9-1 Describe and apply the lower-of-cost-or-market rule.

If inventory declines in value below its original cost, for whatever reason, a company should write down the inventory to reflect this loss. The general rule is to abandon the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost. 9-2 Explain when companies value inventories at net realizable value. Companies value inventory at net realizable value when: (1) there is a controlled market with a quoted price applicable to all quantities, (2) no significant costs of disposal are involved, and (3) the cost figures are too difficult to obtain. 9-3 Explain when companies use the relative sales value method to value inventories. When a company purchases a group of varying units at a single lump-sum pricea so-called basket purchasethe company may allocate the total purchase price to the individual items on the basis of relative sales value. 9-4 Discuss accounting issues related to purchase commitments. Accounting for purchase commitments is controversial. Some argue that companies should report purchase commitment contracts as assets and liabilities at the time the contract is signed. Others believe that recognition at the delivery date is most appropriate. The FASB neither excludes nor recommends the recording of assets and liabilities for purchase commitments, but it notes that if companies recorded such contracts at the time of commitment, the nature of the loss and the valuation account should be reported when the price falls. 9-5 Determind ending inventory by applying the gross profit method. Companies follow these steps to determine ending inventory by the gross profit method: (1) Compute the gross profit percentage on selling price. (2) Compute gross profit by multiplying net sales by the gross profit percentage. (3) Compute cost of goods sold by subtracting gross profit from net sales. (4) Compute ending inventory by subtracting cost of goods sold from total goods available for sale. 9-6 Determine ending inventory by applying the retail inventory method. Companies follow these steps to determine ending inventory by the conventional retail method: (1) To estimate inventory at retail, deduct the sales for the period from the retail value of the goods available for sale. (2) To find the cost-to-retail ratio for all goods passing through a department or firm, divide the total goods available for sale at cost by the total goods available at retail. (3) Convert the inventory valued at retail to approximate cost by applying the cost-to-retail ratio. 9-7 Explain how to report and analyze inventory. Accounting standards require financial statement disclosure of: (1) the composition of the inventory (in the balance

sheet or a separate schedule in the notes); (2) significant or unusual invnetory financing arrangements; and (3) inventory costing methods employed (which may differ for different elements of inventory). Accounting standards also require the cnsistent application of costing methods from one period to another. Common ratios used in the management and evaluation of inventoy levels are inventory turnover and average days to sell the inventory. 10-1 Describe property, plant, and equipment. The major characteristics of property, plant, and equipment are: (1) They are acquired for use in operations and not for resale. (2) They are long-term in nature and usually subject to depreciation. (3) They possess physical substance. 10-2 Identify the costs to include in initial valuation of property, plant, and equipment. The costs included in initial valuation of property, plant, and equipment are as follows: Cost of land: Includes all expenditures made to acquire land and to ready it for use. Land costs typically include (1) the purchase price; (2) closing costs, such as title to the land, attorney's fees, and recording fees; (3) costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, and clearing; (4) assumption of any liens, mortgages, or encumbrances on the property; and (5) any additional land improvements that have an indefinite life. Cost of buildings: Includes all expenditures related directly to their acquisition or construction. These costs include (1) materials, labor, and overhead costs incurred during construction, and (2) professional fees and building permits. Cost of equipment: Includes the purchase price, freight and handling charges incurres, insurance on the equipment while in transit, cost of special foundations if required, assembling and installation costs, and costs of conducting trial runs. 10-3 Describe the accounting problems associated with self-constructed assets. Indirect costs of manufacturing create special problems because companies cannot easily trace these costs directly to work and material orders related to the constructed assets. Companies might handle these costs in one of two ways: (1) Assign no fixed overhead to the cost of the constructed asset. Or (2) assign a portion of all overhead to the construction process. Companies use the second method extensively. 10-4 Describe the accounting problems associated with interest capitalization. Only actual interest (with modifications) should be capitalized. The rationale for this approach is that during construction, the asset is not generating revenue and therefore companies should defer (capitalize) interest cost. Once construction is completed, the asset is ready for its intended use and revenues can be earned. Any interest cost incurred in purchasing an asset that is ready for its intended use should be expensed. 10-5 Understanding accounting issues related to acquiring and valuing plant

