II. Answer the questions.

1. What does depreciation represent?

2. What must the accountant do to estimate depreciation?

3. What are the two most popular formulas in the USA?

4. When is straight-line depreciation recognized?

5. When is declining-charge depreciation recognized?

6. What must be divided between the cost of goods sold and the cost of the ending inventory?

7. What are the three main inventory costing methods?

III. What meaning have the following word combinations?

Beginning inventory, ending inventory, declining-charge depreciation, straight-line depreciation, anticipated life-time services, the cost of goods sold, inventory costing method, the oldest batch, income tax, measurement principles.

IV. Put a word or phrase in the correct place to complete the following sentences.

goods available, FIFO, LIFO, declining-charge depreciation, costing methods

1. The two most popular formulas expressing depreciation are straight-line depreciation and …

2. The cost of … for sale is the sum of the cost of the beginning inventory and the cost of goods purchased in the period.

3. There are three main inventory…

4. The … method is widely used in the USA.

5. Under …, the cost of goods is determined by adding the costs of various batches of the goods available, starting with the oldest batch in the beginning inventory until the total number of units equals the number of units sold.

V. Match accounting concepts with their definitions.

1. Revenue 2. Cost 3. Net income 4. Asset 5. Cost of goods sold 6. Depreciation expense 7. Inventory

a) … is the difference between revenue and expense in a certain time period. b) … is the portion of the cost of an asset that is deducted from the revenues of the period. c) … is the amount earned by a company for providing goods and services to customers. d)… is something that requires the use of business resources. e) … is a right to use resources that are expected to have future economic benefits for the entity. f) … is an expense that represent the company’s cost of the products sold to customers. g) … is an asset that the company intends to sell to customers.

VI. Agree or disagree.

Explain your opinion on each idea.

1. Accumulated depreciation represents the portion of the cost of the assets that have been used in an effort to generate revenues.

2. Depreciation expense is not included in the expenses of the income statement.

3. Accumulated depreciation and depreciation expense refer to a loss in value or usefulness of the asset.

VII. Read the text and describe the LIFO and the FIFO methods.

Each purchase of goods constitutes a single batch, acquired at a specific price. Under FIFO, the cost of goods sold is determined by adding the costs of various batches of the goods available, starting with the oldest batch in the beginning inventory, continuing with the next oldest batch, and so on until the total number of units equals the number of units sold. The ending inventory, therefore, is assigned the costs of the most recently acquired batches. For example, suppose the beginning inventory and purchases were as follows:

Inventory, January 1 1,000 units x $5.00 $5,000

Purchases, March 19 800 units x $5.25 4,200

Purchases, September 12 1,20 units x $5.50 6,600

Total goods available 3,000 units $15,800

The company sold 1,900 units during the year and had 1,100 units remaining in inventory at the end of the year. The FIFO cost of goods sold is:

Oldest batch 1,000 units x $5.00 $5,000

Next oldest batch 800 units x $5.25 4,200

Next oldest batch 100 units x $5.50 550

Total cost of goods sold 1,900 units $9,750

The ending inventory consists of 1,100 units at a FIFO cost of $5.50 each (the price of the last 1,100 units purchased), or $6,050.

Under LIFO, the cost of goods sold is the sum of the most recent purchase, the next most recent, and so on, until the total number of units equals the number sold during the period. In the example, the LIFO cost of goods sold is:

Most recent purchase 1,200 units x$5.50 $6,600

Next most recent purchase 700 units x $5.25 3,675

Total cost of goods sold 1,900 units $ 10,275

The LIFO cost of the ending inventory is the cost of the oldest units in the cost of goods available. In this simple example, assuming the company adopted LIFO at the beginning of the year, the ending inventory cost is 1,000 units in the beginning inventory at $5 each ($5,000), plus 100 units from the first purchase during the year at $5.25 each ($525), a total of $5,525.