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Topics include inventory, capitalization & fixed assets.

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1. Under what circumstances would a company need to estimate its inventory? What are the differences between using the gross profit method and retail inventory method for estimating inventory? Which method of estimation, gross profit or retail inventory, is best? Explain your answer.

2. What are the criteria for capitalization of fixed assets? What items are included in the cost of a fixed asset? Should interest be included in the cost of a fixed asset? Why or why not?

3. How do we account for the disposition of fixed assets? What are the differences in how the exchanges of assets are handled, pending on whether they are similar or dissimilar? What is the rationale for these differences? What is the impact to the companies' financial statements?

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Solution Summary

This solution addresses the following questions:

1. Under what circumstances would a company need to estimate its inventory? What are the differences between using the gross profit method and retail inventory method for estimating inventory? Which method of estimation, gross profit or retail inventory, is best? Explain your answer.

2. What are the criteria for capitalization of fixed assets? What items are included in the cost of a fixed asset? Should interest be included in the cost of a fixed asset? Why or why not?

3. How do we account for the disposition of fixed assets? What are the differences in how the exchanges of assets are handled, pending on whether they are similar or dissimilar? What is the rationale for these differences? What is the impact to the companies' financial statements?

Solution Preview

1. If a creditor or other user of the company's information needs a financial statement, the company may need to estimate inventory. A physical inventory count is typically only taken at year-end, so if a financial statement is needed before year-end, the company will need to estimate inventory, as taking an inventory count would be a time-consuming, costly event. The gross profit method uses beginning inventory and adds purchases, and then subtracts ending inventory. The retail profit method converts the retail prices to cost, and management must track the retail value of the inventory on a continual basis. The method that is appropriate would be based on the business. A company that has a large amount of ...

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