San Diego State University Operations And Supply Chain Management Assignment Help - Investment

Question - Cadenhead presented an approach to uniformity referred to as circumstantial variables.
Circumstantial variables are environmental conditions (conditions beyond the control of the individual firm that
are applicable to the particular industry that the firm is in).
Circumstantial variables lead to problems relative to either (1) costliness of the prescribed method in the
particular event situation or (2) a low degree of verifiability because estimates vary widely relative to the
prescribed method. For example, Cadenhead notes that the existence of a ready market with regularly quoted
prices would facilitate inventory valuation if realizable value were not used relative to inventories, but the
absence of such a market would allow a firm ...Read More to use another type of inventory/cost of goods sold measurement.
In the four situations discussed here, classify each situation according to whether it involves finite uniformity,
rigid uniformity, flexibility, or circumstantial variables.
a. Research and development costs: SFAS No. 2 requires that all research and development costs (some of
which will have future cash flow benefits and others will not) be written off to expense as incurred. Are there
any other accounting principles that are present here? Discuss.
b. Unusual right of return by customers: SFAS No. 48 covers those industries (of which there are not many)
where buyers have an unusual right of return due to industry practices that cannot be avoided by the individual
firm. The “unusual right of return” arises where buyers have an unusually long time period during which
purchase returns can be made. From the seller’s standpoint, revenue is recognized at time of sale, provided that
the future returns can be reasonably estimated (there are five other conditions that must also be met but they are
of no concern here). If sales returns cannot be reasonably estimated, then sales revenues are not recognized until
returns can be reasonably estimated or (more likely) the return privilege has substantially expired. Hence, it is
not cash flow differences that are at issue but rather the ability to estimate the expected returns that is the key
point.
c. Investment tax credit (assume no investment tax credit carryforward problem): All of the cash benefits in the
form of lower taxes are received in the year of asset acquisition. The enterprise may recognize benefit (in the
form of lower tax expense) in the year of acquisition or the benefits may be spread over the life of the asset in
the form of lower annual depreciation.
d. Oil and gas accounting: SFAS No. 19 tried to allow only “successful efforts.” In successful efforts, the costs
of dry holes must be written off once it is known that the holes are dry. If (and only if) a well were successful,
drilling costs would be capitalized and amortized over future years. ...Read Less

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