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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Note 10 to MWW’s financial statements includes among the company’s long-term debt an “estimated future earnout payable—on Paul John Enterprises acquisition”of $2,000,000. Explain what this
Examine the financial statements and Note 17 to the financial statements.a. What is the combined federal and provincial tax rate that applies to MWW’s taxable income?b. How much is MWW liable for
(Calculating cost of sales and ending inventory using average cost, FIFO, and LIFO cost flow assumptions, LO 1, 2) Adamo Limited (AL) is a wholesaler of machine parts. Jacob Avery recently purchased
(The impact of cost flow assumptions on ratios, LO 1, 2, 7) Cardigan Corp.(Cardigan), Huskisson Ltd. (Huskisson), and Mallet Inc. (Mallet) are small distribution companies. They are identical in
(The impact of cost flow assumptions on ratios, LO 1, 2, 7) Weybridge Corp.(Weybridge), Kennetcook Ltd. (Kennetcook), and Aaskana Inc. (Aaskana) are small retail stores. They are identical in every
(Recommending inventory accounting policies, LO 1, 2, 3, 4, 6) Tesseralik Inc. (Tesseralik) is a small private manufacturing company that makes inexpensive laptop computers. Tesseralik is owned by
(Recommending inventory accounting policies, LO 1, 2, 3, 4) Howser Ltd. (Howser) is a Canadian manufacturer of wooden shingles. Howser purchases lumber from saw mills and manufactures the shingles in
(Considering the effect of inventory errors, LO 1, 4, 7) Abney Ltd. (Abney) is a small manufacturing company. In the fiscal year just ended a number of errors were made in accounting for inventory.
(Considering the effect of inventory errors, LO 1, 3, 4, 7) Cariboo Ltd. (Cariboo) is a small manufacturing company. In the fiscal year just ended a number of errors were made in accounting for
(Determining the amount of inventory on hand when a periodic inventory system is used, LO 1,7) On March 24, 2001 Enterprise Inc. (Enterprise) suffered a serious fire that destroyed its entire
(Determining the amount of inventory on hand when a periodic inventory system is used, LO 1,7) On February 19, 2004 Exploits Inc.’s (Exploits) entire inventory was stolen in a daring daylight
(Lower of cost and market, LO 3,7) Tumbell Corp. (Tumbell) reports its inventory at the lower of cost and market, where market is defined as net realizable value. Tumbell has five inventory
(Lower of cost and market, LO 3, 7) Wolverine Corp. (Wolverine) reports its inventory at the lower of cost and market, where market is defined as replacement cost.Wolverine has five inventory
(Determine the amount of inventory lost due to theft, LO 1) Wekusko Ltd.(Wekusko) is a wholesaler of electronic equipment that it imports from Asia.Recently the manager of Wekusko’s warehouse in
(Determine the amount of inventory shrinkage, LO 1) Magyar Ltd. (Magyar) is a large retail clothing store located in a suburban mall. Recently, the store manager became concerned that a significant
(Consider the effect of different inventories on the inventory turnover ratio, LO 7)Xena Inc. (Xena) is an importer of gift items from Europe and Asia. Xena classifies its inventory into three
(Consider the effect of different inventories on the inventory turnover ratio, LO 7)Herschel Inc. (Herschel) is a small chain of convenience stores. Herschel classifies its inventory into three
Suppose MWW decided to write off some of its inventory because it could not be sold (perhaps it was damaged or destroyed).a. What journal entry (or worksheet entry) would MWW make to record the
Given the type of business it is in, do you think that MWW is likely to have to address lower of cost and market (LCM) problems on a regular basis? Explain.
Calculate the amount of inventory that MWW purchased during its year ended January 27, 2001. Assume that the inventory was purchased in a single transaction.Ignore the implications of the purchase of
Use the information from MWW’s annual financial statements to calculate the inventory turnover ratio for MWW for the years ended January 27, 2001 and January 29, 2000. Use the quarterly information
Examine the quarterly information shown in question M8-4 above. Why do you think the amount of inventory is so much higher at the end of the third quarter than the other quarters? Why are cost of
MWW does not break down its inventory into sub-categories. Why do you think this is the case? As a user of MWW’s financial statements, do you think that it would be useful to have the inventory
Examine the last paragraph in Note 11 to MWW’s financial statements (page A-56).Describe the agreement Mark’s and Work World have with its banker in the event the banks foreclose on any of the
Explain the strengths and limitations of the different bases for valuing capital assets on the balance sheet.
Recognize how to account for the purchase of capital assets.
Describe the different methods of amortizing capital assets and understand the implications of the different methods for financial statements and for the users of the statements.
