CMSA Intermediate Financial Accounting Introduction to Liabilities Questions
Question Description
1. Briefly explain the concept of liquidity. Which asset is more liquid: inventory or accounts receivable? Why
2. If Aveeno, Inc. understates its ending inventory at the end of 2019, what is the effect on cost of goods sold during 2019? Effect on the beginning inventory of 2020?
3. Why does a company need to estimate its possible obligation under a warranty? Ranch Company estimates warranty expense as 5% of sales. On January 1, Warranty Payable was $13,000. During the year Ranch paid $5,000 to meet its warranty obligations and recorded sales of $120,000. The December 31 Warranty Payable balance would be: (in $s)
4. Starting in November of 2015, Golden Inc. entered into long-term contracts with corporate customers to supply one million ounces of 14K gold for $1,000 an ounce over the next 5 years.
By its fiscal year-end (December 31, 2015), the price of 14K gold increased to $1,050 an ounce. Unfortunately, Golden Inc., did not hedge the price and therefore would have to pay more in order to meet its sales contracts. Golden Inc.’s auditor argued that a $50 million contingent loss liability should be recognized in the 2015 financial statements.
Golden Inc. stated that it was considering trying to renegotiate with its corporate customers and that the amount of the loss cannot be reasonably estimated until early-2016. Golden Inc. expects to renegotiate the contracts in order to increase the initial contract price to $1,100 or reduce the amount of ounces to be delivered under the long-term sales contract.
Defend a position of how the long-term contract should be treated from an accounting perspective in the 2015 year-end financial statements, including the footnotes.
5. Should net income and cash flow from operations always be equal? Yes/No and why.
