2C Inventory

Question 1

Product costs (capitalized to inventory)

Answer 1

Inventory
\+ import duties
\+ freight-in
\+ storage
\+ insurance

Question 2

Cost of goods sold calculation

Answer 2

Beginning Inventory
\+ cost of goods purchased
\_\_\_\_\_\_\_\_\_\_\_\_\_
Cost of goods available for sale
- Ending Inventory
\_\_\_\_\_\_\_\_\_\_\_\_\_
Cost of goods sold

Question 3

Cost of goods purchased calculation

Answer 3

Gross purchases
- discounts
- returns and allowances
\_\_\_\_\_\_\_\_\_\_\_
Net purchases
\+ freight-in or transportation-in
\_\_\_\_\_\_\_\_\_\_\_
Cost of goods purchased

Question 4

Period costs (expensed)

Answer 4

selling and administrative costs

Freight-out

Question 5

Perpetual inventory system

Answer 5

updates are made in real time for each purchase and sale

Question 6

Periodic inventory system

Answer 6

updates are made by counting the ending inventory at the end of a period to determine how much was sold.

Question 7

Perpetual inventory entries

Answer 7

Dr - Inventory
Cr - AP
to record purchase

Dr - AR
Cr - Sales
to record sales

Dr - Cost of good sold
Cr - Inventory
to transfer inventory to cogs

Question 8

Periodic inventory entries

Answer 8

Dr - Purchases
Cr - AP
to record purchase

Dr - AR
Cr - Sales
to record sales

No entry is made to cost of goods sold. Use cost of goods sold calculation.

Question 9

Variance between inventory record and physical count (perpetual)

Answer 9

debit Inventory over and short to write down, credit to write up. Use Inventory as offset.

Question 10

FOB shipping point (or FOB)

Answer 10

Included in inventory at the time it is shipped by the seller.

Question 11

FOB destination

Answer 11

Included in inventory once it reaches the buyer

Question 12

Consignment

Answer 12

Goods held in consignment are still included in the consignor’s inventory

Question 13

Consignor entry

Answer 13

Dr - AR
Dr - Commission expense
Cr - Consignment sales
to record consignment sales less commission

Question 14

Consignee entry

Answer 14

Dr - Cash
Cr - Commissions earned
Cr - AP
to record consignment sale

Question 15

Weighted average

Answer 15

Periodic method (calculated at the end of the period)

Question 16

Moving average

Answer 16

Perpetual method (calculated after each purchase)

Question 17

Average cost of inventory calculation

Answer 17

Total cost/total units = cost per unit

cost per unit * units left = ending inventory
cost per unit * units sold = cost of good sold

Question 18

FIFO

Answer 18

• COGS will be lower
• Tends to produce higher gross profit
• Will produce same ending inventory regardless of periodic vs perpetual
• offers the best valuation of ending inventory

Question 19

LIFO

Answer 19

• COGS will be higher
• tends to produce lower gross profit
• offers the best matching on income statement
• Prohibited under IFRS

Question 20

Dollar-value LIFO

Answer 20

Step 1 - Calculate base year increase
(ending inventory at year end / conversion price index = inventory at base year prices)
Step 2 - Calculate each year’s layer
(change in base year prices x conversion price index = ending inventory at dollar value LIFO cost)

Question 21

LCNRV

Answer 21

NRV = Selling price less costs of completion, disposal and transportation (compare to cost)

Question 22

Impairment on inventory

Answer 22

If NRV is lower than the cost, inventory is impaired.

Question 23

LCNRV JE’s

Answer 23

Periodic:
loss on write down of inventory (expense)
Inventory (asset)

Perpetual:
loss on write down of inventory
Inventory (cost of goods sold)

Question 24

Lower of cost or market (LCM)

Answer 24

Only for LIFO

Take the lower of cost or replacement cost and determine if it falls between ceiling and floor.

Ceiling = NRV (selling price less cost of disposal)
Floor = Ceiling less normal profit margin

Once inventory is written down, it cannot be recovered under GAAP

Question 25

Inventory over and short

Answer 25

Adjusts COGS as appropriate for gains and loss from damaged inventory

Question 26

Inventory turnover

Answer 26

Cost of goods sold
_________
Average inventory

Question 27

Days in inventory

Answer 27

365
________
Inventory turnover

Question 28

Gross profit %

Answer 28

Gross profit
_________
Net sales

Question 29

Net method of purchase discounts

Answer 29

• record the net assuming the vendor takes the discount.

- Debit ‘Discount Lost’ for difference if discount not taken

Question 30

Gross method of purchase discounts

Answer 30

• Record gross assuming discount not taken

- Credit ‘Purchase discounts’ if discount is taken