Financial Accounting Solution CH09

CHAPTER 9

WORKING CAPITAL

Questions, Exercises, and Problems: Answers and Solutions

9.1

9.2 See the text or the glossary at the end of the book. Prepayments are future economic benefits that a firm will receive because it

has exchanged cash for the right to receive services in the future. Firms charge the asset to expense over the period during which it receives services. All assets promise future economic benefits, so all assets are prepayments. The underlying principle is that acquisition cost includes all costs required to prepare an asset for its intended use. Assets provide future services. Costs that a firm must incur to obtain those expected services are, therefore, included in the acquisition cost valuation of the asset. In the case of merchandise inventory, this includes the costs associated with obtaining the goods (purchase price, transportation costs, insurance costs). For manufactured inventory, acquisition costs include direct labor, direct materials, and manufacturing overhead.

Depreciation on manufacturing equipment is a product cost and remains in inventory accounts until the firm sells the manufactured goods. Depreciation on selling and administrative equipment is a period expense, because the use of such equipment does not create an asset with future service potential.

Both the Merchandise Inventory and Finished Goods Inventory accounts include the cost of completed units ready for sale. A merchandising firm acquires the units in finished form and debits Merchandise Inventory for their acquisition cost. A manufacturing firm incurs direct material, direct labor, and manufacturing overhead costs in transforming the units to a finished, salable condition. The Raw Materials Inventory and Work-in-Process Inventory accounts include such costs until the completion of manufacturing operations. Thus, the accountant debits the Finished Goods Inventory account for the cost of producing completed units. The accountant 9.3 9.4 9.5 9-1 Solutions

9.5 continued.

credits both the Merchandise Inventory and Finished Goods Inventory

accounts for the cost of units sold and reports the inventory accounts as current assets on the balance sheet.

Accounting reports cost flows, not flows of physical quantities. Cost-flow assumptions trace costs, not physical flows of goods. With specific identification, management can manipulate cost flows by controlling physical flow of goods.

Rising Purchase Prices

Higher Inventory Amount:

Lower Inventory Amount:

Higher Cost of Goods

Sold Amount:

Lower Cost of Goods

Sold Amount: FIFO LIFO LIFO FIFO 9.6 9.7

9.8 Suppliers often grant a discount if customers pay within a certain number

of days after the invoice date, in which case this source of funds has an explicit interest cost. Suppliers who do not offer discounts for prompt payment often include an implicit interest change in the selling price of the product. Customers in this second category should delay payment as long as possible because they are paying for the use of the funds. Firms should not delay payment to such an extent that it hurts their credit rating and raises their cost of financing.

The Parker School should accrue the salary in ten monthly installments of $360,000 each at the end of each month, September through June. It will have paid $300,000 at the end of each of these months, so that by the end of the reporting year, it reports a current liability of $600,000 [= $3,600,000 – (10 X $300,000)].

It is cheaper (and, therefore, more profitable) to repair a few sets than to have such stringent quality control that the manufacturing process produces zero defectives. An allowance is justified when firms expect to have warranty costs. Manufacturers of TV sets for use on space ships or heart pacemakers should strive for zero defects. 9.9 9.10

Solutions 9-2

9.11 Similarities: The accountant makes estimates of future events in both

cases. The accountant charges the cost of estimated uncollectibles or warranties to income in the period of sale, not in the later period when specific items become uncollectible or break down. The income statement reports the charge against income as an expense in both cases, although some accountants report the charge for estimated uncollectibles as a revenue contra.

Differences: The balance sheet account showing the expected costs of future uncollectibles reduces an asset account, whereas that for estimated warranties appears as a liability.

A reversal implies that the previously accrued charge turned out to be too high, in light of the new information (including realized expenditures). Because the reversal lowers the amount of expense reported in the current period, it increases income.

(Accounting for prepayments.) (amounts in millions of euros)

a. Journal entry to record insurance premium payments in 2012, 2011, and

2010:

Prepayments............................................................ 50.0

Cash..................................................................... 50.0

b. Adjusting journal entries required each year.

2011:

Insurance Expense................................................... 66.3

Prepayments........................................................ 66.3 To adjust Prepayments for the amount consumed

during 2011, of …… 此处隐藏：3256字，全部文档内容请下载后查看。喜欢就下载吧 ……