Question

1.Assume that you are the president of your company and paid a year-end bonus according to the amount of net income earned during the year. When prices are rising, would you choose a FIFO or weighted average cost flow assumption? Explain, using an example to support your answer. Would your choice be the same if prices were falling?

2. Compare and contrast the direct write-off method and the allowance method for bad debts. At a minimum, please consider the following in your answer:

• When is the expense for uncollected accounts receivable recognized under each method?
• Why is the direct write-off method not considered to follow generally accepted accounting.

3.Why are the costs of plant/long term assets recovered through depreciation vs. expensed out during the period purchased? Choose one of the following depreciation methods to discuss: straight line, units of production, declining balance. Share how depreciation using this method is calculated and provide an example of when this would be the most ideal method for application.

4.What distinguishes a current liability from a long-term liability? Why is it so important to report these separately? How is this information used in decision making applications?

5.Define coupon and market/effective interest rates as they determine bond pricing at par, premium, or discount values.

Answer 1

As per the policy, only one question is allowed to answer at a time, so answering Q1 here :

Answer 1)

Being the President of the company, it is would be better to have lower Bonus bill. As the Year end bonus is based on the amount of net income earned during the year, so lower the net income will only help to lower the Bonus bill. The low net income target is achieved through lower cost of Closing Inventory. Thus, under the rising prices, we should go for the Weighted average cost method of valuing the Closing Stock instead of FIFO method because that will calculate the Closing inventory at lower average price of initial lower price and later year’s higher price.

For example :

Closing Inventory of Raw Material (RM) : 1000 units

Beginning price of RM was $100 and Ending price of RM is $200.

The Average price of RM = $150

The Value of ending inventory in Weighted Average case is 1000 * $150 = $150000 instead of 1000 * $200 = $200000 in case of FIFO method of inventory valuation.

In the case of falling prices to have lowest Bonus bill, we would go for the FIFO method of inventory valuation , which will provide us lower ending inventory cost because ending prices would be the lowest prices of the year.