Acc 422 Preview Full Class
- 1. Week 1 – DQ 1 Consider how an organization must manage cash, receivables, and inventory. Which of the three variables is the most important to manage? Is one more susceptible to fraud and errors than the others? Explain your answer. How would a misstatement in each affect the organization? Response #1Evidently, inventory, receivables, and managing cash are all important. However, cash is what keeps the whole organization going. So from this point of view, I think managing cash is the most important to manage. Week 1 – DQ 2 What is the perpetual method of tracking inventory? How does it differ from the periodic method of tracking inventory? Why would a company choose one method over the other method? Which is the best method? Why? Response #1 What is the perpetual method of tracking inventory? The perpetual method of tracking inventory is a situation where a company records all purchases and sales of goods directly in the inventory account as the event occurs. How does it differ from the periodic method of tracking inventory? Week 1 – DQ 3 What are the different ways to estimate bad debt? How does this affect net income? What does Generally Accepted Accounting Principles (GAAP) require? Why? Should all companies have bad debt? Explain your answer. Response #1Two ways to estimate bad debt are the allowance method and the direct write-off method. The allowance method uses an estimate of the bad debts resulting from the current receivables, recognizing the net realizable value of the receivables on the balance sheet by increasing the ‘Allowance for Doubtful Accounts’ account to offset the balance in ‘Accounts Receivables.’ Net income is more accurate with this approach because the estimate of bad debt expense is recorded each period that the sales have taken place, which complies with GAAP requirements. On the other hand, the direct
- 2. write-off method records a loss once the account has been deemed uncollectible, which will require an entry to decrease ‘Accounts Receivables’ and increase ‘Bad Debt Expense.’ Disclosure Analysis Name ACC/422 Date Instructor Name
- 3. Disclosure Analysis Chipotle Mexican Grill, Incorporated a public limited liability company has a mandatory obligation to prepare financial statement in a manner prescribed in the Financial Accounting Standards Board - FASB standards. These are guidelines intended to promote corporate governance through objective financial reporting. In order for the financial statements to be complete, it is necessary that proper disclosures in accordance to the FASB standards are followed. This paper will consider in detail the areas of accounts receivable, inventory, cash, and cash equivalents with regard to reporting from the consolidated balance sheet, income statement, and cash flow statements of Chipotle Mexican Grill, Incorporated. Week 1 – Summary Response #1 One of this week's topics that was interesting was on cash control. I learned that it is one of the most important functions in a company and having effective cash control will only benefit the company. There are many different methods to obtain effective cash flow, such as bank reconciliation and petty cash for small items. The person reconciling the bank statements should not be the one that has control over the cash because there is no one to double check and make sure that fraud is not taking place. This can be difficult when working in a smaller company, as there may not be very many employees to delegate different tasks to. Even in small company's there should always be more than one person who knows how the cash is being spent. Even if there is not fraud happening, there is human error. What one person misses, another could spot. This could save the company time and money in the long run. Week 2 – DQ 1 Under what circumstances would a company need to estimate its inventory? What are the differences between using the gross profit method and retail inventory method for estimating inventory?
- 4. Which method of estimation, gross profit or retail inventory, is best? Explain your answer. Response #1 A company would need to estimate their inventory if a large theft incident occurred or some type of disaster suddenly happened. The difference between using the gross profit method and retail inventory method for estimating an inventory is the retail method uses a formula of the current retail prices to convert to cost. The gross profit method estimates an inventory by using the previous year’s average gross profit margin. Week 2 – DQ 2 What are the criteria for capitalization of fixed assets? What items are included in the cost of a fixed asset? Should interest be included in the cost of a fixed asset? Explain why or why not. Response #1Property, plant, and equipment are called fixed assets. Fixed assets must be installed and ready to use in order to capitalize costs related to fixed assets. In addition, they must meet one of the three conditions: "the useful life of the asset must be increased, the quantity of units produced from the asset must be increased, and the quality of the units produced must be enhanced" (Kieso, Weygandt, & Warfield, p. 491). The costs of fixed assets also include all expenditures made to acquire the asset. For example, when purchasing buildings, costs incurred may include material, labor, overhead, and any fees and licensing, or for example, when equipment is acquired, costs include delivery, installing, and testing. Week 2 – DQ 3 How do we account for the disposition of fixed assets? What are the differences in how the exchanges of assets are handled, pending on whether they are similar or dissimilar? What is the rationale for these differences? What is the impact to the companies’ financial statements? Response #1We account for the disposition of fixed assets by removing the corresponding total accumulated depreciation and the asset’s total historical cost. Losses and gains are accounted for based on how an asset was disposed. When the asset was sold for cash, losses and gains are recognized in the income statement. The way the asset was exchanged for a similar or dissimilar asset will affect how gains or losses will be recognized in an exchange of assets. Week 2 – Summary
