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Instructions For each individual situation, determine the amount that should be reported
as cash. If the item(s) is not reported as cash, explain the rationale. 1. Checking account
balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of
$980,000; utility deposit paid to gas company $180. 2. Checking account balance
$600,000; an overdraft in special checking account at same bank as normal checking
account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300;
coins and currency on hand $1,350. 3. Checking account balance $590,000; postdated
check from customer $11,000; cash restricted due to maintaining compensating balance
requirement of $100,000; certified check from customer $9,800; postage stamps on hand
$620. 4. Checking account balance at bank $37,000; money market balance at mutual
fund (has checking privileges) $48,000; NSF check received from customer $800. 5.
Checking account balance $700,000; cash restricted for future plant expansion $500,000;
short-term Treasury bills $180,000; cash advance received from customer $900 (not
included in checking account balance); cash advance of $7,000 to company executive,
payable on demand; refundable deposit of $26,000 paid to federal government to
guarantee performance on construction contract.
1.
2.
$600,000
(17,000)
300
1,350
$584,650
Cash held in a bond sinking fund is restricted. Assuming that the bonds are
noncurrent, the restricted cash is also reported as noncurrent.
3.
$590,000
9,800
$599,800
$37,000
48,000
$85,000
13. FIFO, weighted average, and LIFO methods are often used instead of specific
identification for inventory valuation purposes. Compare these methods with the specific
identification method, discussing the theoretical propriety of each method in the
determination of income and asset valuation.
The first-in, first-out method approximates the specific identification method when
the physical flow of goods is on a FIFO basis. When the goods are subject to
spoilage or deterioration, FIFO is particularly appropriate. In comparison to
the specific identification method, an attractive as-pect of FIFO is the
elimination of the danger of artificial determination of income by the selection
of advantageously priced items to be sold. The basic assumption is that costs
should be charged in the order in which they are incurred. As a result the
inventories are stated at the latest costs. Where the inventory is consumed and
valued in the FIFO manner, there is no accounting recognition of unrealized
gain or loss. A criticism of the FIFO method is that it maximizes the effects of
price fluctuations upon reported income because current revenue is matched
with the oldest costs which are probably least similar to current replacement
costs. On the other hand, this method produces a balance sheet value for the
asset close to current replacement costs. It is claimed that FIFO is deceptive
when used in a period of rising prices because the reported income is not fully
available since a part of it must be used to replace inventory at higher cost.
The results achieved by the weighted average method resemble those of the
specific identi-fication method where items are chosen at random or there is a
$700,000
900
$700,900
1.
LIFO
600 @ $6.00 =
$3,600
200 @ $6.08 =
1,216
$4,816
2.
Average cost
Total cost
Total units
$33,655*
5,300
Price
Total Cost
600
$6.00
$ 3,600
1,500
$6.08
9,120
800
$6.40
5,120
1,200
$6.50
7,800
700
$6.60
4,620
500
$6.79
3,395
5,300
(b)
1.
FIFO
$33,655
500 @ $6.79 =
$3,395
300 @ $6.60 =
1,980
$5,375
2.
LIFO
100 @ $6.00 =
$ 600
200 @ $6.08 =
1,216
500 @ $6.79 =
3,395
$5,211
(c)
(d)
FIFO.
$33,655
5,375
$28,280