29 - FR&A - Inventories Flashcards
LOS 29.A - Distinguish between costs included in inventories and costs recognized as expenses in the period in which they are incurred.
Costs included in inventory on the balance sheet include purchase cost, conversion costs, and other costs necessary to bring the inventory to is present location and condition. Period costs, such as abnormal waste, most storage costs, administrative costs, and selling costs, are expensed as incurred.
LOS 29.B - List the different inventory valuation methods (cost formulas).
FIFO, LIFO, Weighted Average Cost, Specific identification.
Define the FIFO inventory costing method.
The cost of the first item purchased is the cost of the first item sold. Ending inventory is based on the cost of the most recent purchases, thereby approximating current cost.
Define the LIFO inventory costing method.
The cost of the last item purchased is the cost of the first item sold. Ending inventory is based on the cost of the earliest items purchased. LIFO is prohibited under IFRS.
Define the Weighted Average inventory costing method.
COGS and inventory values are between their FIFO and LIFO values.
Define the Specific Identification inventory costing method.
Each unit sold is matched with the unit’s actual cost.
Calculate cost of sales and ending inventory using the FIFO inventory valuation method and explain the impact on gross profit.
Under FIFO, cost of sales reflects the oldest purchase or production costs for inventory, and balance sheet inventory values reflect the most recent costs. LIFO cost of sales and FIFO inventory values better represent economic reality (replacement costs).
Calculate cost of sales and ending inventory using the LIFO inventory valuation method and explain the impact on gross profit.
Under LIFO, cost of sales reflects the most recent purchase or production costs, and balance sheet inventory values reflect older outdated costs. When purchase or production costs are falling, LIFO cost of sales is lower than FIFO cost of sales, and LIFO gross profit is higher than FIFO gross profit as a result. LIFO inventory is higher than FIFO inventory. LIFO cost of sales and FIFO inventory values better represent economic reality (replacement costs).
Calculate cost of sales and ending inventory using the Weighted Average inventory valuation method and explain the impact on gross profit.
Under the weighted average cost method, cost of sales and balance sheet inventory values are between those of LIFO and FIFO. What purchase or production costs are rising, LIFE cost of sales is higher than FIFO cost of sales, and LIFO gross profit is lower than FIFO gross profit as a result. LIFE inventory is lower than FIFO inventory. LIFO cost of sales and FIFO inventory values better represent economic reality (replacement costs).
LOS 29.D - Calculate and compare cost of sales, gross profit, and ending inventory using perpetual and periodic inventory systems.
In a periodic system, inventory values and COGS are determined at the end of the accounting period. In a perpetual system, inventory values and COGS are updated continuously. In the case of FIFO and specific identification, ending inventory values and COGS are the same whether a periodic or perpetual system is used. LIFO and weighted average cost, however, can produce different inventory values and COGS depending on whether a periodic or perpetual system is used.
LOS 29.E - Compare cost of sales, ending inventory, and gross profit using the LIFO inventory valuation model.
When prices are rising and inventory quantities are stable or increasing, LIFO results in higher COGS, lower gross profit, lower inventory balances, and higher inventory turnover.
LOS 29.E - Compare cost of sales, ending inventory, and gross profit using the FIFO inventory valuation model.
When prices are rising and inventory quantities are stable or increasing, FIFO results in lower COGS, higher gross profit, higher inventory balances, and lower inventory turnover.
LOS 29.E - Compare cost of sales, ending inventory, and gross profit using the weighted average inventory valuation model.
The weighted average cost method results in values between those of LIFO and FIFO.
LOS 29.F - Describe the measurement of inventory at the lower of cost and new realisable value.
Under IFRS, inventories are values at the lower of cost or net realisable value. Inventory write-ups are allowed, but only to the extent that a previous writedown to net realisable value was recorded.
Under US GAAP, inventories are valued at the lower of cost or market. Market is usually equal to replacement cost but cannot exceed net realizable value or be less than net realizable value minus a normal profit margin. No subsequent write-up is allowed.
LOS 29.G - Describe the financial statement presentation of and disclosures relating to inventories.
Required inventory disclosures:
- The cost flow method (LIFO, FIFO, etc) used.
- Total carrying value of inventory and carrying value by classification (raw materials, work-in-process, and finished goods) if appropriate.
- Carrying value of inventories reported at fair value less selling costs.
- The cost of inventory recognized as an expense (COGS) during the period.
- Amount of inventory writedowns during the period.
- Reversals of inventory writedowns during the period (IFRS only because US GAAP does not allow reversals).
- Carrying value of inventories pledged as collateral.
