Financial Accounting Homework: Inventory, Depreciation, and More

This homework assignment covers key financial accounting concepts. It begins with computational multiple-choice questions addressing inventory costing methods (FIFO, LIFO, weighted-average) and depreciation methods (straight-line, double-declining balance, units-of-activity). The open-ended questions delve into financial reporting topics such as unearned income, goodwill, cash and cash equivalents, short-term investments, retirement plans (defined contribution and defined benefit), LIFO reserve, and the use of estimates in financial reporting, referencing examples from Lowe's, Google, Cisco, and Twitter's financial statements. The solutions demonstrate the application of these concepts and require detailed explanations and calculations to arrive at the correct answers. The assignment aims to test the student's understanding of core accounting principles and their application in real-world financial scenarios. The solutions include detailed workings and explanations, providing a comprehensive understanding of the concepts.

SHOW WORK BY THE QUESTION TO INDICATE HOW YOU GOT THE ANSWER
PROBLEM 2: Computational Multiple-Choice Questions: 1-6. (2 points each)
You must show your work next to your answer on the answer sheet to get any credit.
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 1, 2, AND 3.
Abba Medical Supply’s inventory records for industrial switches indicate the following at
October 31:
10/1 Beginning inventory 7 units at $160 per unit
10/8 Purchase 4 units at $160 per unit
10/15 Purchase 11 units at $170 per unit
10/26 Purchase 5 units at $176 per unit
10/31 Ending inventory 8 units
1. The cost of ending inventory using the periodic FIFO costing method is:
a. $1,390
b. $1,280
c. $1,336
d. $1,330
Answer:
(5 units x $ 176) + (3 units x $170)
= $ 1390
2. The cost of goods sold using the periodic LIFO costing method is:
a. $3,180
b. $3,174
c. $3,120
d. $3,230
Answer:
(7 units x $ 160) + (1 units x $ 160)
Closing Inventory = $ 1280
Cost of Goods sold:
Opening + Purchase – Closing
1120 + 3390 – 1280 = $ 3230
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3. The cost of ending inventory using the periodic weighted-average method
is (rounded to the nearest dollar):
a. $1,390
b. $1,280
c. $1,336
d. $1,322
Answer:
[ (7 x 160) + (4 x 160) + (11 x 170) + (5 x 176) ] / 27
= Average Rate $ 167.04
Closing Inventory 8 units x 167.04 = $ 1336.30
4. A company purchased factory equipment on April 1, 2014, for $48,000. It is estimated
that the equipment will have a $3,000 salvage value at the end of its 10-year useful life.
Using the straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2014, is:
a. $4,500
b. $4,800
c. $3,375
d. $3,750
Answer
(48000 – 3000) / 10 = 4500
5. A company purchased factory equipment for $100,000 on January 1, 2014. It is estimated
that the equipment will have a $10,000 salvage value at the end of its estimated 4-year
useful life. If the company uses the double-declining-balance method of depreciation, the
amount of annual depreciation recorded for the second year after purchase would be:
a. $50,000.
b. $25,000.
c. $45,000.
d. $22,500.
Acquisition Cost as on 1-1-
2014 100000
Salvage Value 10000
Life of asset in years 4
Depreciation % 25%
Double Depreciation 50%
Depreciation for 1st year 50000
WDV after 1st year end 50000
Depreciation for 2nd year 25000
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6. A machine with a cost of $80,000 has an estimated salvage value of $5,000 and an
estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-
activity method of depreciation. What is the amount of depreciation for the second full
year, during which the machine was used 5,000 hours?
a. $25,000
b. $15,000
c. $21,667
d. $26,667
Acquisition Cost as on 1-1-2014 80000
Salvage Value 5000
Life of asset in hours
15000
hours
Hours used by end of 2nd year
5000
hours
Balance on which asset to be
depreciated 75000
Depreciation after 2nd year end 25000
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PROBLEM 3. Open-Ended Questions. (Total of 43 points for all parts.)
PLEASE USE COMPLETE SENTENCES (subject and predicate) except where an entry is
required.
As we discussed many of the financial reporting topics in class, we referred to the Intel financial
statements. Some of the questions below cover topics with reference to financial statements
that I have posted to T-Square (in the Annual Reports folder). All of the dollar amounts
below are in millions except for Twitter. Please answer the questions in millions (or
thousands for Twitter) as well. That is, please leave off all of the following zeroes.
(1) We discussed the concept of unearned income in some depth. There are many reasons that
a company could have this type of liability.
(a) Review the Lowe’s balance sheet for the year ended 1/29/16 (referred to as 2015
Annual Report). What accounts and amounts do they list that are types of unearned
(deferred) income?
