AFM 191 - 5.1: accounting for inventory transactions

Question 1

define a merchandising business

Answer 1

company that purchases finished goods from a manufactured business + resells them to customers at a higher price to make a profit

Question 2

define inventory

Answer 2

asset account on the balance sheet that holds the costs of merchandise before it’s re-sold to customers

Question 3

how to recognize the cost of merchandise?

Answer 3

cost of inventory moves out of the balance sheet + is recognized as an expense on the income statement as Cost Of Goods Sold in the same period in which revenue is recognized

Question 4

define Cost of goods sold (COGS)

Answer 4

an expense on the income statement used to recognize the cost of inventory when it is sold to a customer

Question 5

What does ASPE indicate should be included in the cost of inventory?

Answer 5

cost of merchandise, cost to deliver merchandise + other costs directly attributable to the purchase of the merchandise (insurance, costs paid to get inventory ready for sale)

Question 6

What should be deduced when calculating inventory?

Answer 6

trade discounts or rebates

Question 7

what’s the formula to calculate inventory?

Answer 7

inventory cost = cost of merchandise + merchandise shipping + handling cost + other costs directly attributable to the purchase of merchandise - trade discounts or rebates

Question 8

define perpetual inventory system - when is inventory counted?

Answer 8

system which uses computer software to keep track of goods bought, sold, and on hand

inventory is manually counted at least once a year

e.g. big name grocery stores, most large retailers

Question 9

define periodic inventory system - when is inventory counted?

Answer 9

system which does not keep track of goods bought, sold, and on hand

inventory is manually counted several times a year

e.g. small privately owned retailers

Question 10

what’s the formula used in an inventory system

Answer 10

beginning inventory + inventory purchase - COGS = ending inventory

Question 11

define accounts payable

Answer 11

amount owed to suppliers for goods received that have not been paid yet

Question 12

define a purchase order

Answer 12

source document that representa ta request to purchase goods + includes purchase order number to track the order, number fo units ordered + price per unit

Question 13

does a journal entry created for a purchase order?

Answer 13

no, as no transaction has been exchanged, no goods/services or cash has been exchanged

Question 14

What are the 3 ASPE inventory costing methods

Answer 14

1. specific identification method
2. first-in, first-out method
3. weighted average cost method

Question 15

Define specific identification method

Answer 15

inventory costing method used to measure COGS, where each item in inventory = identified + tracked

Question 16

What’s the ASPE guidance for specific identification method? and examples?

Answer 16

required for inventory that is not interchangeable - also required for inventory used for specific projects

customers specifically buy 1 item,

• e.g. building custom luxury car, home

Question 17

define FIFO method

Answer 17

an inventory costing method used to measure COGS, where it’s assumed that inventory purchased or produced first is sold first

Question 18

what’s the ASPE guidance for FIFO method? provide examples of FIFO

Answer 18

appropriate to use for inventory that is interchangeable - common for companies that sell a large number of similar products that are available for purchase to all customers

e.g. clothing stores, grocery stores

Question 19

define weighted average cost method

Answer 19

inventory costing method used to measure COGS, where the weight average cost of inventory is assumed to be the cost of inventory sold

Question 20

What’s the ASPE guidance for the weighted average cost method? provide examples

Answer 20

appropriate to use for inventory that is interchangeable

e.g. clothing stores, grocery stores

Question 21

What’s the formula to FIFO method

Answer 21

1. calculate cost of goods sold in the month
2. prepare the COGS journal entry for the month
3. calculate ending inventory balance at month-end close

Question 22

What’s the formula for the weighted average cost method

Answer 22

1. calculate COGS for the month (weighted average cost per unit)
2. calculate ending inventory balance at month-end close