Question

Using Intermediate Accounting 16 edition by Kieso, Weygandt, Warfield answer the following:

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:

a. 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.

b. 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.

c. 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.

d. 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.

Answer 1

a. Approach followed by Fife is not in line with GAAP as it prescribes to report inventory as per FIFO OR LIFO OR weighted-average cost; and specific identification are acceptable accounting methods for determining cost of inventory. Carrying value is determined as per Lower of cost or market value

b. Statement is correct, while reporting quaters income, tax rate of that particular quarter is taken.

c. The above statement is incorrect. US GAAP rules says to report loss of the discontinued operations in the period in which it has occured and it cannot be deffered.

d. Write down of inventory is done only when it is absolute necessary and if the degration in value is temporary than it is not necessary to write down the value. US GAAP does not allow write up of values which have been written dowin in case they have recovered their values. Thus it is not compulsary to write down inventory value in between quarters.