Question Answer

1: What are some of the cost flow assumptions used to account for inventories? Why would companies choose one method of accounting for inventories over another? For a company you have worked for or are familiar with, what was the main product and which cost flow assumption would you suspect they use?

Cost flow assumption is necessary to determine what will be the exact cost of goods being sold and how they can make profits for the company. This is strictly used for financial reporting about a company and it may not show the actual growth chart of the company. Under the process, the actual cost of the sold item is determined and it is charged under the sold goods portion. Goods that are being purchased by the company are kept in the ending inventory. The process, though mainly used for tax purposes, it is also used for getting financial statements for the company. But as earlier mentioned, the cost flow assumption is never used for actual movement of goods. It is basically an assumption. But, the most important advantage is that it results in significant tax saving for the organization.

2: What are the advantages and disadvantages of using a LIFO inventory system? In what circumstances would you make the case for using LIFO? How do you feel about the IASB approach to LIFO compared to the FASB approach? Which is more appropriate and why?

LIFO or Last in First Out Method is based on the fact that all the material units should carry the basic cost of the recent purchases, though the physical flow of the process might be different from the assumed. It shows that the most recent cost is the most important in matching cost with the general revenue in the income determination procedure of an organization.

The materials brought are generally priced in a systematic and realistic manner in the LIFO procedure, along with unrealized gains and losses of the inventory are minimized, while the operational profits are being stabilized in the time of price fluctuations. This is the most important advantage of the process. There are some disadvantages of the method too. For example, this is a cost only method and the record keeping process in the case are substantially more complex than any other processes.

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3: What are the costs to include in the initial valuation of fixed assets? How would you report them? Provide an example from among property, plant, and equipment, as well as other costs you can identify as should be included.

Fixed asset is an accounting term, used for different assets that can not easily termed into cash. In other words, the tangible assets can be only named as fixed assets. As per the International Accounting Standard or IAS, the Fixed Assets are the assets whose future economic benefits is possible to flow into the entire cost flow that can be measured reliably.

Fixed assets are generally considered as the long term revenues of a company. So it is important for the organization to accurately determine what the net income of the fixed asset is for a given period, along with how the total value of the asset has contributed to the revenue factor of the organization. This is really important in the prudent reporting of the net revenue. All the fixed assets have their depreciating value in every year. For example, any land or building might change their values after a year, depending upon the location of them.

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4: How would you handle the retirement of fixed assets? What accounting treatment or reporting would you give them? Why? Provide an example of an asset you may still have, but have retired. Would it be on the books?

Once a fixed asset like land, equipments, plants or machinery is removed from the balance sheet of a company the operating activities of the said asset seizes to exist. A company can retire fixed assets by selling or exchanging. The accounting treatment or reporting of this process is carried out in the books of accounts of the company for many years in form of depreciation. This process affects the accounting procedures of asset retirement because continuous usage ramifies the utility of a fixed asset. For example, machinery looses its optimum potential by a percentage each operating year. This machinery can be retired after few years. It may physically exists but the books of accounts would not record it. From the point of view of accounting procedure it would appear in the gains and losses part of the income statement.

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5: Compare the equity method of accounting to the fair value method for equity securities. In what cases would you use each? How can these rules be manipulated to make an investment appear different than it is? Is that ethical?

Equity method of accounting is one of the most standard processes of accounting; it is used for the access of the properties that is earned by a company with the help of the equity investments.  As per the ideas, the perfect example of equity method is if a company, suppose ‘A’, holds a significant percentage of stake in a company, and hence all the earnings should be in accordance with the investments made by him. But the method is only used if a person has 20% of more than 20% stoke in another company. But here one has to remember the fact that all the debt and equity investments do not fall under any major investment categories.

6: Can you elaborate on why LIFO might be the preferred method?

With the help of LIFO, one company can minimize any type of unrealized inventory gains as well as losses. The operating profits of the company are being stabilized in different industries that are subject to sharp price fluctuations on the basic materials. The inflationary prices of all the recent purchases of a company are generally charged on the basis of the operations done with then in the periods of rising prices. It goes to reduce the profit margin for the company.  But the basic benefit in the case is of tax saving as well as the basic cash advantage of the company, with the process of deferring the income tax payments. That is why a number of companies prefer LIFO as the preferred method.

7. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following is the number of financing institutions that refused to refinance the debt. WHY?

In accounting procedure each time a financing institution is approached the short-term obligation is excluded from current liabilities because of refinancing. However, once the refinancing is refused the entries are inverted and thus they would feature in the books of accounts. It is a process that elaborates all the details of any financial transaction and thus it is necessary to record all possible transactions. 

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