Financial Accounting Solution CH09

CHAPTER 9

WORKING CAPITAL

Questions, Exercises, and Problems: Answers and Solutions

9.1

9.2 See the text or the glossary at the end of the book. Prepayments are future economic benefits that a firm will receive because it

has exchanged cash for the right to receive services in the future. Firms charge the asset to expense over the period during which it receives services. All assets promise future economic benefits, so all assets are prepayments. The underlying principle is that acquisition cost includes all costs required to prepare an asset for its intended use. Assets provide future services. Costs that a firm must incur to obtain those expected services are, therefore, included in the acquisition cost valuation of the asset. In the case of merchandise inventory, this includes the costs associated with obtaining the goods (purchase price, transportation costs, insurance costs). For manufactured inventory, acquisition costs include direct labor, direct materials, and manufacturing overhead.

Depreciation on manufacturing equipment is a product cost and remains in inventory accounts until the firm sells the manufactured goods. Depreciation on selling and administrative equipment is a period expense, because the use of such equipment does not create an asset with future service potential.

Both the Merchandise Inventory and Finished Goods Inventory accounts include the cost of completed units ready for sale. A merchandising firm acquires the units in finished form and debits Merchandise Inventory for their acquisition cost. A manufacturing firm incurs direct material, direct labor, and manufacturing overhead costs in transforming the units to a finished, salable condition. The Raw Materials Inventory and Work-in-Process Inventory accounts include such costs until the completion of manufacturing operations. Thus, the accountant debits the Finished Goods Inventory account for the cost of producing completed units. The accountant 9.3 9.4 9.5 9-1 Solutions

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