【文章內容簡介】 It is the opposite of FIFO. d: Explain the effect of an overstatement or understatement of inventories on the financial statements. In working out the effects of an overstatement (O) or understatement (U), it is necessary to realize that the ending inventory in one period is the beginning inventory of the next period. Then use the following relationships: Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold or Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory For example, let ending inventory in year 1 be overstated by $1,000 (., $1,000 of inventory was accidentally or fraudulently double counted at the end of year 1). Therefore, in year 1 cost of goods sold will be understated, ine overstated, and inventory overstated all by $1,000. Later, assuming that inventory is properly accounted for at the end of year 2, beginning inventory (which is ending inventory in year 1) is overstated causing cost of goods sold to be overstated and ine understated by $1,000. Because ending inventory in year 2 is correct, inventory on the balance sheet of year 2 would be correct. Hence, an inventory error washes out in year two. e: Calculate the lowerofcostormarket amount of an inventory. After inventory is valued using specific identification, weighted average, FIFO, or LIFO, that value is pared to the current replacement market price of each distinct product in inventory. If the market price is higher than cost, then nothing is done. If the market price is lower than cost, then ending inventory is writtendown to the lower replacement market price. Example: Suppose that Company X uses FIFO and that two items remain in inventory at year end. The original cost of these two items is $40 and their market value or replacement cost is $30. In this case, the inventory account would be written down to $30 and this $10 loss would be reflected on the ine statement (., the inventory account would fall and expenses would increase). Alternatively, if the replacement cost of these units were $50, then no writedown or additional expense recognition would occur. : Preliminary Reading Current Liabilities and the Time Value of Money a: Define liabilities, explain the difference between current and longterm liabilities, and describe the uncertanties about the value of some liabilities. Liabilities are probable future payments of assets (usually cash) or services (prepaid revenue) that a firm is obligated to make as a result of a past transaction. Current liabilities are expected to be paid within one year or operating cycle from the firm’s existing current assets. Longterm liabilities are obligations that will not be paid within the year or operating cycle. There are several uncertainties related to liabilities. Sometimes the payee is unknown. For example, when the board of directors declares a cash dividend (dividends payable) the stockholders at the future date of record are not known with certainty. Also, warranty payables are recognized at the time of sale but the payees are not yet known. Sometimes the due date is uncertain. Examples would be warranty payables and the prepayment for goods and services to be delivered at a future unspecified date. Finally, the amount may be uncertain. An example would be warranty payables. Also, at the end of the year a firm must estimate and recognize some expenses like utilities, pensions, taxes, employee benefits. b: Describe how accountants record and report estimated liabilities (such as warranties and ine taxes) and contingent liabilities. In some cases, the precise amount of a liability is not known, but the liability can be reasonably estimated. Warranties are recorded as: During period of sale: Warranty expense XX Estimated warranty payable XX When repairs made under warranty: Estimated warranty payable XX Parts inventory XX Cash XX Ine taxes are recorded as: A pany must estimate interim (quarterly) ine taxes (say 100): Provision for ine taxes (expenses) 100 Ine taxes payable 100 Then when taxes are determined (assumed to be greater than estimated, 115) and paid: Ine taxes payable 100 Provision for ine taxes 15 Cash 115 A contingent liability exists when, as a result of a past event, a firm is obligated to pay only if a future event occurs. The most frequent source of contingent liabilities is lawsuits for which future cash payments depend upon the result of court action. Disclosure depends on the ability to estimate the liability and likelihood of future payment of the liability. ? If the future payment is probable and reasonably estimable, then the loss (expense) and liability must be disclosed on the ine statement and balance sheet, respectively. ? If the future payment is reasonably likely or not reasonably estimable, then only footnote disclosure is required. ? If future payment is remote, then no disclosure is required. : Preliminary Reading LongTerm Assets a: Describe the difference between longterm assets and other kinds of assets. A longterm asset is an asset that has a useful life that is more than one year, is acquired for use in operations, and is not intended for resale to customers. Longterm assets are generally reported at their carrying value or book value. If however, the asset has lost its revenuegenerating ability, it may be written down. A plant asset is a tangible asset that is fixed or permanent. Property, plant, and equipment (PPamp。E) assets are longlived tangible assets used in the production or sale of other assets. PPamp。E assets’ long lives distinguish them from prepaid expenses and other current assets. PPamp。E assets are used and not sold (like inventory) during the business’s regular course of operations. Also, PPamp。E assets are not ultimately sold as would be done with interest or dividend