Savings accounts are usually classified as cash on the balance sheet.

To be reported as cash, an asset must be readily available for the payment of current obligations and free from contractual restrictions that limit its use in satisfying debts. Cash consists of coin, currency, and available funds on deposit at the bank. Negotiable instruments such as money orders, certified checks, cashiers checks, personal checks, and bank drafts are also vi ewed as cash. Savings accounts are usually classified as cash. Companies treat postdated checks and I.O.U.s as receivables not cash. temporary investments than as cash, include money market funds, money market savings certificates, certificates of deposit (CDs), and similar types of deposits and short-term paper (Analysis of Receivables) Presented below is information for Grant Company. 1. Beginning-of-the-year Accounts Receivable balance was $15,000. 2. Net sales (all on account) for the year were $100,000. Grant does not offer cash discounts. 3. Collections on accounts receivable during the year were $80,000. Instructions (a) Prepare (summary) journal entries to record the items noted above. (b) Compute Grants accounts receivable turnover ratio for the year. The company does not believe it will have any bad debts. (c) Use the turnover ratio computed in (b) to analyze Grants liquidi ty. The turnover ratio last year was 7.0Solution (A). Accounts Receivable. 100,000 Sales. Cash. 80,000 Accounts Receivable

100,000

80,000

(B). Accounts Receivable Turnover is equal to net sales divided by Average Trade Receivables . Net sales = 100,000 Average Trade Receivables = (15,000 +35,000)/ 2 = 50,000/2 = 25,0000 100,000 / 25,000=4.0 times Number of days to collect Receivable= 365/4.0= 91 days ( C). This company has definitely declined . As we can see it is turning receivables 4 times and it takes for them to collect the receivables 91 days. Just by looking a last years turnover ration which was 7.0 and this year is 4.0 is a major declination within this companys receivables. If this ratio decreases so does liquidity . Freight charges on goods purchased are not considered a period cost and therefore are not part of the cost of the inventory. Purchase Discounts Lost is a financial expense and is reported in the other expenses and losses sect ion of the income statement.LIFO liquidations can occur frequently when using a specificgoods approach. when inventory in base year dollars decreases Lifo layer is liquidated. Johnson Company had 400 units of "Tank" in its inventory at a cost of $4 each. It purchased 600 more units of "Tank" at a cost of $6 each. Johnson then sold 700 units at a selling price of $10 each. The LIFO liquidation overstated normal gross profit by 600 .. 700-600 ) * 10-4=600Dollar-value LIFO.Abner Company manufactures one product. On December 31, 2009, Abner adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was $180,000. Inventory data are as follows: Inventory at Year year-end prices $180,000 $252,000 373,750 393,750 Price index (base year 2009) 1.00 1.05 1.15 1.25

2009 2010 2011 2012

Compute the inventory at December 31, 2010, 2011, and 2012, using the dollar-value LIFO method for each year. Quantity in Ending Inventory at Current Prices $180,000 $252,000 Current Price Index 1.00 1.05 Quantity Ending Inventory at Bases Prices $180,000 $240,000 Split into Layers $180,000 $180,000 $ 60,000 $180,000 $ 60,000 $ 85,000 $180,000 60,000 75,000 Proper Price Index 1.00 1.00 1.05 1.00 1.05 1.15 1.00 1.05 1.15 Quantity in Ending Inventory at Dollar-Value LIFO $180,000 $180,000 63,000 $243,000 $180,000 63,000 97,750 $340,750 $180,000 63,000 86,250 $329,250

