Study Notes

E7-2 (Determine coin Balance) Presented below argon a number of independent situations. Instructions For each individual situation, determine the amount that should be inform as gold. If the item(s) is not reported as cash, explain the rationale. 1. Checking account rest period $925,000 certificate of mend $1,400,000 cash advance to subsidiary of $980,000 utility deposit paid to gas company $180. 2.Checking account agreement $600,000 an overdraft in special biting account at same bank as normal checking account of $17,000 cash held in a bond sinking fund $200,000 petty cash fund $300 coins and currency on delve $1,350. 3. Checking account balance $590,000 postdated check from customer $11,000 cash restricted due to maintaining compensating balance requirement of $100,000 certified check from customer $9,800 postage stamps on hand $620. 4.Checking account balance at bank $37,000 money marketplace balance at mutual fund (has checking privileges) $48,000 NSF check received from customer $800. 5. Checking account balance $700,000 cash restricted for succeeding(a) plant expansion $500,000 short-term Treasury bills $180,000 cash advance received from customer $900 (not included in checking account balance) cash advance of $7,000 to company executive, collectable on demand refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract. . Cash balance of $925,000. Only the checking account balance should be reported as cash. The certificates of deposit of $1,400,000 should be reported as a temporary investment, the cash advance to subsidiary of $980,000 should be reported as a receivable, and the utility deposit of $180 should be identified as a receivable from the gas company. 2. Cash balance is $584,650 computed as follows Checking account balance $600,000 Overdraft (17,000) Petty cash 300 Coin and currency 1,350 $584,650 Cash held in a bond sinking fund is restricted. presume that the bonds are noncur rent, the restricted cash is also reported as noncurrent. 3. Cash balance is $599,800 computed as follows Checking account balance $590,000 Certified check from customer 9,800 $599,800 The postdated check of $11,000 should be reported as a receivable. Cash restricted due to compensating balance should be described in a note indicating the type of arrangement and amount. Postage stamps on hand are reported as part of office supplies strain or prepaid expenses. 4. Cash balance is $85,000 computed as follows Checking account balance $37,000 Money market mutual fund 48,000 $85,000 The NSF check received from customer should be reported as a receivable. 5. Cash balance is $700,900 computed as follows Checking account balance $700,000 Cash advance received from customer 900 $700,900 Cash restricted for future plant expansion of $500,000 should be reported as a noncurrent asset. Short-term exchequer bills of $180,000 should be reported as a temporary investment.Cas h advance received from customer of $900 should also be reported as a indebtedness cash advance of $7,000 to company executive should be reported as a receivable refundable deposit of $26,000 paid to federal government should be reported as a receivable. 13. FIFO, weighted average, and LIFO orders are often used instead of specific acknowledgement for stock certificate valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.The first-in, first-out method approximates the specific identification method when the physiologic flow of goods is on a FIFO basis. When the goods are subject to spoilage or deterioration, FIFO is particularly appropriate. In comparison to the specific identification method, an attractive as-pect of FIFO is the elimination of the hazard of artificial determination of income by the selection of advantageously priced items to be sold. The basic assumption is that costs should be charged in the order in which they are incurred.As a result the inventories are stated at the latest costs. Where the inventory is consumed and valued in the FIFO manner, in that location is no accounting recognition of unrealized gain or loss. A criticism of the FIFO method is that it maximizes the effects of price fluctuations upon reported income because current revenue is matched with the oldest costs which are belike least similar to current permutation costs. On the other hand, this method produces a balance sheet value for the asset close to current replacement costs.It is claimed that FIFO is deceptive when used in a period of rising prices because the reported income is not fully available since a part of it must be used to replace inventory at higher cost. The results achieved by the weighted average method resemble those of the specific identi-fication method where items are chosen at random or there is a rapid invento ry turnover. Com-pared with the specific identification method, the weighted average method has the advantage that the goods need not be individually identified therefore accounting is not so costly and the method nominate be applied to fungible goods.The weighted average method is also appropriate when there is no marked trend in price changes. In opposition it is argued that the method is illogical. Since it assumes that all sales are make proportionally from all purchases and that inventories will always include units from the first purchases, it is argued that the method is illogical because it is contrary to the chronological flow of goods. In addition, in periods of price changes there is a lag between current costs and costs assigned to income or to the valuation of inventories.If it is assumed that actual cost is the appropriate method of valuing inventories, last-in, first-out is not theoretically correct. In general, LIFO is directly adverse to the specific identification method because the goods are not valued in accordance with their usual physical flow. An exception is the application of LIFO to piled coal or ores which are more or less consumed in a LIFO manner. Proponents argue that LIFO provides a better matching of current costs and revenues.During periods of sharp price movements, LIFO has a stabilizing effect upon reported income figures because it eliminates paper income and losses on inventory and smooths the impact of income taxes. LIFO opponents object to the method principally because the inventory valuation reported in the balance sheet could be seriously misleading. The profit figures can be artificially influenced by management through contracting or expanding inventory quantities.Temporary in-voluntary depletion of LIFO inventories would distort current income by the previously unrecognized price gains or losses applicable to the inventory reduction. E8-14 (FIFO, LIFO and Average Cost Determination) John Adams Companys record of tr ansactions for the month of April was as follows. Purchases Sales April 1 (balance on hand) emailprotected $6. 00 April 3 500 $10. 0040 41,500 6. 08 9 1,400 10. 00 8 800 6. 40 11600 11. 00 131,200 6. 50 231,200 11. 00 21 700 6. 60 27 900 12. 0 29 500 6. 79 4,600 5,300 (a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average cost. (b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO. (c) Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO. (d) In an inflationary period, which inventory methodFIFO, LIFO, average costwill show the highest net income?