(a) Nygren Inc., a manufacturer of transportation equipment,
maintains areas for raw materials inventory in each plant. Nygren’s
policy is that, at any time, each plant keeps raw materials
inventory levels at around 10% of the total amount of each item
that would be used in production in a typical year. Nygren
management knows it has a choice within GAAP between FIFO, LIFO,
average cost, and specific identification methods to measure its
cost of goods sold and inventory

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cost for its financial statements.

Which assertions are impacted by management’s choice of cost
flow method for inventory?   Explain fully in a few

(b) Basu Company uses a lot of production equipment to
manufacture its goods. For a specific assembly line, it leases a
set of equipment, with the leases starting 4 years ago. Basu
management negotiated lease terms of 10 years for this equipment.
Now, 4 years later, management has changed plans, and will probably
only lease the equipment for an additional 3 years of production,
and will consider whether to lease or buy equipment after these 3
years. Which assertions are impacted by management’s choice to
lease the equipment? Explain fully

in a few sentences.

(c) Thimble Company’s manufacturing process creates excess bits
of metal scrap (called ‘offal’) that
Thimble ships monthly to scrap dealers for disposal. During
October, Thimble collects the offal from the factory, and on
December 20, 2017 places it in storage bins in a warehouse to await
shipment. On December 26 a large rainstorm floods the warehouse and
washes most all of the offal into a stream. The stream flows into
land owned by Dosch Brewery (DB), which uses water from the stream
to make its premium ale. Thimble management believes the offal
washed into the stream, knows the stream flows into DB land, and
knows DB uses stream water to make its ale. Management does not
know how DB filters its water before brewing the ale, and is
therefore unsure whether the filters will keep the offal out of the
ale. Thimble management decides not to

tell DB of the event as of December 31.

What types of assertions would management potentially make about
the above event in 2017’sfinancial reports? Explain fully in a few

(d) Recall the Kat bonds issued to the market in 2016 from a
previous exercise. The bonds pay semi-annual interest to the
bondholder, and mature in 6 years. The bonds are unique in their
interest payment structure: the bondholder can choose, for each
interest payment, to receive either a stated amount of cash
interest or a stated number of shares of Kat’s common stock. Each
bondholder notifies Kat within 2 weeks of each interest payment
date of its preference, and Kat

must honor the bondholders’ choices on the payment dates.

Which types of assertions are particularly difficult for
management to make for this txn? Explain Fully in a few

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