chapter 4 - Kelly Legner Acct 815 Chapter 4 Exercises 6 In...

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Kelly Legner Acct 815 Chapter 4 Exercises 6. In periods of rising prices and assuming the company has not previously liquidated older layers of inventories, LIFO reports ending inventories at prices that can be significantly lower than replacement cost. As a result, balance sheets for LIFO companies do not accurately represent the current investment that the company has in its inventories. If valued at FIFO, the reported amount would have been more. If the cost are lowing than using the LIFO method would carry the higher balance. Also, the ending inventory asset value, and therefore total assets, is higher under FIFO and lower under LIFO. In contrast, in a period of declining inventory costs and stable output prices, all of the answers here will reverse 7. Examples of potentially unrecorded assets on balance sheets include: Excess of replacement values over costs for plant assets. LIFO inventory reserve. Excess of market value over adjusted cost of equity in nonconsolidated subsidiaries and in affiliates. Intangibles--recognized firm name, product name, or brand name not capitalized. Proved reserves of extractivetype companies carried at substantially less than market value of the product less extraction costs. Human (intellectual) capital. Value of savings on shortterm credit lines where maximum interest payable is currently below bank prime rate. The analyst must remember that book values are only the starting point for accounting- based valuation. If unrecorded assets have economic value, they will eventually be recognized through higher future abnormal earnings (residual income). This means the analyst must consider the impact of unrecorded assets when projecting future profitability for valuation purposes. 9. a. 1. Average total life span of plant and equipment:
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Kelly Legner Acct 815 Chapter 4 Gross plant and equipment Current year depreciation expense 5549/329= 16.87 years 2. Average age of plant and equipment: Accumulated depreciation Current year depreciation expense 2999/329= 9.12 years 3. Average remaining life of plant equipment: Net plant and equipment Current year depreciation expense 2550/329= 7.76 years b. Generally, these ratios can be used to assess a company's depreciation policies both over time (temporal) and for comparative purposes with other companies in the same industry. An analyst must take care whenever comparisons are made between companies. There often are economic reasons for different depreciation methods and assumptions, which can be obscured in a simple restatement of results. For example,
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This note was uploaded on 05/23/2011 for the course ACCT 815 taught by Professor Fontana during the Summer '09 term at Governors State University.

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chapter 4 - Kelly Legner Acct 815 Chapter 4 Exercises 6 In...

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