- 5. Response #1 This week was another week filled with a ton of information. One of the things I learned this week was about the lower of cost or market concept. This concept pertains to inventory and how a company can use it. The lower of cost or market concept is when inventory falls below its original purchase price the company records the loss. Some of the reasons that the price could fall below the purchase price is obsolescence, price- level changes, or damaged goods. This concept is useful because this keeps the company from overstating inventory and the way that the economy is today, prices for items seem to change regularly. Week 3 – DQ 1 What is the purpose of depreciation? Does the book value of a fixed asset (cost minus accumulated depreciation) communicate to a user what the asset is worth? Explain why or why not. Should the financial statements reflect the value of fixed assets? Explain why or why not. Response#1According to Chapter 11 of our text, depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. In other words, depreciation occurs when a company writes off the cost of long-lived assets over several periods. I do not believe that the book value of a fixed asset communicates to a user what the asset is worth. Week 3 – DQ 2 What are the different methods used to calculate depreciation? How does a company decide which method it should utilize? How does its choice affect the financial statements? Should companies standardize the method of depreciation to enhance comparability? Explain your answer. Response #1The methods used to calculate depreciation are the activity method, the straight-line method, decreasing charge methods (sum-of-the-years'-digits and declining-balance method), and special depreciation methods (group and composite methods and hybrid or combination methods). The activity method is based on the
- 6. assumption that depreciation is "a function or use or productivity, instead of the passage of time" (Kieso, Weygandt, & Warfield, 2007, p. 525). Week 3 – DQ 3 What is an intangible asset? Should all intangible assets be subject to amortization? Explain why or why not. Why are some intangible assets not amortized? What is the implication to the financial statements? Response #1An intangible asset is something that lacks physical existence, and it is not a financial instruments. Some intangible assets examples are goodwill, trademarks or trade names, franchises or licenses, copyrights, and patents. All intangible assets should not be subject to amortization. In fact, some intangible assets are not amortized. These intangible assets typically are considered to have an indefinite useful life, and therefore, are not amortized. Week 3 – DQ 4 Why are research and development costs expensed? Is this consistent with how other similar costs are handled? Explain why or why not. Should research and development costs be expensed? Explain why or why not. Response #1Research and development costs are expensed because these are costs that are used in the creation of intangible assets within the company. This is consistent with how similar costs are handled, either through expenses or amortization. Research and development costs should be expensed because the company would have other fees and they cost the company money because of the creation. These fees may include architectural, attorney, laboratory, designing, and pre-production costs. Week 3 – Summary Response #1 Another week of tons of information. The discussions were great and the points some of the other classmates were helpful. One thing I learned more about was depreciation. Depreciation is "the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those period expected to benefit from the use of the asset." There are four types of depreciation methods; activity method, straight-line method, decreasing charge methods, special depreciation methods. The
- 7. most commonly used method is the straight-line method; it is the simplest of the methods. Week 4 – DQ 1 What are the criteria for classifying an item as a current liability? What are some examples of current liabilities? Why is it important to classify a portion of long-term debt on a yearly basis as a current liability? What is the implication of misclassifying a liability as current or long-term? Response #1 Current Liabilities are obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities. Unearned revenues, income taxes payable, sales taxes payable, dividends payable, notes payables, and accounts payable are some examples of current liabilities. When a long-term matures (let’s say is to be paid within the next 18 months), it is important to classify this portion of the long-term debt as a current liability because of its short time-frame and urgent requirement to be paid. Week 4 – DQ 2 What is a contingency? Why are contingencies important to users of financial statements? What are the criteria for recording contingencies? Should companies record a liability for threatened litigation? Explain why or why not. Response #1A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Users of financial statements use this information to determine the future of the company, whether it faces some positive or negative impacts. Gain contingencies are not usually reported, unless the contingencies are tax loss carry-forwards. Week 4 – DQ 3 What is a bond? What are some features of a bond? How do you value bonds? What factors can affect that value?
- 8. Response #1 A bond is a debt security that an authorized issuer owes the holders a debt. A bond is somewhat like a loan. Features of a bond are the nominal, principal, or face amount. This is the amount on which the issuer of the bond pays interest and most commonly is paid at the end of the term. Week 5 – DQ 1 What are the differences between a direct-financing and a sales-type lease for a lessor? Why would a lessor provide direct-financing to a lessee? What types of organizations provide direct-financing leases? Response #1A lease is considered a sales type lease if it meets one or more of the capital lease criteria and a manufacturer's or dealer's profit or loss is given to the lessor. On the other hand, a direct financing lease differs from a sales type lease in that there is no manufacturer or dealer's profit or loss is given to the lessor. Week 5 – DQ 2 What are the criteria for classifying a lease as operating or capital? Why is there a difference between the two? What are the implications of an operating lease versus a capital lease on an entity’s financial statements? Response #1The criteria and characteristics of operating lease is that operating lease usually a shorter-term lease under which the lessor is responsible for insurance, taxes, and upkeep. An operating lease maybe canceled by the lessee on short notice. The criteria and characteristics of capital lease is that capital lease is typically a longer-term, fully amortized lease under which the lessee is responsible for maintenance, taxes, and insurance. A capital lease is usually not cancelable by the lessee without penalty. Week 5 – DQ 3 What is residual value? What is the implication to the lessee if the residual value is guaranteed or unguaranteed? What is the implication to the lessor?
- 9. Response #1The residual value of an asset would be the amount of profit an organization might expect to gain from the sale of that asset. Week 5 – DQ 4 What are the advantages of operating and capital leases? What are the disadvantages? Why would a company pick one over the other? Response #1A couple of advantages of operating leases: can be for short periods of time and the risk is shifted from the lessee to the lessor. A couple of advantages of capital leases are: evidence of the lease on the balance sheet of the lessee and option to purchase at the end of end of the lease.