Techno Tools

Questions: 1. Like many technology companies, TechnoTools operates in an environment of increasing prices. It uses a periodic inventory system. Its reported profits will tend to be highest if it accounts for inventory using the: a. FIFO method. b. LIFO method. c. Weighted average cost method. 2. CROCO S.P.A. sells an intangible asset with a historical acquisition cost of 12 million and accumulated amortisation of 2 million and reports a gain on disposal of the asset of 3.2 million. Which of the following amounts is most likely the sale price of the asset? a. 13.2 million b. 3.8 million c. 15.2 million 3. An analyst is studying the impairment of the manufacturing equipment of WLP Corp.,a U.K.- based corporation that follows IFRS (International Financial Reporting Standards). He gathers the following data on the equipment: Fair value 16,800,000; Costs to sell 800,000; Value in use 14,500,000; Net carrying amount 19,100,000. The amount of the impairment loss on WLP Corp.s income statement related to its manufacturing equipment is closest to: a. 2,300,000. b. 3,100,000. c. 4,600,000. 4. In order to identify possible overstatement of expenses connected to income smoothing, an analyst would most likely be on the look-out for: a. A material increase in expected useful life. b. A material reduction in expected useful life. c. An increased residual value. 5. For the year ending 31 December 2014, Flamingo Products had net income of $1,000,000. At 1 January 2014, there were 1,000,000 shares outstanding. On 1 July 2014, the company issued 100,000 new shares for $20 per share. The company declared $200,000 in dividends to common shareholders in 2014. What is Flamingos basic earnings per share for 2014? a. $0.80 b. $0.91 c. $0.95. Answers: Solution -1: FIFO method is the correct answer for the situations where business operates in the environment of high prices. When a business runs in the environment of surging prices, the latest inventory in the stock will be brought at higher price but as the price are constantly going up, same inventory will sell at higher prices than it was bought. We understand that rise is quick whereas fall of price is gradual and slow. For example, the price of a commodity may rise suddenly in market but it takes to slow down and come normal. Using FIFO method, will result to compensate for the high priced paid for purchasing the inventory and also yield good profits when it is sold at high price. Option a is the correct answer-FIFO method Solution -2: Historical cost of the asset = 12 million and there is accumulated amortization of 2 million and asset is reported to be sold at profit of 3.8 million. Lets go by the formula for calculating the gain or loss. Gain or loss on the sale of asset= Sale proceeds carrying cost -Sale proceeds + carrying cost= - Gain or loss on the sale of asset Cancelling minus (negative) from both the sides, Sale proceeds-carrying cost= Gain or loss on the sale of asset Or in other words Sale proceeds= carrying cost + Gain or loss on the sale of asset Applying the formula in our question: Sale proceeds= (Historical cost- Accumulated amortization) + Gain or (loss)* on the sale of asset. *amount will be in negative in case of loss. Sale proceeds= (12million-2 million) + 3.8 million =10 million +3.8 million =13.8 million. Option a is the correct answer-13.8 million. Solution -3: Impairment refers to the sudden fall or decrease in the value of the asset. There can be any reason for such downfall like asset become outdated or got damaged. Somehow, there is still some recoverable value that come as proceeds if the asset is sold. Impairment=maximum among the recoverable amount* and value in use** minus net carrying amount*** *Recoverable amount= Fair value of the asset-cost to sell For our question, Recoverable amount = 16,800,000 - 800,000 = 16,000,000 **Given in our question value in use= 14,500,000 and ***net carrying cost=19,100,000. So maximum among the recoverable amount* and value in use** is 16,000,000. Thus, Impairment= 16,000,000 - 19,100,000 =-3,100,000. Option b is the correct answer--3,100,000. Solution -4: Some companies are involved in the practice of using the accounting techniques to level out net income fluctuations from one period to another. In order to identify possible overstatement of expenses connected to income smoothing, best possible solution would be to look at the material increase in the expected useful life because with the increase in useful life, there is decrease in the depreciation rate and also there is increase in the income. This practice help the companies to earn good value on their consistent shares as investor have believe in the consistent earnings of the company. Option a is the correct answer- A material increase in expected useful life. Solution -5: Since dividends oncommon stock they are not expenses, they are not reported on income statement. Although dividend on preferred stock are not expenses but for the purpose of reporting the earnings available for common stock, it will be deducted from net income. Earnings per share =Net Income-Dividends on preferred stock Average outstanding shares Net Income as per question = $1,000,000 The company declared $200,000 in dividends to common shareholders in 2014 .As stated earlier, there is no effect of declaration and payment of cash dividend on common stock, and it implies that $200,000 is add-on profit for the company. T Therefore, net income =$1,000,000 + $200,000=$1,200,000 There is no info on dividend on preferred stock so we assume it to be zero. At 1 January 2014, there were 1,000,000 shares outstanding and on 1 July 2014, the company issued 100,000 new shares for $20 per share making total of outstanding shares= 1,000,000+2,000,000=making sum of outstanding shares= 1,000,000+2,000,000=3,000,000 and average of outstanding shares=3,000,000/2=1,500,000. Earnings per share =Net Income-Dividends on preferred stock Average outstanding shares = $1,200,000-$0 1,500,000 = $1,200,000 1,500,000 =$0.80 Option a is the correct answer $.80