Accounting Chapter 9 Homework Accordingly Accounting Records Prior Years Usually Are

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Problem 916 (concluded)
Requirement 3
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976 Intermediate Accounting, 8/e
Judgment Case 91
1. Hudson should account for the warehousing costs related to its wholesale
inventories as part of inventory. All reasonable and necessary costs of preparing
2. a. The lower of cost and net realizable rule produces a more realistic estimate
of future cash flows to be realized from assets, which is consistent with the principle
3. Hudson’s freight-in costs should be included only in the cost amounts to
determine the cost-to-retail percentage. Hudson’s net markups should be included
4. By not deducting net markdowns from the retail amounts to determine the
cost-to-retail percentage, Hudson produces a lower cost-to-retail percentage than
CASES
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Communication Case 92
Arguments for the lower of cost and net realizable approach versus historical cost
should focus on the loss of utility concept. A departure from cost is warranted when
the utility of an asset (its probable future economic benefits) is no longer as great as its
cost. The utility or benefits from inventory result from the ultimate sale of the goods.
So, deterioration, obsolescence, changes in price levels, or any situation that might
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978 Intermediate Accounting, 8/e
Integrating Case 93
Requirement 1
YORK CO.
Schedule of Cost of Goods Sold
For the Year Ended December 31, 2016
Beginning inventory $ 65,600
Add: Purchases 368,900
YORK CO.
Supporting Schedule of Ending Inventory
December 31, 2016
Inventory at cost (LIFO):
Cost Total
Units per unit cost
Beginning inventory, January 1, 8,000 $8.20 $ 65,600
Requirement 2
Inventory should be valued at the lower of cost and net realizable value.
In this situation, because inventory valued at net realizable value ($176,000) is
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Judgment Case 94
1. a. The advantages of using the dollar-value LIFO method are to reduce the
cost of accounting for inventory and to minimize the probability of liquidation of
2. a. Huddell’s net markups should be included only in the retail amounts
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980 Intermediate Accounting, 8/e
Communication Case 95
Suggested Grading Concepts and Grading Scheme:
Content (70%)
______
30 Describes the method.
____ Determining ending inventory at retail.
Multiply ending inventory at retail by the cost percentage.
____ Markups and markdowns.
______ 10 Discusses the conditions that may distort results.
____ Possible inaccurate cost percentage.
Does not explicitly consider theft, breakage, etc.
______ 30 Describes the advantages of using the method when
compared to other methods.
____ Avoids physical inventory count.
____ Acceptable for financial reporting and income taxes.
____ Can explicitly incorporate cost flow methods, taxes,
and an approximation of lower of average cost and net
realizable value.
____
______ 70 points
Writing (30%)
______ 6 Terminology and tone appropriate to the audience of a company
president.
______ 12 Organization permits ease of understanding.
____ Introduction that states purpose.
____ Paragraphs that separate main points.
______ 12 English
____ Sentences grammatically clear and well organized,
concise.
____ Word selection.
____ Spelling.
____ Grammar and punctuation.
____
______ 30 points
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Analysis Case 96
For changes not involving LIFO or changes from the LIFO method to another, the
event is accounted for as a normal change in accounting principle. In general, we
report voluntary changes in accounting principles retrospectively. This means
revising all previous periods’ financial statements as if the new method were used in
The advantage of retrospective application is to enhance comparability of the
statements from year to year. The recast statements appear as if the newly adopted
accounting method had been applied in all previous years.
Consistency and comparability suggest that accounting choices once made should
be consistently followed from year to year. So, any change requires that the new
method be justified as clearly more appropriate. In the first set of financial statements
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982 Intermediate Accounting, 8/e
Real World Case 97
We report most voluntary changes in accounting principles retrospectively. This
means recasting all previous periods’ financial statements as if the new method were
used in those periods. For each year in the comparative statements reported, we revise
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Real World Case 98
Requirement 1
Inventories are valued using the retail first-in, first-out method for goods in stores
and the first-in, first-out cost method for goods in distribution centers. For pharmacy
department inventories, cost is determined using the dollar-value LIFO retail method.
Requirement 2
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984 Intermediate Accounting, 8/e
Case 98 (concluded)
Requirement 5
For changes not involving LIFO or changes from the LIFO method to another, the
event is accounted for as a normal change in accounting principle. In general, we
report voluntary changes in accounting principles retrospectively. This means
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Communication Case 99
Requirement 1
Change in Inventory Method
During 2016, the Company changed the method of valuing its inventories from the
first-in, first-out (FIFO) method, to the last-in, first-out (LIFO) method, determined
by the retail method. To estimate the effects of changing retail prices on
inventories, the Company utilizes internally developed price indexes. The impact
Requirement 2
It usually is impracticable to calculate the cumulative effect of a change to LIFO.
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986 Intermediate Accounting, 8/e
Judgment Case 910
Despite the self-correcting feature of certain inventory errors, the errors cause the
financial statements of the year of the error as well as the financial statements in the
subsequent year to be incorrect. For example, an overstatement of ending inventory at
the end of 2015 will correct itself in 2016 and retained earnings at the end of 2016 will
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Ethics Case 911
Requirement 1
Bonuses will be negatively affected because if the error is corrected, a lower
Requirement 2
It will be reported as a prior period adjustment to the beginning retained earnings
Requirement 3
Ethical Dilemma:
Should John recognize his obligation to disclose the inventory error to Danville
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988 Intermediate Accounting, 8/e
Analysis Case 912
GAAP requires that purchase commitments be evaluated in the same way as
inventory on hand for the purpose of determining any lower of cost and net realizable
value adjustment. Purchases are recorded at market price when market price is lower
Air France-KLM Case
No. Both U.S. GAAP and IFRS require inventory to be valued at the lower of

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