Intermediate accounting Essay

1. Distinguish between perpetual and periodic inventory system. Why conduct physical inventory? When should, if any a physical inventory count occur? Perpetual inventory system is a system for determining the cost of goods sold by keeping continuous records of the physical inventory as goods are bought and sold. In other words, under the perpetual inventory system – records are kept of the quantity and usually the cost of individual items of inventory throughout the year, as items are bought and sold. The cost of goods sold is recorded as goods are transferred to customers, and the inventory balance is kept current throughout the year, as items are bought and sold. The physical inventory is important because it is an actual amount of all merchandise on hand at the end of an accounting period. The actual physical count of the product must occur after the Pre-Physical Inventory update is run.   It means that no movements of the product can occur until after the actual count is done.   In other words the product is frozen until a physical count is done on the item.   After the actual count the movement of the individual item within the product group can resume while other products are being count. In periodic inventory system, it is a system for determining the cost of goods sold by deducting the ending inventory (based on a physical count of the inventory) from the beginning inventory plus total purchases over the period. 2. Intangible assets have two main characteristics. They lack physical existence and they are not financial instruments. Costs incurred internally to create intangibles are generally expensed as incurred. Explain the procedure for amortizing intangible assets. Intangible assets are a long-term assets that have no physical substance but have a value based on rights or privileges that accrue to the owner. Intangible assets  don’t have the obvious physical value of a  factory or equipment; they can prove very valuable for a firm and can be critical to its long-term success or failure. For example, a company such as Coca-Cola wouldn’t be nearly as  successful was it not for the high value obtained through its brand-name recognition. Although brand recognition is not a physical asset you can see or touch, its positive effects on bottom-line profits can prove extremely valuable to firms such as Coca-Cola, whose brand strength drives global sales year after year. In FASB STATEMENT NO. 142, the useful life of certain intangible assets is difficult to judge, particularly assets that involve contracted or other legally set terms. Companies use the useful life of assets to guide their decisions on whether or not to amortize them on their financial statements. The key factor in determining whether to amortize an â€Å"other† intangible asset is its useful life. If it is indefinite, the asset is not amortized. Although the question of whether an asset’s useful life is definite or indefinite may seem straightforward, certain intangibles—particularly those that are a result of contracted or other legally set terms—are difficult to judge. Prior to the issuance of FASB Statement no. 142, the maximum useful life of an intangible asset was 40 years. Could an asset a company was amortizing over a useful life of less than 40 years now have an indefinite life under Statement no. 142? The answer is â€Å"maybe.† Prior to its implementation companies may not have taken all of the three criteria in Statement no. 142—renewability, costs and modifications—into account in making amortization decisions. Further, it was not an option for an asset to have an indefinite useful life, regardless of how a company evaluated the criteria before Statement no. 142. The limit was 40 years. The bottom line? Even those intangibles that weren’t assigned the full 40-year useful life prior to Statement no. 142 should be evaluated against the statement’s criteria. They may have indefinite useful lives as well. References http://www.sdc.on.ca/sdc6/help/Physical%20Inventory%20Process.htm Jennefer M. Mueller. Journal of Accountancy: Amortization of Certain Intangible Assets. DECEMBER 2004 / Volume 198, Number 6.