2013 follows: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,200,000 Cost of goods manufactured

> Nephi Corporation reported the following income items before tax for the year 2013: Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $260,000 Loss from operations of a discontinued business componen

> The following information was taken from the books of Tapwater Company. Compute the amount of net cash provided by (used in) operating activities during 2013 using the indirect method.

> The selling expenses of Caribou Inc. for 2013 are 13% of sales. General expenses, excluding doubtful accounts, are 25% of cost of goods sold but only 15% of sales. Doubtful accounts are 2% of sales. The beginning inventory was $136,000, and it decreased

> From the following information for Carter Corporation, prepare a statement of cash flows for the year ended December 31, 2013, using the indirect method. Amortization of patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

> Where in a multiple-step income statement would each of the following items be reported? (a) Purchase discounts (b) Gain on early retirement of debt (c) Interest revenue (d) Loss on sale of equipment (e) Casualty loss from hurricane (f) Sales commissions

> Norrington Trading Co. provides the following income statement for 2013: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $675,400 Cost of goods sold . . . . . . . . . . . .

> Borgquist Corporation purchased a patent on January 2, 2010, for $600,000. Its original life was estimated to be 10 years. However, in December of 2013, Borgquist’s controller received information proving conclusively that the product protected by the Bo

> Anakin, Inc., provides the following account balances for 2013 and 2012: Using the format presented in the chapter, prepare the Operating Activities section of the statement of cash flows and present that information using (a) The direct method and (b)

> For each of the following items, indicate whether the expense should be recognized using (1) Direct matching, (2) Systematic and rational allocation, or (3) Immediate recognition. Provide support for your answer. (a) Johnson & Smith, Inc., conducts cance

> On January 1, the company received layaway payments from two customers. Each customer paid $50. On December 24, the layaway period expired. On that date, the company received $300 from Customer 1 and delivered the promised merchandise (costing $200). Cus

> The accountant for Alpine Hobby Stores prepared the following selected information for the year ended December 31, 2013: Equipment with a book value of $18,000 was sold for $16,000 cash. The original cost of the equipment was $21,000. Determine the ca

> Indicate which of the following transactions or events gives rise to the recognition of revenue in 2013 under the accrual basis of accounting. If revenue is not recognized, what account, if any, is credited? (a) On December 15, 2013, Howe Company receive

> State how each of the following items would be reflected on a statement of cash flows. (a) Securities classified as available for sale were purchased for $4,200. (b) Buildings were acquired for $210,000, the company paying $60,000 cash and signing an 11%

> For each of the following transactions, events, or circumstances, indicate whether the recognition criteria for revenues and gains are met and provide support for your answer. (a) An order of $25,000 for merchandise is received from a customer. (b) The v

> Indicate whether each of the following items would be classified as (1) An operating activity, an investing activity, or a financing activity or (2) As a noncash transaction or noncash item. (a) Cash collected from customers. (b) Cash paid to suppliers f

> Why is an adjustment made on the balance sheet date to reflect exchange rate changes?

> Identify three different indexes that can be used in valuing a new LIFO layer with dollar-value LIFO. Which index is most consistent with the LIFO assumption?

> What is wrong with the statement, “Cash flow is equal to net income plus depreciation”?

> The income statement provides detail as to transactions that occurred during the period relating to what balance sheet account? The statement of cash flows provides detail as to the transactions that occurred during the period relating to what balance sh

> How do the provisions of IAS 2 differ from the lower-of-cost-or-market rule contained in U.S. GAAP?

> Installment sales contracts generally include interest. Contrast the method of recognizing interest revenue from the method used to recognize the gross profit on the sale.

> Changes in the balance sheet account balances for the Bubble Bobble Co. during 2013 follow. Dividends declared during 2013 were $18,000. Calculate the net income for the year assuming that no transactions other than the dividends affected retained earnin

> What differences result from applying lower of cost or market to individual inventory items instead of to the inventory as a whole?

> On average, which number is larger, net income or cash from operations? Explain.

> How is interest paid classified in a statement of cash flows under the provisions of FASB ASC Topic 230?

> What is the current status of LIFO under IASB standards?

> What kinds of companies would be least likely to use LIFO? Explain.

> Is the purchase of securities an operating activity or an investing activity? Explain.

> The construction in progress account is used to accumulate all costs of construction. What additional item is included in this account when percentage-of-completion accounting is followed?

> Explain what special accounting procedures are required when receivables are assigned as collateral for a secured loan.

> Output measures of percentage of completion are sometimes preferred to input measures. What are some examples of commonly used output measures?

> The following balance sheet and income statement information includes actual data for 2013 and forecasted data for 2014: Prepare a forecasted statement of cash flows for 2014. Use the indirect method of reporting cash flow from operating activities.