Year 2009 2010

/ /

= =

X X X X X X X X X

= = = = = = = = =

2011

$373,750

1.15

$325,000

2012

$393,750

1.25

$315,000

Inventory at December 31 , 2010 = $243,000 Inventory at December 31st, 2011 = $340,750 Inventory at December 31st, 2012 = $329,250 The major advantages of LIFO are the following: (1) It matches recent costs against current revenues to provide a better measure of current earnings. (2) As long as the price level increases and inventory quantities do not decrease, a deferral of income tax occurs in LIFO. (3) Because of the deferral of income tax, cash flow improves. Major disadvantages are: (1) reduced earnings, (2) understated inventory, (3) does not approximate physical flow of the items except in peculiar situations, and (4) involuntary liquidation issues. When prices are rising there will be a deferral of income tax. If inventory levels are stable or increasing cost assignments typically parallel the physical flow of goods. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes. Gross profit method. An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of March 12. The following additional data is available from the books: Inventory on hand, March 1 $ 84,000 Purchases received, March 1 11 75,000 Sales (goods delivered to customers) 120,000 Past records indicate that sales are made at 50% above cost. Instructions Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit method and determine the amount of the theft loss. Show appropriate titles for all amounts in your presentation Gross Profit on Selling Price Beginning inventory $ 84,000 Purchases 75,000 Goods Available 159,000 0.50 / (1.00 + 0.50) = 0. Less: (120,000 / 1.5) Cost + Gross profit = Selling Price C + 0.50C = 120,000 1.50C = 120,000 C = 80,000 Inventory Theft of goods Actual Inventory 33 1/3% 80,000 79,000 (19,000) 60,000

st

Beginning inventory Purchases Goods Available

$ 84,000 75,000 159,000

Sales Less: Gross profit (33.33% of 120,000) Sales Inventory Actual Inventory Theft of goods

120,000 40,000 80,000 79,000 60,000 (19,000)

Gross Profit on Selling Price 0.50 / (1.00 + 0.50) = 0.

33 1/3%

(Lower-of-Cost-or-Market) Sedato Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis.From the information above; determine the amount of Sedato Companys inventorySolution :

Item Number

Cost per unit

Replacement cost

Net realizable value

Net value less normal profit

Designated Market Value

LCM

Quantity

Inventory Value

1320

3.20

3.00

4.15

2.90

3.00

3.00

1,200

3,600

1333

2.70

2.30

2.90

2.40

2.30

2.40

900

2.160

1426

4.50

3.70

4.60

3.60

3.70

3.70

800

2.,960

1437

3.60

3.10

2.75

1.85

2.75

2.75

1,00

2,750

1510

2.25

2.00

2.45

1.85

2.00

2.00

700

1,400

1522

3.00

2.70

3.50

3.00

3.00

3.00

500

1,500

1573

1.80

1.60

1.75

1.25

1.60

1.60

3,000

4,800

1626

4.70

5.20

5.50

4.50

5.20

4.70

1,000

4,700

Net Realizable Value (NRV) = Estimated Selling Price - Cost of Completion and Disposal

Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use. For example, companies like Kellogg Co. consider the purchase price, freight costs, sales taxes, and installation costs of a productive asset as part of the assets cost. It then allocates these costs to future periods through depreciation. Further, Kellogg adds to the assets original cost any related costs incurred after the assets acquisition, such as additions, improvements, or replacements, if they provide future service potential. Otherwise, Kellogg expenses these costs immediately. 1Additional costs to be included in the cost of property, plant, and equipment are those related to asset retirement obligations (AROs). These costs, such as those related to decommissioning nuclear facilities or reclamation or restoration of a mining facility, reflect a legal requirement to retire the asset at the end of its useful life. The expected costs are recorded in the asset cost and depreciated over the useful life. All expenditures made to acquire land and ready it for use are considered part of the land cost. Thus, when Wal-Mart or Home Depot purchases land on which to build a new store, its land costs typically include (1) the purchase price; (2) closing costs, such as title to the land, attorneys fees, and recording fees; (3) costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, and clearing; (4) assumption of any liens, mortgages, or encumbrances on the property; and (5) any additional land improvements that have an indefinite life. For example, when Home Depot purchases land for the purpose of constructing a building, it considers all costs incurred up to the excavation for the new building as land costs. Removal of old buildings clearing, grading, and fillingis a land cost because this activity is necessary to get the land in condition for its intended purpose. Home Depot treats any proceeds from getting the land ready for its intended use, such as salvage receipts on the demolition of an old building or the sale of cleared timber, as reductions in the price of the land. The cost of buildings should include all expenditures related directly to their acquisition or construction. These costs include (1) materials, labor, and overhead costs incurred during construction, and (2) professional fees and building permits. Generally companies contract others to construct their buildings. Companies consider all costs incurred, from excavation to completion, as part of the building costs. But how should companies account for an old building that is on the site of a newly proposed building? Is the cost of removal of the old building a cost of the land or a cost of the new building? Recall that if company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building. In other words, all costs of getting an asset ready for its intended use are costs of that asset. The term equipment in accounting includes delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar fixed assets. The cost of such assets includes the purchase price, freight and handling charges incurred, insurance on the equipment while in transit, cost of special foundations if required, assembling and installation costs, and costs of conducting trial runs. Costs thus include all expenditures incurred in acquiring the equipment and preparing it for use