assets. The following issues relate to acquiring and valuing plant assets: (1) Cash discounts: Whether taken or not, they are generally considered a reduction in the cost of the asset; the real cost of the asset is the cash or cash equivalent price of the asset. (2) Deferred-payment contracts: Companies account for assets purchased on long-term credit contracts at the present value of the consideration exchanged between the contracting parties. (3) Lump-sum purchase: Allocate the total cost among the various assets on the basis of their relative fair market values. (4) Issuance of stock: If the stock is actively traded, the market value of the stock issued is a fair indication of the cost of the property acquired. If the market value of the common stock exchanged is not determinable, establish the value of the property and use it as the basis for recording the asset and issuance of the common stock. (5) Exchanges of nonmonetary assets: The accounting for exchanges of nonmonetary assets depends on whether the exchange has commercial substance. See Illustrations 10-10 (page 502) and 10-20 (page 505) for summaries on how to account for exchanges. (6) Contributions: Record at the fair value of the asset recieved, and credit revenue for the same amount. 10-6 Describe the accounting treatment for costs subsequent to acquisition. Illustration 10-21 (page 511) summarizes how to account for costs subsequent to acquitisiton. 10-7 Describe the accounting treatment for the disposal of property, plant, and equipment. Regardless of the time of disposal, companies take depreciation up to the date of disposition, and then remove all accounts related to the retired asset. Gains or losses on the retirement of plant assets are shown in the income statement along with other items that arise from customary business activities. Gains or losses on involuntary conversions may be reported as extraordinary items. 11-1 Explain the concept of depreciation. Depreciation allocates the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit fro the use of the asset. 11-2 Identify the factors involved in the depreciation process. Three factors involved in the depreciation process are: (1) determining the depreciation base for the asset, (2) estimating service lines, and (3) selecting a method of cost apportionment (depreciation). 11-3 Compare activity, straight-line, and decreasing-charge methods of depreciation. (1) Activity method: Assumes that depreciation is a function of use or productivity instead of the passage of time. The life of the asset is considered in terms of either the output it provides, or an input measure such as the number of hours it works, (2) Straight-line method: Considers depreciation a function of time instead of a function of usage. The straight-line procedure is often the most conceptually appropriate when the decline in usefulness is constant from period to period. (3) Decreasing-charge

methods: Provides for a higher depreciation cost in the earlier years and lowers charges in later periods. The main justification for this approach is that the asset is the most productive in its early years. 11-4 Explain special depreciation methods. Two special depreciation methods are : (1) Group and conposite methods: The group method is frequently used when the assets are fairly similar in nature and have approximately the same useful lives. The composite method may be used when the assets are dissimilar and have different lives. (2) Hybrid or combination methods: These ethods may combine straight-line/activity approaches. 11-5 Explain the accounting issues related to asset asset impairment. The process to determine an impairment loss is as follows: (1) Review events and changes in circumstances for possible imapirment. (2) If events or changes suggest impairment, determine if the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset. If less, measure the impairment loss. (3) The impairment loss is the amount by which the carrying value of the asset exceeds the fair value of the asset. After a company records an impairment loss, the reduced carrying amount of the long-lived asset is its new cost basis. Impairment losses may not be restored for assets held for use. If the company expects to dispose of the asset, it should report the impaired asset at the lower of cost or net realizable value. It is not depreciated. It can be continuously revalued, as long as the write-up is never an amount greater than the carrying amount before impairment. 11-6 Explain the accounting procedures for depetion of natural resources. To account for depletion of natural resources, companies (1) establish the depletion base and (2) write off resource cost. Four factors are part of establishing the depletion base: (a) acquisition costs, (b) exploration costs, (c) development costs, and (d) restoration costs. To write off resource cost, companies normally compute depletion on the units-ofproduction method. Thus, depletion is a function of the number of units withdrawn during the period. To obtain a cost per unit of product, the total cost of the natural resource less salvage value is divided by the number of units estimated to be in the resource deposit, to obtain a cost per unit of product. To compute depletion, this cost per unit is multiplied by the number of units withdrawm. 11-7 Explain how to report and analyze property, plant, equipment, and natural resources. The basis of valuation for property, plant, and equipment and for natural resources should be disclosed along with pledges, liens, and other commitments related to these assets. Companies should not offset any liability secured by property, plant, and equipment or by natural resources against these assets, but should report it in the liabilities section. When depreciating assets, credit a valuation account normally called Accumulated Depreciation. When depleting assets, use ana ccumulated depletion account, or credit the depletion directly to the natural resource account. Companies

engaged in significant oil and gas producing activities must provide additional disclosures about these activities. Analysis may be performed to evaluate the asset turnover ratio, profit margin on sales, and rate of return on assets. 12-1 Describe the characteristics of intangible assets. 12-2 Identify the costs to include in the intial valuation of intangible assets. 12-3 Explain the procedure for amortizing intangible assets. 12-4 Describe the types of intangible assets. 12-5 Explain the conceptual issues related to goodwill. 12-6 Describe the accounting procedures for recording goodwill. 12-7 Explain the accounting issues related to intangible-asset impairments. 12-8 Identify the conceptual issues related to research and development costs. 12-9 Describe the accounting for research and development and similar costs. 12-10 Indicate the presentation of intangible assets and related items.