- Deferred Tax Asset which is the timing difference between the taxable income as per the
Companies Act and the Revenue Act. The taxation impact of non allowance of certain
expenditure in income tax leads to generation of Asset in the Balance Sheet. The
treatment for the year is to be separately shown as Deferred Tax Asset in the Profit and
Loss Statement
- Deferred Revenue have been accounted in Sales and revenue from operations which are
the amounts received from the Customers but against which the company has not
dispatched the merchandise
- Deferred Stored Revenue Cards are those which include gift cards and return
merchandise credits are recognized when the cards are redeemed.
- Deferred Stock units are the Company’s common stock on the date of Grant. These
stocks have vested interest to the Non-employee Directors
- Non qualified deferred compensation program – Lows Cash deferral plan
(b) In their footnotes, Lowe’s identifies two types of transactions that result in
amounts being recorded in a deferred income account. Identify those two types of
transactions and why they result in unearned (deferred) income.
- Deferred Stock units. They are the stock option plans formulated by the Company
which contain vested interest of the Employees to get certain defined benefits out of the
same. The stock options are converted to fair market value and are compared to the actual
value. The difference is charged to revenue as unearned inome
- Deferred Compensation plan. It is a kind of deferred revenue for the Company which
additionally provides option to the Employees to defer their income to avoid tax liability
in current year. This option becomes deferred revenue of the company as it defers the
expense liability
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(2) As of December 31, 2014, Google reports Goodwill in the amount of $15,599. This is an
increase from the year before.
(a) One of the reasons for the increase in the Goodwill account from the previous year is
the acquisition of Skybox. Using the footnotes, show the transaction that
would have resulted from this acquisition. Use the “arrows” approach to reflect the
accounts and amounts.
- Goodwill is created in books of Google which is the excess payment of Purchase
consideration over the fair value of asset of the Selling company as a Goodwill gesture.
Google has acquired Skybox in year 2013, where the goodwill is the synergic effect of
such acquisition. It has nothing to do with the actual calculated difference between the
purchase consideration paid and the fair value of assets ascertained in the arrangement of
amalgamation.
Purchase consideration 478
Cash 6
Net assets fair value 15
Other intangibles 69
Goodwill 388
(b) Assume that Google has no acquisitions in 2015. (This is not actually the case and
the reporting became more complicated with the newly-formed Alphabet holding
company. Please go with my stated assumption for purposes of this exam.) At the
end of 2015, Google’s Goodwill is determined to be valued at $13,482. What entry
would Google need to record before preparing their financial statements for 2015?
Use the “arrows” approach we used in class to provide this information.
- Had there been no acquisitions made by Google in 2015. The Goodwill which is a
Fictitious asset which is just another name for the Excess paid purchase consideration
over the factual worth of the Company. It is a goodwill gesture which the Purchaser
company is supposed to account. if there is not going to be any future use of this
Goodwill account, then the same should be written off over a period of Five years from
the books of account. Goodwill is different from Brand Accounting. And the same has to
be separated off from the books as it has not salability
(3) When we discussed Cash and Cash Equivalents, we considered the possibility that a
company may have too much cash. Your instructor believes that Cisco has too much cash.
(a) Based on your review of Cisco’s financial statements, identify three indicators
(amounts or trends or items on the financial statements) that would suggest that they do
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have too much cash. You can only include one ratio in your three indicators – your
other indicators should be based on our class discussion.
3 indicators
- Rise in operating income in current year compared to previous year resulting in increase
in cash flow from operations. Ratio of Operating Profit has increased to 21%
- Issuance of Common Stock (Equity shares)
- Reduction in Debt Repayment as compared to previous year. It is possible, that the
company would have foreclosed certain loan from the balance sheet in order to improve
its Debt Equity ratio.
(b) When a company has too much cash, there are alternative (productive) uses they can
employ. Identify three different productive uses that Cisco is actually employing with
their cash.
- Restructuring of Assets. An estimate of $ 700 is put forward by the management which
includes Realignment of assets
- Securities lending. The company has been frequently engaged in lending products. The
employment of cash would in a future generate regular Cash inflows in the business at
good margins
- Stock Repurchase program. The company wishes to buy back its own securities which
are held in the Market by public investors. The same can be purchased which increases
the hold of the promotors in the business and their decision making in the business
supports the backing of their share holding also.
(4) Twitter reports Short-Term Investments on their Balance Sheet on 12/31/15 in the amount
of $2,583,877 (thousands).
(a) From the footnotes, determine the classification that Twitter is using for their
Short-Term Investments.