Regardless of the time of disposal, companies take depreciation up to thedate of disposition, and then remove all accounts related to the retired asset. Gains or losses on the retirement of plant assets are shown in the income statement along with other items that arise from customary business activities. Gains or losses on involuntary conversions, if unusual and infrequent, may be reported as extraordinary items. assume that Barret Company recorded depreciation on a machine costing $18,000 for 9 years at the rate of $1,200 per year. If it sells the machine in the middle of the tenth year for $7,000, Barret records depreciation to the date of sale as: Depreciation Expense ($1,200 * 1/2) 600 Accumulated DepreciationMachinery 600 The entry for the sale of the asset then is: Cash Accumulated DepreciationMachinery 7,000 11,400

[($1,200 * 9) + $600] Machinery 18,000 Gain on Disposal of Machinery 400 The book value of the machinery at the time of the sale is $6,600 ($18,000 2 $11,400). Because the machinery sold for $7,000, the amount of the gain on the sale is $400

Only actual interest (with modifications) should be capitalized. The rationale for this approach is that during construction, the asset is not generating revenue and therefore companies should defer (capitalize) interest cost. Once construction is completed, the asset is ready for its intended use and revenues can be earned. Any interest cost incurred in purchasing an asset that is ready for its intended use should be expensed. Capitalize no interest charges during construction. Under this approach, interest is considered a cost of fi nancing and not a cost of construction. Some contend that if a company had used stock (equity) fi nancing rather than debt, it would not incur this cost. The major argument against this approach is that the use of cash, whatever its source, has an associated implicit interest cost, which should not be ignored. 2. Charge construction with all costs of funds employed, whether identifi able or not. This method maintains that the cost of construction should include the cost of fi - nancing, whether by cash, debt, or stock. Its advocates say that all costs necessary to get an asset ready for its intended use, including interest, are part of the a ssets cost. Interest, whether actual or imputed, is a cost, just as are labor and materials. A major criticism of this approach is that imputing the cost of equity capital (stock) is subjective and outside the framework of a historical cost system. 3. Capitalize only the actual interest costs incurred during construction. This approach agrees in part with the logic of the second approachthat interest is just as much a cost as are labor and materials. But this approach capitalizes only interest costs incurred through debt fi nancing. (That is, it does not try to determine the cost of equity fi nancing.) Under this approach, a company that uses debt fi nancing will have an asset of higher cost than a company that uses stock fi nancing. Some consider this approach unsatisfactory because they believe the cost of an asset should be the same whether it is fi nanced with cash, debt, or equity. To qualify for interest capitalization, assets must require a period of time to get them ready for their intended use. A company capitalizes interest costs starting with the first expenditure related to the asset. Capitalization continues until the company substantially readies the asset for its intended use. Assets that qualify for interest cost capitalization include assets under construction for a companys own use (including buildings, plants, and large machinery) and assets intended for sale or lease that are constructed or otherwise produced as discrete projects (e.g., ships or real estate developments). Examples of assets that do not qualify for interest capitalization are (1) assets that are in use or ready for their intended use, and (2) assets that the company does not use in its earnings activities and that are not undergoing the activities necessary to get them ready for use. Examples of this second type include land remaining undeveloped and assets not used because of obsolescence, excess capacity, or need for repair.

Contingent liabilities. Below are three independent situations. 1. In August, 2012 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Wesley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. 2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Greer Co. on October 4, 2012. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $800,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount. 3. Quinn is involved in a pending court case. Peetes lawyers believe it is probable that Quinn will be awarded damages of $1,200,000. Instructions Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. The Wesley Company should report the notes in the financial statement due to the pending law suit which is a liability. This note that needs to be reported should state the min and max amount ($250,000 -$500,000) of money that may be lost. The amount that would be probable needs to be recorded as a loss which would be debited and a credit to the settlement of the liability which would be 600,000 in this case. The Greer CO should state the amount of the law suit, the reason of the accrual and the range of the possible loss. If the estimated loss can only be defined as a range of outcomes, the USA approach generally results in recording the low end of the range ($600,000). When it comes to Quinn, he should not report the accrued amount until he has gained/ realized it. Also the amount of 1,000,000 should be disclosed as a gain contingency in the notes only when a high probability exists for realizing them.