7 - Inventory

Question 1

COGS

Answer 1

Question 2

Periodic VS perpetual Inventory System (JEs)

Answer 2

Periodic:

At Time of purchase:

Purchases X

AP X

At Year End:

Ending inv. X

COGS (plug at year end) X

Purchases X

Perpetual Inventory System

At time of purchase:

Inventory 80

AP 80

As sales occur

AR 100

Sales rev. 100

COGS 80

Inventory 80

Question 3

Dollar Value LIFO

Answer 3

Question 4

Lower of Cost or Market Rule (LCM)

Answer 4

• cost - original cost
• market - middle of 3 numbers:
  
  • ceiling - NRV (selling price - disposal costs)
  • floor - NRV - normal profit margin
  • replacement cost = purchase or reproduction
    
    • middle of these numbers is used as market, then compare market with cost and take the lower.

Question 5

Consignment Inventory

Answer 5

• Consignor
  
  • includes inv. in his b/s
  • has ownership, but not possession
  • costs incurred by consignor in transferring goods to the consignee are considered inv. costs until sold. they include:
    
    • COGS
    • freight paid on shipments to consignee
    • warehousing costs
    • advertising
    • in-transit insurance
• Consignee
  
  • items not included in inv.
  • has possession but not ownership
  • when sold, the sales price is given to the consignor after deducting any reimbursable costs and commissions earned by the consignee

Question 6

Costs of Inventory (intended use)

Answer 6

• warehousing costs prior to sale
• insurance, repackaging, modifications
• freight-in paid by buyer
• transportation costs paid by the seller on consignment arrangements.
• DO NOT include abnormal costs (idle factory expense, excessive spoilage, double freight, an rehandling costs, should be expensed immediately)

Question 7

Gross Profit (Margin) Method

Answer 7

Beg. Inv. 100

+ purchases 300

Good avail. for sale 400

(ending inv.) ?? 200 (plugged)

COGS 180

Gross profit %= 40%

COGS% = 60% (estimated) so, if sales = 300 (60%)= 180 (cogs)

Question 8

Retail Inventory Method

Answer 8