Chapter 3 - Inventory

Question 1

Inventory are ____ items held for sale in the __________ of business, or goods that will be _________in the production of goods to be sold.

Answer 1

Asset; Ordinary course; Used/Consumed

Question 2

(Manufacturer) “Merchandise” may be categorized into 3 types, which are… (FWR)

Answer 2

1. Finished goods (held for sales)
2. Work in progress (in the course of production)
3. Raw materials (to be consumed in the production)

Question 3

(Distributor) ______ and ______ MUST be distinguished.

Answer 3

Inventory; Supplies (there is NO inventory for SERVICES)

Question 4

(Inventory) What goes under “debit”?

Answer 4

1. Beginning inventory
2. Acquisition cost
3. Goods in transit (considered as asset)

Question 5

(Inventory) How do you calculate “acquisition cost”?

Answer 5

Quantity x Price

Question 6

(Inventory) What must be considered to calculate “price” of acquisition cost? (TLIPP)

Answer 6

1. Trade discount
2. Losses during goods in transit (shipping, destination)
3. Incidental costs
4. Purchase allowance & return
5. Purchase discount

Question 7

What are the types of “trade discounts”? (PQ)

Answer 7

1. Price discount

2. Quantity discount (for bulk orders)

Question 8

Price under “acquisition cost” must be _____

Answer 8

Invoice price (actually transacted price)

Question 9

Conditions for liability may be contractually established in 2 ways:

Answer 9

1. FOB Shipping point, (once shipped, buyer is liable)

2. FOB Destination point (until arrival at buyer’s place, seller is liable)

Question 10

What are some examples of “incidental costs”? (FIH)

Answer 10

1. Freight-in cost
2. Insurance cost
3. Handling cost

Question 11

“Purchase allowance and return” is recorded when _____

Answer 11

Seller authorizes it

Question 12

(Destination point) “Freight-out cost”/transportation cost (transportation from warehouse to port) is considered _____

Answer 12

Selling expense (incurred by seller)

Question 13

What is a “credit term?”

Answer 13

Offer of a cash discount on payments within a specified period

Question 14

(Credit term) What does “2/10, n/30” mean?

Answer 14

1. Discount of 2% if payment is made within 10 days

2. If discount is not taken, then the entire (gross) amount is due in 30 days

Question 15

What are the two methods of “purchase discount”? (GN)

Answer 15

1. Gross method - Records sales without regard to discounts

2. Net method - Records sale net of the discount

Question 16

For cost allocation, what are the 2 types of “quantity” determination? (PP)

Answer 16

1. Perpetual inventory system

2. Periodic inventory system (physical counting method)

Question 17

Perpetual inventory system ________ tracks changes in the inventory account. CGS is recorded at ________ by debiting _______ and crediting _______

Answer 17

Continuously; Time of each sale; CGS; Inventory

Question 18

Periodic inventory system determines inventory quantity only ______ by subtracting the ________ from the _________ available for sale. CGS is a ______ that depends on physical count at the end.

Answer 18

Periodically; Ending inventory; CGS; Residual amount

Question 19

What are the 3 methods for “price determination”? (SCG)

Answer 19

1. Specific identification method
2. Cost flow assumption
3. Gross profit method

Question 20

What are the 3 types of “cost flow assumption”? (FAL)

Answer 20

1. FIFO (First In, First Out) method
2. Average method (moving average - perpetual system; total average - periodic system)
3. LIFO (last In, First Out) method

Question 21

When do companies/auditors use “gross profit method”?

Answer 21

1. When fire/other disaster destroys either inventory or inventory records
2. Auditors use it when they need an estimate of the company’s inventory (e.g., interim reports)

Question 22

(Valuation) When the _______ of goods is no longer great as their _____, then a departure from the cost basis principle to measure inventory is required.

Answer 22

Utility; Cost

Question 23

(Valuation) New valuation is accomplished by stating such goods at _____ or _______. (LCN)

Answer 23

Lower cost; Net realizable value (NRV)

Question 24

For US GAAP, restoration is/is not permitted.

For IFRS, restoration is/is not permitted.

Answer 24

IS NOT;

IS

Question 25

Under “Purchase” account, debit is _____, and credit is ______

Answer 25

Inventory; Accounts payable

Question 26

Under “Allowance” account, debit is _____, and credit is ______

Answer 26

Accounts payable; Purchase allowance 10

Question 27

Under “Returns” account, debit is _____, and credit is ______

Answer 27

Accounts payable; Inventory

Question 28

“Allowance” and “Return” accounts are recorded when _____

Answer 28

Counterpart authorizes the recording (but inventory may be in buyer’s warehouse until seller takes back)

Question 29

(Purchase Discount) Under “Gross Method,” debit is _______, and credit is ______.

Discount recording occurs at _____; Debit is ______, and credit is ________.

Answer 29

Inventory (total); Accounts payable (total) - Assumption that there is no discount

Deadline; Accounts payable; Cash and Discount taken

Question 30

(Purchase Discount) Under “Net Method,” debit is ______, and credit is _____.

Answer 30

Inventory (discounted); Accounts payable (discounted)

Question 31

(Under Net Method) “Discount Not Taken” is considered as _____

Answer 31

Interest expense

Question 32

Both “Gross Method “ and “Net Method” are recognized by _____

Answer 32

GAAP

Question 33

(Price determination) “Specific identification method” is used for goods that are ______ or _____

Answer 33

Expensive; low in quantity (“price tag method”)

Question 34

“Inventory” account must be balanced with either _____ and/or ______

Answer 34

CGS; Ending inventory

Question 35

(LCN Valuation) For the price of “Ending Inventory” is determined by _____. Market value is used when it is _____ than original price. Market value is NOT used when it is _____ than original price.

Answer 35

Market value (fair value); Lower; Higher

Question 36

What are the 2 methods for valuation of price? (HC)

Answer 36

1. Historical cost (acquisition cost)

2. Current market price

Question 37

What are the two types of “current market price”? (IO)

Answer 37

1. Input market -> Replacement cost

2. Output market -> Selling price (realizable value) OR Net realizable value (NRV)

Question 38

Net realizable value (NRV) = ?

Answer 38

Realizable value (RV) - Additional sales expenses

Question 39

“Fair value” can refer to both ______ (specific by agreement) OR _____ (general)

Answer 39

Selling price; Current market price (one of)

Question 40

When do you “Gross Profit Method” for price determination?

Answer 40

1. Destroyed inventory/records
2. Insurance costs
3. Sub-periodic/interim reports

Question 41

(Gross Profit Method) CGS is calculated by:

Answer 41

Sales x (1 - past income percentage)

• (1 - past income percentage) is past CGS

Question 42

(Valuation)
Debit: ____
Credit: _____

Answer 42

Loss due to market decline/Loss on LCN;

Allowance for LCN