Fife Company prepares quarterly reports following generally accepted accounting principles. For each of the items below,...

Fife Company prepares quarterly reports following generally accepted accounting principles. For each of the items below, state whether the method is in conformity with generally accepted accounting principles with an explanation of your answer and appropriate justification:

Fife takes a physical inventory at year-end for annual financial statements. Inventory and cost of sales reported in quarterly reports are based on estimated gross profit rates. Fife does have reliable perpetual inventory records.

The company records income tax expense for each quarter based on the expected tax rate for the year rather the tax rate based on the quarter’s income.

The company had a loss on a discontinued operation in the third quarter. The company plans to recognize one-half of the loss in each of the third and fourth quarters.

The company reports inventory at lower of cost or market. At the end of the second quarter, the market value was below cost. Fife did not report a loss for the quarter since they expected the year-end market value to exceed year-end cost.

Expert Solution

Answer to part (a):

The process followed by Fife of reporting inventory & cost of sales on estimated gross profit rates is against the generally accepted accounting principles which states that inventory should be valued at cost or net realisable value- whichever is lower. In this case, Fife is valuing it at a value which is higher than the cost (since it is being valued at a certain gross profit percentage). The reporting is incorrect.

Answer to Part (b)

In this case, Fife is violating the accrual concept which states that revenues & cost are reported in the financial statements as and when they are incurred & in the period to which they relate. In this case, Fife is recording the tax expense at the rate which it expects to be at year end rather than the tax rate which prevails during that particular quarter. The correct treatment would be to calculate the tax expense based on the tax rate of that particular quarter

Answer to part (c)

The company is violating the accrual concept in this case since it is not reporting the loss in the quarter in which it has accrued but carrying half the amount to next quarter. Accrual concept states that all losses and income should be reported in the period in which they accrue.

Answer to part (d)

Inventory has to be reconised at lower of cost or net realisable value. Also, as per principle of conservatism, anticipated losses should be reported but anticipated gains should not be reported.Hence, in this case, Fife is violating the generally accepted accounting principle since it is not reporting the inventory at lower market value nor it reporting the anticipated loss.

ekkarill92 answered 1 year ago

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