Homework Solutions - Ch 20

Homework Solutions - Ch 20 - Exercise 20-1 Requirement 1...

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Exercise 20-1 Requirement 1 January 1, 2006 ($ in millions) Retained earnings . ......................................................................... 30 Inventory (cumulative effect) * .................................................. 30 2005 2004 Total * Cost of goods sold (FIFO) . ....................................................... 40 38 Cost of goods sold (average) . ................................................... 56 52 Difference . ............................................................................. 16 14 30 Since the cost of goods available for sale each period is the sum of the cost of goods sold and the cost of goods unsold (inventory), a $30 million difference ($16 + 14) in cost of goods sold due to using FIFO rather than Average means there also is a $30 million difference in inventory. The cumulative prior year difference in cost of goods sold is reflected as a difference in prior years’ income and therefore the balance in retained earnings. Requirement 2 C OMPARATIVE I NCOME S TATEMENTS ($ in millions) 2006 2005 Revenues $420 $390 Cost of goods sold (average) (62) (56) Operating expenses (254) (250) Net income $104 $ 84 Requirement 3 Calculations ($ in millions) : 2004 Revenues $380 Cost of goods sold (FIFO) (38) Operating expenses (242) Net income $100 Dividends (20) Retained earnings, Jan. 1, 2004 0 Retained earnings, Jan. 1, 2005 $ 80
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Exercise 20-1 (concluded) Requirement 4 Calculations ($ in millions) : 2004 FIFO Average Difference Revenues $380 $380 Cost of goods sold (38) (52) Operating expenses (242) (242) Net income $100 $ 86 $14 Comparative Statements of Shareholders’ Equity (not required) ($ in millions) Common Stock Additional Paid-in Capital Retained Earnings Total Shareholders’ Equity Jan. 1, 2005* 66 Net income 84** Dividends (20) Jan. 1, 2006 130 Net income 104** Dividends (20) Jan. 1, 2007 214 * Decreased from $80 million to $66 million to reflect the effect of the change in inventory methods. **Calculations ($ in millions) : 2006 2005 Revenues $420 $390 Cost of goods sold (average) (62) (56) Operating expenses (254) (250) Net income $104 $ 84
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Exercise 20-9 Requirement 1 In general, we report voluntary changes in accounting principles retrospectively. However, a change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method reflects a change in the (a) estimated future benefits from the asset, (b) the pattern of receiving those benefits, or (c) the company’s knowledge about those benefits, and therefore the two events should be reported the same way. Accordingly, Clinton reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from now on. The undepreciated cost remaining
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This note was uploaded on 09/27/2008 for the course BUS 1000 taught by Professor Professor during the Spring '08 term at Cal Poly.

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Homework Solutions - Ch 20 - Exercise 20-1 Requirement 1...

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