Ebook Financial accounting (11th edition): Part 2

Required: 1. Determine the amounts for ending inventory, cost of goods sold, and gross margin under the following costing alternatives. Use the perpetual inventory method. Round amounts to the nearest dollar. a. FIFO b. LIFO c. Average cost (calculate unit costs to the nearest cent) 2. Interpretive Question: Which alternative results in the highest gross margin? Why? L O 9 Unifying Concepts: Inventory Estimation Method McCarlie Clothing Store has the following information available: P 7-79 Purchases during March 2012 . . . . . . . . . . . . . . . . . . . . . Inventory balance, March 1, 2012 . . . . . . . . . . . . . . . . . . Sales during March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average gross margin rate for the last three years. . . . . . . Cost $250,000 75,000 Selling Price Other $400,000 115,000 550,000 52% Required: 1. On the basis of this information, estimate the cost of inventory on hand at March 31, 2012, using the gross margin method. 2. How accurate do you think this method is? Inventory and the Cost of Sales Chapter 7 329 C H A P T E R 8 Operating Cycle After studying this chapter, you should be able to: L O 1 Account for the various components of employee compensation expense. In addition to wages and salaries, companies also compensate their employees through bonuses, stock options, pensions, and other benefits. Computing total compensation expense involves a significant element of estimation and assumption. L O 2 Compute income tax expense, including appropriate consideration of deferred tax items. Reported income tax expense reflects all of the tax implications of transactions and events occurring during the year. Because financial accounting rules and income tax rules are not the same, income tax expense this year sometimes reflects items that will not actually impact the legal computation of income taxes until future years. L O 3 Distinguish between contingent items that should be recognized in the financial statements and those that should be merely disclosed in the financial statement notes. A contingent item is an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs. Contingent losses are recognized when they are probable and estimable; they are not recognized but are only disclosed when they are just possible. L O 4 Understand when an expenditure should be recorded as an asset and when it should be recorded as an expense. Conceptually, a cost should be recorded as an asset whenever it has a probable future economic benefit. In practice, it is frequently quite difficult to tell when a cost should be recorded as an asset (capitalized) and when it should be recorded as an expense. L O 5 Prepare an income statement summarizing operating activities as well as other revenues and expenses, extraordinary items, and earnings per share. Because the items in the income statement are carefully arranged and sequenced, emphasis is placed on the portion of income that is generated by the ongoing core operations of the business. S E T T I N G T H E S TA G E n 1855, John D. Rockefeller started his business career in Cleve-land as a bookkeeper. By saving his earnings, he acquired some investment capital, and, with a partner, he put up $4,000 to begin an oil refinery in Cleveland in 1862. Rockefeller subsequently cre- ated an empire of oil companies located in various states, which were eventually consolidated into a holding company called the Standard Oil Company of New Jersey.1 In 1911, in response to many people’s concerns that Big Busi-ness was too powerful, the U.S. Supreme Court mandated the break-up of the Standard Oil Company into 34 smaller companies. Many of those companies are still very well known, as evidenced by the partial list contained in Exhibit 8.1. The largest piece of the dismembered Standard Oil Trust was the Standard Oil Company of New Jersey, which changed its named to Exxon in 1972. Exxon now operates in virtually every country in the world, exploring for oil, producing petrochemical products, and trans-porting oil and natural gas. On December 1, 1998, Exxon (the former Standard Oil Company of New Jersey) announced an agreement to merge with Mobil (the former Standard Oil Company of New York), thus reuniting these two pieces of the vast empire built by Rockefeller. The formal joining of the two companies was completed in 1999, creating ExxonMobil. As of December 31, 2008, the company had worldwide proven oil reserves of 12.0 billion barrels and proven natu- ral gas reserves of 65.9 trillion cubic feet. In Chapters 6 and 7, we discussed accounting for sales and the cost of inventory sold. For firms that sell a product, the cost of the inventory sold typically represents the largest expense. For example, cost of goods sold was the largest expense category for ExxonMobil in 2008, totaling 60% of sales. For Wal-Mart, cost of goods sold was 76% of sales in fiscal 2008. Although cost of goods sold represents a significant expense for companies like ExxonMobil and Wal-Mart that manufacture and/or sell a product, it is certainly not the only expense. And for those companies that sell a service, other expenses like employee compensation or advertising can be far more significant than cost of goods sold. In this chapter, we discuss a number of these other significant operating issues, including employee compensation and income taxes. We also discuss accounting for the costs associated with contingencies, which are items that are not fully resolved at the time the financial state-ments are prepared. Two common examples of contingencies are lawsuits and environmental cleanup obligations. Also in this chapter, we discuss how one determines whether a cost should be recorded as an asset (capitalized) or recorded as an expense. The expense versus capitalize issue has arisen many times over the years as accountants have wrestled with how to account for advertising costs, research costs, and others. The financial statement items covered in this chapter are illustrated in Exhibit 8.2. Various operating items affecting the income statement are covered in the chapter. The two most significant are employee compensation and income taxes. The balance sheet items discussed are pen-sion liabilities, deferred income tax liabilities, and contingent liabilities. The accounting aspects of these balance sheet items are intriguing in that both the pension and deferred tax items are sometimes reported as assets rather than liabilities. In addition, contingent liabilities are frequently not reported on the balance sheet at all. The details of all these topics, and more, are discussed in this chapter. E X H I B I T 8 . 