Chapter 8 - Solution Manual

B trading securities are reported as current assets

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b. Trading securities are reported as current assets on the balance sheet. Individual held-to- maturity and available-for-sale securities are reported as either current assets or investments as appropriate. c. The individuals supporting current value maintain that all gains and losses affecting the company during an accounting period that can be measured should be recorded and reported. Since current values are generally available for marketable securities, proponents of current value accounting hold that these current values should be reported on the annual financial statements. The individuals who fear that current value accounting might allow earnings management are concerned about gains trading. A manager using a gains trading strategy would transfer securities that have declined in value to a long-term asset account and retain those securities that have increased in value under the temporary investment category. Case 8-2 a. The average cost method is based on the assumption that the average costs of the goods in the beginning inventory and the goods purchased during the period should be used for both the inventory and the cost of goods sold. The FIFO (first-in, first-out) method is based on the assumption that the first goods purchased are the first sold. As a result, the inventory is at the most recent purchase prices, while cost of goods sold is at older purchase prices. The LIFO (last-in, first-out) method is based on the assumption that the latest goods purchased are the first sold. As a result, the inventory is at the oldest purchase prices, while cost of goods sold is at more recent purchase prices. b. In an inflationary economy, LIFO provides a better matching of current costs with current revenues because cost of goods sold is at more recent purchase prices. Net cash inflow is generally increased because taxable income is generally decreased, resulting in payment of lower income taxes. c. Where there is evidence that the utility of goods to be disposed of in the ordinary course of business will be less than cost, the difference should be recognized as a loss in the current period, and the inventory should be stated at market value in the financial statements. In accordance with the concept of conservatism, inventory should be valued at the lower of cost or market. Case 8-3
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146 a. Inventory cost should include all reasonable and necessary costs of preparing inventory for sale. These costs include not only the purchase price of the inventories, but also the other costs associated with readying inventories for sale. b. The lower of cost or market rule produces a realistic estimate of future cash flows to be realized from the sale of inventories. This is consistent with the principle of conservatism, and recognizes (matches) the anticipated loss in the income statement in the period in which the price decline occurs.
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