7. Inventory

Question 1

Which inventory methods value inventory at the lower of cost or market under US GAAP?

Answer 1

LIFO and retail methods, subject to a ceiling (NRV) and a floor (NRV - normal profit).

Question 2

The market value of inventory is equal to its ________________.

Answer 2

1. Replacement cost when it is between a ceiling (NRV) and a floor (NRV - normal profit) 2. NRV when replacement cost is above NRV 3. NRV - normal profit when replacement cost is below NRV - normal profit

Question 3

The ceiling and floor that bound market value are ______________ and ______________, respectively.

Answer 3

Ceiling: Net realizable value (NRV) Floor: Net realizable value minus normal profit

Question 4

Market value cannot be higher than ______________..

Answer 4

Net realizable value

Question 5

Under the periodic inventory method, it is assumed that all sales occurred when?

Answer 5

On the last day of the period.

Question 6

What is the formula for the periodic inventory method?

Answer 6

Beginning inventory + Purchases - Sales at cost = Ending inventory

Question 7

Under the perpetual inventory method, when are sales and purchases recognized?

Answer 7

As they occur.

Question 8

Which costs are included in the cost of inventory?

Answer 8

1. All normal costs incurred to acquire the inventory and prepare it for its intended use (e.g., freight-in, freight insurance, packaging materials, etc.) 2. Purchase returns Not included in inventory cost: interest on financing for the cost of inventory

Question 9

Will perpetual FIFO and periodic FIFO produce different ending inventory values?

Answer 9

No. Although perpetual FIFO recognizes sales as they occur, and periodic FIFO assumes all sales occur at period-end, both methods always charge the earliest units purchased to COGS. Therefore both methods produce the same ending inventory value.

Question 10

How is the inventory turnover ratio calculated?

Answer 10

Sales / Inventory or COGS / Average inventory

Question 11

Will perpetual LIFO and periodic LIFO produce different ending inventory values?

Answer 11

Yes. Because periodic LIFO assumes all sales occur at period-end, it charges the last units purchased during the period to COGS. By contrast, perpetual LIFO recognizes sales as they occur and charges last the units purchased before each sale to COGS. Therefore the methods produce different ending inventory values.

Question 12

Which costs does a consignor recognize on its balance sheet as the cost of inventory out on consignment?

Answer 12

1. All normal costs incurred to acquire the inventory and prepare it for its intended use. 2. The cost of shipping the inventory to the consignee 3. Advertising costs incurred by the consignor (not reimbursable advertising costs incurred by the consignee) The consignor recognizes costs such as the consignee’s commission and reimbursable expenses (e.g. advertising) as operating expenses.

Question 13

Which inventory method is permitted under US GAAP but not permitted under IFRS?

Answer 13

LIFO

Question 14

How is all inventory valued under IFRS?

Answer 14

At the lower of cost or net realizable value (NRV) on an item by item basis (not in aggregate).

NRV is equal to the normal sales price of each item minus the cost to complete and sell the item (i.e. cost of disposal). E.g., if an item normally sells for $12,50, and it costs $2.00 to finish and sell the item, NRV is $10.50 per item.

Question 15

When prices are rising, which method results in the highest value for ending inventory: FIFO or LIFO?

Answer 15

FIFO

Question 16

Under dollar-value LIFO, how do you calculate the value of a LIFO layer added in the current year?

Answer 16

1. Take current-year ending inventory in current-year dollars and divide it by current-year ending inventory in base-year dollars to arrive at the conversion index.
2. Multiply the current-year LIFO layer in base-year dollars by the conversion index. The result is the current-year LIFO layer at dollar-value LIFO.

Question 17

Under the moving average method, a new unit cost is calculated each time goods are _________.

Answer 17

Purchased.

At each purchase, the new unit cost =

total units on hand / total cost of all units on hand

This average unit cost will change each time units are purchased at a different price than before.

Question 18

How is ending inventory value calculated under the moving average method?

Answer 18

A new unit cost is calculated each time goods are purchased by dividing the total cost of inventory on hand by the total number of units on hand. Then the new unit cost is multiplied by the total number of units on hand to arrive at ending inventory value.

Question 19

Under IFRS, can inventory that was previously written down be written back up?

Answer 19

Yes, but only to the extent of its previous value.

Question 20

Under US GAAP, can inventory that was previously written down be written back up?

Answer 20

No

Question 21

How is FIFO inventory valued?

Answer 21

At the lower of cost or net realizable value (NRV)

Question 22

What is LIFO liquidation?

Answer 22

LIFO liquidation occurs when an entity sells all units that were purchased during the current year and begins selling units purchased in the prior year. Thus the cost basis for the units sold changes.

Question 23

At interim reporting periods, must an entity use the same inventory valuation method it uses to value ending inventory at annual periods?

Answer 23

No, the entity may use the gross profit margin method at interim reporting periods.

Question 24

How does an entity estimate ending inventory value using the gross profit margin method?

Answer 24

1. Calculate COGS by multiplying sales by the historical gross profit percentage 2. Calculate goods available for sale by adding total purchases to beginning inventory 3. Subtract COGS from goods available for sale to arrive at ending inventory.

Question 25

A US company imports goods from overseas and then immediately drop-ships them as exports from a US port to overseas customers without ever warehousing the goods. Which shipping costs, if any, should it include in its inventory valuation?

Answer 25

The company should include the shipping costs from overseas to the US port (i.e. freight in) in its inventory valuation. The shipping costs to export customers are period expenses.

Question 26

When determining whether to value ending inventory at cost or market, should you determine the lower of cost or market for each individual item based on its original cost?

Answer 26

No. To determine the lower of cost or market for ending inventory, you should determine “cost” by totalling the original costs of all items in inventory. Then you should determine “market” by multiplying the number of units in ending inventory by the market price per unit at period end. Then you compare total cost to total market to determine which is lower.