Evaluate each method in terms of its effect on cash

Question

Accounting for Inventory (  put a link for the article to support your answer )

One of the primary differences between US GAAP and international accounting standards is the use of LIFO is permitted for US companies.

How does LIFO affect a company's financial results?

 In your opinion, should LIFO be a permitted inventory costing methods?

Why might companies that currently use LIFO oppose its elimination?

Problem 1

The following is a list of account titles and amounts (in millions) from a recent company annual report:

 

Buildings and improvements	$  182	Goodwill	$  324
Prepaid expenses	135	Machinery and equipment	521
Allowance for Doubtful Accounts	41	Accumulated Depreciation	382
Other noncurrent assets	248	Inventory	421
Accumulated amortization	800	Other intangibles	1,452
Cash and cash equivalents	710	Accounts receivable	685

Required:

Prepare the asset section of the balance sheet for this company, classifying assets into Current Assets, Property, Plant and Equipment (net), and Other Assets.

Problem 2

Assume that a company sold a delivery van that had been used in the business for three years. Records of the company related to the van reflect the following:

 

                                Delivery van cost                                        $42,500

                                Accumulated Depreciation                            25,200

 

Required:

1. Prepare the required journal entry to record disposal of the van, assuming the following sales amounts for cash:
   1. $17,300
   2. $20,500
   3. $15,800
2. Based on the situation above, explain the effects of the disposal of an asset on the company's financial statements. 

 

Problem 3

At the beginning of the year, a company bought three new machines for its production facilities. The machines were all different so each had to be recorded separately. Below are the costs related to each purchase.

 

	Machine A	Machine B	Machine C
Amount paid for the machine	14,000	28,500	11,200
Installation cost	600	1,000	400
Delivery cost	600	800	600
Insurance cost	450	600	400

 

At the end of the first year, each machine had been operated 5,200 hours

 

Required:

1. Compute the cost of each machine.
2. Prepare the journal entry to record depreciation expense at the end of year 1, assuming the following:

 

Machine	Life	Residual Value	Depreciation Method
A	6 years	1,000	Straight-line
B	50,000 hours	2,000	Units-of-production
C	5 years	1,000	Double-declining-balance

 

Problem 4

You are a financial analyst for your company and have been asked to determine the impact of various depreciation methods on the company's financial statements. Your analysis is based on a machine costing $110,000 with an estimated useful life of 12 years and an estimated residual value of $8,000. The machine also has an estimated useful life in output of 220,000 units. Actual output was 21,000 units in year 1 and 15,000 units in year 2.

 

Required:

1. For years 1 and 2, prepare depreciation schedules (round all results to the nearest dollar) for the asset assuming:
   1. Straight-line method
   2. Units-of-production method
   3. Double-declining-balance method

 

Year	Computation	Depreciation Expense	Accumulated Depreciation	Net Book Value
Straight-line:
Acquisition
Year 1
Year 2
Units-of-production:
Acquisition
Year 1
Year 2
Double-declining-balance:
Acquisition
Year 1
Year 2

1. Evaluate each method in terms of its effect on cash flows, fixed asset turnover, and earnings per share. Assuming that the company is most interested in maintaining a high EPS during year 1 and 2, which method would you recommend? Assuming that the company is most interested in reducing taxes during year 1 and 2, which method would you recommend?