> Describe the 2-step test required under the provisions of IAS 39 to determine whether a receivable should be derecognized.

> When preparing a cash flow statement, what is the “target number”?

> What is an activity-based cost (ABC) system?

> Why would a company prefer gross revenue reporting over net revenue reporting?

> Refer to Practice 8-7 and Practice 8-10. Assume that the company uses the completed contract method. Make the journal entries necessary in Year 3 to recognize revenue and costs for the completed project. In Practice 8-7 The company signed an $880,000 co

> How is inventory shrinkage computed under a perpetual inventory system?

> Under FASB ASC Subtopic 605-25, when is an element of a multiple-element arrangement considered to be a unit of accounting?

> In general, why are up-front, nonrefundable fees not recognized as revenue immediately?

> What is the significance of customer acceptance provisions?

> What is the normal pattern of cash flow (positive or negative) for operating, investing, and financing activities?

> Dean Lang Enterprises Inc. developed a new machine that reduces the time required to insert the fortunes into its fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Dean Lang patented the machine. The followi

> What is the general rule for distinguishing between inventory related costs that should be included in the cost of inventory and those that should be expensed as incurred?

> Why did the SEC issue Staff Accounting Bulletin (SAB) 101?

> Identify which of the following cash flow patterns most likely belongs to (1) A start-up, high-growth company; (2) A steady-state company; and (3) A cash cow.

> What are the two general revenue recognition criteria?

> The company collected $1,000 cash in advance from a customer for services to be rendered. Subsequently, the company rendered the services. Make the journal entries necessary to record (1) The receipt of the cash and (2) The subsequent completion of the

> How can external users use a forecasted statement of cash flows?

> A forecasted statement of cash flows allows management to plan ahead. What information is contained in the statement that can be used for planning purposes?

> What does it mean when the value of a company’s cash flow adequacy ratio is less than 1.0?

> How are significant noncash investing and financing transactions reported in connection with a statement of cash flows?

> What supplemental disclosures are required by the FASB if a company elects to use the direct method in preparing its statement of cash flows? What disclosures are required if the indirect method is used?

> Use the following information to answer the questions below: Dividends declared and paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 Cash from investing activities . . . . . . . . . . . . . . . . . . . . .

> How is a loss on the sale of a long-term asset treated when using the direct method? The indirect method?

> When using the direct method, what items must be considered in the calculation of cash paid for inventory purchases?

> Why does the FASB treat interest payments as an operating activity rather than as a financing activity?

> How is depreciation expense handled when the direct method is used? The indirect method?

> Why do many users prefer the direct method? Why do the majority of preparers prefer the indirect method?

> Either the direct method or the indirect method may be used to report cash flows from operating activities. What is the difference in approach for the two methods?

> What are the three categories in a statement of cash flows? What types of items are included in each?

> What criteria must be met for an item to be considered a cash equivalent in preparing a statement of cash flows?

> Under what circumstances does cash flow from operations offer a clearer picture of a company’s performance than does net income?

> Under what conditions are goods in transit legally reported as inventory by the (a) Seller? (b) Buyer?

> The following expenditures were incurred by Peterson Enterprises Co. in 2013: Purchase of land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 282,000 Land survey . . . . . . . . . .

> What acquisition costs are included in (a) Copyrights, (b) Franchises, and (c) Trademarks?

> Would you expect to find a perpetual or a periodic inventory system used in each of the following situations? (a) Diamond ring department of a jewelry store (b) Computer department of a college bookstore (c) Candy department of a college bookstore (d) Au

> A campus bookstore has a computerized inventory system. Is it more likely that the system is a periodic system or a perpetual system? Explain.

> (a) What are the three cost elements entering into work in process and finished goods? (b) What items enter into manufacturing overhead?

> What factors should a company consider in identifying the appropriate number of dollar value LIFO pools?

> (a) How are markdowns treated when estimating average cost using the retail inventory method? (b) How are markdowns treated when estimating lower of cost or market using the retail inventory method?

> How can FIFO and LIFO assumptions be incorporated into the retail inventory method?

> What advantages does the retail inventory method have over the gross profit method?

> Company A has an inventory turnover ratio of 8.0 times. Company B has an inventory turnover ratio of 10.0 times. Both companies are in the same industry. Which company manages its inventory more efficiently? Explain.

> What is the difference between direct materials and indirect materials?

> State the effect of each of the following errors made by Clawson Inc. on the income statement and the balance sheet (1) Of the current period and (2) Of the succeeding period: (a) The ending inventory is overstated as a result of a miscount of goods o

> Using the following information, compute the following ratios: (1) Cash-flow-to-net-income, (2) Cash flow adequacy, and (3) Cash times interest earned. Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

> What information is needed to develop a reliable gross profit percentage for use with the gross profit method?

> Why would a manager care about the value assigned to inventory transferred in from another department?