Discuss the problems with accounting for intangible assets.
Differentiate between capital cost allowance for tax purposes and amortization for financial reporting purposes. —
Explain how to account for disposals of amortizable capital assets and for write-downs of capital assets.
Recognize the implications of changing accounting policies and accounting estimates.
Explain how the cash flow statement is affected by whether expenditures on capital assets are expensed or capitalized.
Analyze and interpret information about capital assets in financial statements.
For each of the following entities, describe the types of capital assets you would expect the entity to have:a. gas stationb. universityc. convenience stored. hotele. dairy farmf. electric utility g.
Why do intangible assets not usually appear on a balance sheet? Under what circumstances will intangible assets be reported on the balance sheet?
Why are capital assets amortized?
What costs should be included in the amount capitalized for the purchase of a new delivery vehicle?
What effect does amortization have on an entity’s cash flow? Why is amortization added back to net income when the indirect method of calculating cash from operations is used?
Academic research has shown that the stock price of a public company is not affected by the amortization method an entity uses. Does the amortization method an entity uses matter? Explain.
Why is the amortization of the cost of an asset considered arbitrary?
Identify and explain the two main reasons why capital assets have to be amortized.
Why is the selection of an amortization method never an issue if tax minimization is the main objective of financial reporting?
Why is accounting for knowledge assets such a difficult problem under existing GAAP?
An accounting firm purchases used office furniture for its support staff. For each of the following, would the expenditure be capitalized or expensed? Explain.a. The office furniture cost $18,000.b.
An uncle of yours explains that amortization is important because it ensures that money is set aside for replacing the capital assets that are being used up. What would be your response to your uncle?
What criteria are applied when deciding whether a capital asset should be written down? How does the approach to writing down capital assets differ from the approach used for writing down inventory?
Explain the difference between full cost and successful efforts accounting used by oil and gas exploration companies.
Why do you think GAAP allow the capitalization of oil and gas exploration costs but not research costs?
Why does judgment by the preparers of financial statements play such an important role in determining the amortization expense that an entity incurs? Be specific.
You are the accountant for a restaurant. The restaurant has recently started a home delivery service and purchased a car to make deliveries. You have to prepare the yearend financial statements for
What is capital cost allowance? How does capital cost allowance differ from amorti- zation?
(Straight-line amortization, LO 2, 3, 6) Roxana Inc. (Roxana) recently purchased new furniture for the reception area of the company’s head office. The furniture itself cost $30,000, taxes were
(Accelerated amortization, LO 2, 3, 6) In early 2003 Jupitagon Ltd. (Jupitagon) purchased new computer equipment. Jupitagon does cutting-edge graphic design work and requires highly sophisticated
(Change in accounting estimate, LO 7) Refer to the original information about Grindstone Corp. in Exercise 9-3 above. Suppose that early in 2006 Grindstone’s management realized that the fad would
(Accounting for a basket purchase, LO 2) In January 2005 Bath Inc. (Bath) purchased a small office building on a half-hectare piece of land in downtown Saskatoon for $9,000,000. An appraiser valued
(Determining the gain or loss on the sale of land, LO 6) In 1995 Chin Corp. purchased a piece of land for $5,000,000. In 2005 the land was sold for $7,000,000.Required:Prepare the journal entry to
(Classifying capital assets, LO 3) Indicate whether the following assets would be considered tangible or intangible. Explain your reason for the classification:. licence to sell lottery tickets in an
(Determining cost, LO 2) Mr. Bogan operates a dairy farm in Québec. Recently one of his cows gave birth to a female calf. The calf will eventually join the dairy herd that produces the milk that Mr.
