Fin Exam - ACC 120a Final Examination Winter 2011...

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ACC 120a Final Examination Winter 2011 (simmonds) Student’s Name:____Kiet Tham_________________________ Problem 1 (20 pts.):_____________ Problem 2 (20 pts.):_____________ Problem 3 (30 pts.):_____________ Problem 4 (30 pts.):_____________ Total (100 pts.):____________
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Problem 1 The president of Jeanette Corporation is in a dilemma regarding which inventory method (LIFO or FIFO) to use. The controller of Jeanette provides the following list of factors that should be considered before making a choice. 1. Jeanette Corporation has borrowed money during the current month and has entered in a debt contract. The covenants of this contract require Jeanette Corporation to achieve a certain amount of net income and maintain a certain amount of working capital. 2. The Board of Directors of Jeanette is contemplating a proposal to reward the top management of Jeanette Corporation with an incentive bonus that is based on accounting net income. 3. The vice president of finance suggests using the LIFO method for tax purposes and the FIFO method for financial reporting purposes. With lower taxable income, Jeanette Corporation can save on the current tax it pays, and at the same time, it can show higher income in the financial reports and “look good.” 4. The controller cautions that while the LIFO method may reduce the current period tax liability, “it could hit us hard when things are not going so well.” This potential problem with the LIFO method could be “avoided if we use FIFO in the first place.” 5. However, the president would like to adopt the method that provides both a better application of the matching principle and a more current measure of inventory on the balance sheet. 6. The controller suggests that Jeanette should adopt the FIFO method since higher accounting income means a higher stock price. REQUIRED: The president of Jeanette Corporation has asked you to write a report evaluating the pros and cons of each of the issues raised above. In answering this question, assume that Jeanette Corporation expects an upward trend in inventory prices. 1. In time of rising prices, LIFO is more suitable because materials are issued at the current market prices which are high. But this method will show lower income, therefore in order to meet the covenant’s requirement; FIFO should be use since it will generate higher income and higher working capital. 2. FIFO would show a higher income which will generate higher bonuses.
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Fin Exam - ACC 120a Final Examination Winter 2011...

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