When valuing inventories using the lower-of-cost-or market (LCM), which of the following is/are true?
Answer(s): A
US GAAP requires that inventory be valued at the lower of cost or market value. This means that if the inventory value falls below the cost (FIFO, LIFO, average cost, etc.) for reasons which include price changes, obsolescence, damage or theft, the loss in value must be recognized immediately. Specifically, the inventory must be "written-down" in value and the loss recognized on the income statement. In the application of this principle, "market value" is defined as current replacement cost, except that this value cannot exceed the net realizable value (NRV) or fall below NRV minus the normal profit margin.
In the full cost method, oil firms:
Answer(s): D
In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue-generating assets, in which case, they are capitalized.
Which of the following will most affect the valuation of a firm's receivables?
The most important factor that will affect the valuation of receivables, of the choices given, is the allowance for uncollectible accounts. This is so, because receivables are reported on the balance sheet as "net realizable value;" i.e., total amount of receivables, less an allowance for uncollectible accounts. If management understates this allowance, the realizable value of accounts receivable will be overstated and the firm's liquidity position will not be as strong as it would appear.
Bay Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would
The T-bill is a cash equivalent and has no effect on the statement of cash flows. Cash equivalents are short- term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturities that they present insignificant risk of changes in value because of the changes in interest rates. They only include investments with original maturities to the holder of 3 months or less.
The following data have been extracted from the financial statements of a firm for two years, 1985 and 1986:1985 1986Assets 4,376 5,214Sales 8,312 7,845Receivables 985 756Inventory 1,108 1,243COGS 5,494 4,971The inventory turnover ratio and the average inventory processing period for 1986 equal ________.
One of the properties of the inventory that is of interest is the rate at which it turns over i.e. the average processing time it takes for a given inventory item to be sold. This can be estimated using either net sales (as is the case with receivables) or the cost-of-goods-sold. COGS is preferable since it does not include the profit margins involved in net sales. Therefore, two relevant ratios are: a. Inventory turnover ratio = COGS/average inventory. b. Average inventory processing period = 365/inventory turnover. For 1986, the average inventory equals (1243+1108)/2 = 1,176. Inventory turnover ratio = 4,971/1,176 = 4.23. Average inventory processing period = 365/4.23 = 86.31 days.
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