(Calculation of gains and losses on sale of capital assets, LO 3, 6) On July 4, 2003 Vroomanton Inc. (Vroomanton) purchased new equipment for its print shop.Vroomanton’s accountant determined that
(Preparing amortization schedules, LO 3) In July 2004 Savory Inc. (Savory) purchased new equipment for $100,000. Savory’s management estimates that the equipment’s useful life will be eight years
(Repairs and maintenance, or betterments, LO 2) For each of the following independent items, indicate whether the expenditure should be capitalized or expensed.Provide your reasoning.a. A courier
(Choosing an amortization period, LO 3) Wandby Inc. (Wandby) recently replaced the roof on its 32-year-old building. The roofing company guarantees the roof for 15 years and advised Wandby’s
(Determine the cost of a capital asset, LO 2) The Nameless Cove Hotel (Nameless Cove) is a luxury resort in Atlantic Canada. Recently Nameless Cove built a new, Olympic-size swimming pool on its
(Effect of transactions and economic events on ratios, LO 4, 6, 7,9) Complete the following table by indicating whether the following transactions or economic events would increase, decrease, or have
(Effect of transactions and economic events on accounting measures, LO 4, 6, 7, 8, 9) Complete the following table by indicating whether the following transactions or economic events would increase,
(Evaluating the effect of the sale of a capital asset, LO 6, 8) In 2001 Triangle Corporation purchased a piece of heavy equipment for $300,000. The equipment was estimated to have a ten-year life and
(Change in accounting estimate, LO 2, 3, 6,7) On November 12, 2001 Griffon Inc.(Griffon) purchased a new front-end loader for $275,000. Management estimated that the loader would have a useful life
(Change in accounting policy, LO 2, 3, 6,7) On April 21, 2000 Rustico Inc. (Rustico)purchased a new fishing trawler for $945,000. Rustico initially amortized the trawler on a straight-line basis over
(Impact of capital asset transactions on the cash flow statement, LO 8) For each of the following items, indicate whether it would appear on the cash flow statement as cash from operations, an
(CCA versus amortization, LO 3, 5) On January 3, 2004 Goglin Inc. (Goglin) purchased new equipment to process fresh fruit into jams and jellies for retail sale. The equipment cost $25,000, fully
(Unit-of-production amortization, LO 2, 3, 6) Grindstone Corp. (Grindstone) produces fad toys for children. In 2004 Grindstone purchased a new stamping machine to produce the latest fad toy. The
Distinguish among the different cost flow assumptions that are used to determine the amount of inventory that is reported on the balance sheet and cost of sales on the income statement, and
Explain the lower of cost and market rule.
Characterize the difference between direct and absorption costing.
Recognize the issues, choices, and effects on the financial statements of using market values instead of cost for valuing inventory.
Discuss the relationship between accounting and income tax.
Analyze and interpret inventory information in financial statements.
For each of the following entities, describe the type of inventory you would expect the entity to have:. Future Shop (an electronics retailer). Loblaw Companies Limited (a grocery chain). Barrick
For each of the following entities, describe what would be included in raw materials inventory, work-in-process inventory, and finished goods inventory:a. an auto manufacturerb. a producer of
Explain why it is not possible to calculate cost of goods sold when a Paces inventory system is used if the inventory is not counted.
Explain the costs that would be included in inventory under each of the following:a. prime costingb. direct costingc. absorption costing
Why is it not possible to determine the amount of inventory that was stolen during a period when a periodic inventory system is used?
Explain why perpetual and periodic inventory control systems can give different ending inventory balances and different cost of sales when average cost and LIFO cost flow assumptions are used.
Why is it necessary to use a cost flow assumption in many situations for valuing inventory and determining cost of sales? Why can’t the actual cost of the goods sold be used to calculate cost of
Regardless of the cost flow assumption being used (FIFO, average cost, LIFO, specific identification), the sum of cost of sales plus ending inventory will be the same.Explain why.
Explain why a FIFO inventory system gives higher inventory valuation and lower cost of sales than LIFO when prices are rising.
Explain the difference between absorption and direct costing. Why is ending inventory always higher when absorption costing is used?
Explain how costs flow through the following cost flow systems: a LIFO versus a FIFO versus an average cost versus a specific identification cost flow system.
Why might it be difficult to actually determine the market value of inventory when applying the lower of cost and market rule? Provide some examples of when determining market might be difficult.
Under the traditional historical cost, transactions-based accounting model, are holding gains and losses always treated the same way? Describe the difference in the accounting treatment used for each
The CICA Handbook is quite unclear with respect to exactly how preparers of financial statements should account for their inventory. Explain the areas where the CICA Handbook is unclear and explain
Why is it necessary to count inventory when a perpetual inventory system is used?
Explain. Why is it necessary to count inventory when a periodic inventory system is used? Explain.
Explain how the specific identification method of valuing inventory works. Why do many entities not use this method? Under what circumstances is the method useful?
Why is it sometimes easy to manipulate the financial statements when the specific identification method is used?
Why is the choice of the inventory cost flow assumption important for tax purposes?Explain.
Why is it not possible to satisfy a tax minimization objective and an income maximization objective when selecting the inventory cost flow assumption that the entity should use?
Why is LIFO so commonly used in the United States but rarely used in Canada?
Does it matter which cost flow assumption an entity uses if the price an entity pays for its inventory is stable? Explain.
How does the choice of cost flow assumption affect financial ratios such as the inventory turnover ratio and the current ratio? Does the choice have any effect on the actual rate at which an entity

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