1 C o m p a n i e s D e s c e n d e d f r o m t h e O r i g i n a l S t a n d a r d O i l ChevronTexaco ConocoPhillips ExxonMobil Amoco* Atlantic Richfield* Pennzoil*-Quaker State Chevron* merged with Texaco in 2001 Conoco* merged with Phillips in 2002 Exxon* merged with Mobil* in 1999 Merged with BP (British Petroleum) Merged with BP Merged with Royal Dutch/Shell *Originally part of Standard Oil. 1 Information for this description was obtained from Ida M. Tarbell, The History of the Standard Oil Company (New York: MacMillan Company, 1904). Completing the Operating Cycle Chapter 8 331 EXHIBIT 8.2 Financial Statement Items Covered in This Chapter Balance Sheet Long-Term Assets: Net pension assets Deferred income tax asset Long-Term Liabilities: Net pension liability Deferred income tax liability Contingent liabilities Statement of Cash Flows Operating: Cash paid for: Employee compensation Research and development Advertising Income taxes Income Statement Employee compensation expense Research and development expense Advertising expense Losses/gains on contingent items Income tax expense L O 1 Employee Compensation WHAT Account for the various components of employee compensation expense. WHY To properly measure how much it is paying its employees, a company must carefully track the total cost of employee compensation, which includes more than ordinary wages and salaries. HOW Account for the fair value of the following: payroll taxes paid on behalf of employees, fringe ben-efits and bonuses, stock options granted in exchange for employment services, and retirement benefits. Often, one of the largest operating expenses of a business is the salaries and wages of its employees. But the cost of employees is not simply the expense associated with the current period’s wages. As the following timeline illustrates, issues associated with employee compensation can extend long after the employee has retired. We will discuss each of these items in further detail in the sections that follow. Employee Compensation Event Line Payroll Compensated Absences Bonuses and Stock Options Postemployment Benefits Pensions and Postretirement Benefits Other than Pensions Time Payroll In its simplest form, accounting for payroll involves debiting Salaries Expense and crediting Salaries Payable when employees work and then debiting Salaries Payable and crediting Cash when wages are paid. However, accounting for salaries and related payroll taxes is never quite that simple and 332 Part 2 Operating Activities can, in fact, be quite complex. This is primarily because every business is legally required to with-hold certain taxes from employees’ salaries and wages. Very few people receive their full salary as take-home pay. For example, an employee who earns $30,000 a year probably takes home between $20,000 and $25,000. The remainder is withheld by the employer to pay the employee’s federal and state income taxes, Social Security (FICA) taxes,2 and any voluntary or contractual withholdings that the employee has authorized (such as union dues, medical insurance premiums, and charitable contributions). Thus, the accounting entry to record the expense for an employee’s monthly salary (computed as 1/12 of $30,000) might be: Social Security (FICA) taxes Federal Insurance Contributions Act taxes imposed on the employee and the employer; used mainly to provide retirement benefits. Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 FICA Taxes Payable, Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Federal Withholding Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 State Withholding Taxes Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,709 To record Mary Perrico’s salary for July. All the credit amounts (which are arbitrary here) are liabilities that must be paid by the em-ployer to the federal and state governments and to the employee. These withholdings do not repre-sent an additional expense to the employer because the employee actually pays them. The employer merely serves as an agent for the governments for collecting and paying these withheld amounts. In addition to remitting employees’ income and FICA taxes, companies must also pay certain payroll-related taxes, such as the employer’s portion of the FICA tax (an amount equal to the employee’s portion) and state and federal unemployment taxes. The payroll-related taxes paid by employers are expenses to the company and are included in operating expenses on the income state-ment. An entry to record the company’s share of payroll taxes relating to Mary Perrico’s employ-ment (again using arbitrary amounts) would be: Payroll Tax Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 FICA Taxes Payable, Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Federal Unemployment Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 State Unemployment Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 To record employer payroll tax liabilities associated with Mary Perrico’s salary for July. The different liabilities recorded in the preceding two entries for payroll would be eliminated as payments are made. The entries to account for the payments are: FICA Taxes Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 Federal Withholding Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Federal Unemployment Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 Paid July withholdings and payroll taxes to federal government. State Withholding Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 State Unemployment Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Paid July withholdings and payroll taxes to state government. 2 Congress has split FICA taxes into two parts—Social Security and Medicare. For the purposes of this chapter, we will combine the two. Completing the Operating Cycle Chapter 8 333 ... - tailieumienphi.vn