09 Inventory

Question 1

List the formula to arrive at net realizable value.

Answer 1

Sales price – Estimated cost to complete and sell the inventory

Question 2

What is the basic inventory equation?

Answer 2

Beginning inventory + Net purchases = Ending inventory + Cost of goods sold

Question 3

If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on cost of goods sold (COGS)?

Answer 3

The impact on COGS is understated.

Question 4

When lower of cost or market is used, how is the market value of inventory calculated?

Answer 4

Market is the middle value of the following:
Ceiling: Sales price - cost of disposal
Replacement cost
Floor: NRV (sales price - cost to complete - disposal costs) - normal profit

Question 5

List the first in first out (FIFO) cost flow assumptions.

Answer 5

Ending inventory is composed of units most recently acquired.
Cost of goods sold (COGS) is comprised of oldest units.
It most closely matches most firms’ actual physical flows.
FIFO produces higher net income and higher valuation of inventory in periods of rising prices.

Question 6

List the last in first out (LIFO) cost flow assumptions.

Answer 6

Ending inventory is composed of oldest inventory.
Cost of goods sold (COGS) is composed of newest inventory.
LIFO produces lower net income and ending inventory valuation in periods of rising prices.

Question 7

List the cost flow assumptions of a perpetual inventory system.

Answer 7

Specific identification
Moving average
First in first out (FIFO)
Last in first out (LIFO)

Question 8

List the differences between moving and weighted average cost flow assumptions.

Answer 8

Moving average computes a new weighted average cost per unit after each purchase of inventory.
Moving average results in lower cost of goods sold during a period of rising prices.

Question 9

What inventory costs are required to be capitalized?

Answer 9

All costs necessary to bring the item of inventory to salable condition

Question 10

What merchandise is included in ending inventory?

Answer 10

All owned inventory, regardless of location

Question 11

What is the calculation for determining cost of goods sold (COGS)?

Answer 11

Beginning inventory + Net purchases − Ending inventory = COGS (Net purchases = Gross purchases + Transportation in − purchases returns and allowances − purchase discounts)

Question 12

List the dollar-valued (DV) last in first out (LIFO) conversion index formula.

Answer 12

Ending inventory in current-year dollars / Ending inventory in base-year dollars

Question 13

List the main differences between perpetual and periodic entries.

Answer 13

The use of the inventory account rather than purchases and recording cost of goods sold at sale.

Question 14

What inventory system is implied when the moving average cost flow assumption is utilized?

Answer 14

The perpetual inventory system is implied.

Question 15

For which method should an ending inventory count be made?

Answer 15

Both periodic and perpetual

Question 16

List the weighted average (WA) cost flow assumptions.

Answer 16

Weighted average (WA) cost per unit is the average cost of all units held during the period.
Each item is treated as if costed at WA cost.

Question 17

Which of the cost flow assumptions (FIFO, LIFO, weighted average) is the same for both the periodic and perpetual systems?

Answer 17

First in first out (FIFO)

Question 18

Which of the cost flow assumptions utilizes the latest purchases at time of sale?

Answer 18

Last in first out (LIFO)

Question 19

List the steps in lower of cost or market (LCM) analysis.

Answer 19

Compute market value.
Value inventory at lower of cost or market.

Question 20

How is the ownership of goods shipped free on board (FOB) destination determined?

Answer 20

The seller owns the goods until they reach the destination.

Question 21

Who is the owner of consigned goods?

Answer 21

The consignor (firm that shipped the inventory to consignee)

Question 22

List the differences between periodic and perpetual applications of last in first out (LIFO).

Answer 22

In perpetual, each sale is costed with most recent purchase.
Perpetual results in a lower cost of goods sold in a period of rising prices.

Question 23

Why would an entity utilize dollar-valued (DV) last in first out (LIFO)?

Answer 23

It reduces the effect of the LIFO liquidation.

Question 24

What effect does using last in first out (LIFO) have on the income statement?

Answer 24

Matching of revenues and expenses on the income statement is significantly improved.

Question 25

List some reasons to avoid last in first out (LIFO) liquidation.

Answer 25

It increases taxes.
It does not match current-period expenses and revenues.

Question 26

What is the main reason for using last in first out (LIFO) in periods of rising costs?

Answer 26

Tax minimization

Question 27

List the reasons for a last in first out (LIFO) liquidation.

Answer 27

Poor planning
Lack of supply

Question 28

What is the weighted average cost-per-unit formula?

Answer 28

Cost of goods available for sale / Number of units available for sale