- Short term investment in marketable securities is one of the principle sources of the
company’s liquidity. The short term investments which the company has shown in
footnotes are
o US Government and agency securities including Treasury bills
o Corporate Notes, Certificate of deposit and commercial paper
(b) Subsequent to 12/31/15, assume the value of these investments decreases to
$2,577,680. What would be the impact of this change in value? That is, what accounts,
amounts, and financial statements would be affected? Use the “arrows” approach to
show the impact.
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- There would be a serious impact in the Cash flow statement. The same will reduce by $
6197 in the cash flow from investing activities. With the effect the non cash effect will
complicate the balance sheet / financial statement
(5) Explain the difference between a defined contribution retirement plan and a defined benefit
retirement plan (Hint: TRS). How does the reporting of these plans differ?
Defined contribution retirement plan specifies the future value of the retirement as on date. It is the
present value of expected and anticipated cost the company shall incur as a part of Retirement plan
Defined benefit plan provides specific benefit for the retirement. It is generally provided in the form
of regular payments over the life time beginning at what the plan decides the normal retirement age.
In Definedd Contribution, the accounting is done on the basis of Planned Assets. The entry of asset /
liability changes with time and estimation every year.
Whereras in Defined Beifit plan, based on the current interest rates and inflation, the regular
intervals or annuities of alter
(6) What is a LIFO reserve? Assuming rising prices, what is the problem for a company when it
depletes (reduces) its LIFO reserve (base layers)?
LIFO implies last in first out. In case of rising prices, the valuation of stock is very low. The reason
being the issues are done at the last prices traded which has increased over rising prices.
The problem when it depletes is that the company has to book revenue in the income tax which is
just a mere difference in projection of the future liability or asset and has nothing to with day to day
operations
(7) We discussed the use of estimates throughout our coverage of financial reporting. Review
pages 83 and 84 of the Cisco annual report. Identify two estimations that they use in their
financial reporting and explain why they are necessary.
Two estimations
- Software development costs. The software cost needs to be amortized over a period of a
defined useful life in books of account. the same is available as depreciation expenditure in
the books of accounts to claim in the income tax
- Income Tax Provision. It is the estimated income tax payable a perthe computation of income
for the purpose of income tax
(8) Does the use of the specific identification inventory costing method avoid the possibility of
manipulation of earnings? Explain.
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Yes, the stock is generally manufactured without the forecasting of price rise or price fall. It is a
routing activity which is a result of the production. The inventory valuation methods like the
FIFO and LIFO are the ones which manipulate earnings in the cases of huge market risks and
price instability
(9) In the context of financial reporting, what does forward-looking statements mean? Where will
you find this type of information in the annual report?
Forward booking statements and forward looking statements basically are nothing but providing for
the anticipated losses or expenses. As the bbooks are maintained in mercantile basis it is quite
essential to record the statements on accrual and estimation basis
(10) What does lower-of-cost-or-market (LCM) mean in the context of inventory reporting? Why is
it important in financial reporting for product companies?
Raw Material is generaly valued at Cost or Realizable value. It is a conservative approach followed
in the accounting standards which helps to give a rational picture of the financial statements. It
is important to mention the policy adopted by the company in the significant policies and other
notes to accounts which help the users to assess the gross profitability of the trading activities
done by the same
(11) Explain why a company might use a reverse-stock split.
Stock split can be done if the stock does not prove good results in the market. If the same looses
expectations inn public, the company needs to split the stock and restructure its capital in order
to remove unneccesary and excess unrealizable profits in the business which is not real. The
same is a part of Capital restructuring
(12) What are the differences between stock options and restricted stock? As an employee
receiving one of these types of share-based compensation, which might you prefer? Why? As
an employer offering these types of share based compensation, which might you prefer?
Why?
Stock options are those which give options to the employees to buy the stock a t any discounted
value. They are in lieu of other types of compensations. However the same doesn’t get coered
in the salary payments but is an additional benefit which is exclusively available to the
employees only. Restricted stock restrict the future purchasing of theshares by the identified
share holders. As an amployer I would prefer issuing restricted stock which will not give
voting rights to the members and will not form part of the decision making in the general
meeting.
(13) Many companies repurchase their own shares in the open market. Identify three reasons that
such repurchases may not benefit the company.
The companies should not repurchase their own shares for the following reasons
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- It reduces the liquidity of the company to a very large extent
- It implies faulty initial public offereing and there are chances of loosing faith in the stock
- It means that the company currently operates with excesss funds and gives a clear cut
negative signals to the investors who are bankers and suppliers.
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