Chapter 3 - Inventory Flashcards
Inventory are ____ items held for sale in the __________ of business, or goods that will be _________in the production of goods to be sold.
Asset; Ordinary course; Used/Consumed
(Manufacturer) “Merchandise” may be categorized into 3 types, which are… (FWR)
- Finished goods (held for sales)
- Work in progress (in the course of production)
- Raw materials (to be consumed in the production)
(Distributor) ______ and ______ MUST be distinguished.
Inventory; Supplies (there is NO inventory for SERVICES)
(Inventory) What goes under “debit”?
- Beginning inventory
- Acquisition cost
- Goods in transit (considered as asset)
(Inventory) How do you calculate “acquisition cost”?
Quantity x Price
(Inventory) What must be considered to calculate “price” of acquisition cost? (TLIPP)
- Trade discount
- Losses during goods in transit (shipping, destination)
- Incidental costs
- Purchase allowance & return
- Purchase discount
What are the types of “trade discounts”? (PQ)
- Price discount
2. Quantity discount (for bulk orders)
Price under “acquisition cost” must be _____
Invoice price (actually transacted price)
Conditions for liability may be contractually established in 2 ways:
- FOB Shipping point, (once shipped, buyer is liable)
2. FOB Destination point (until arrival at buyer’s place, seller is liable)
What are some examples of “incidental costs”? (FIH)
- Freight-in cost
- Insurance cost
- Handling cost
“Purchase allowance and return” is recorded when _____
Seller authorizes it
(Destination point) “Freight-out cost”/transportation cost (transportation from warehouse to port) is considered _____
Selling expense (incurred by seller)
What is a “credit term?”
Offer of a cash discount on payments within a specified period
(Credit term) What does “2/10, n/30” mean?
- 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
What are the two methods of “purchase discount”? (GN)
- Gross method - Records sales without regard to discounts
2. Net method - Records sale net of the discount
For cost allocation, what are the 2 types of “quantity” determination? (PP)
- Perpetual inventory system
2. Periodic inventory system (physical counting method)
Perpetual inventory system ________ tracks changes in the inventory account. CGS is recorded at ________ by debiting _______ and crediting _______
Continuously; Time of each sale; CGS; Inventory
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.
Periodically; Ending inventory; CGS; Residual amount
What are the 3 methods for “price determination”? (SCG)
- Specific identification method
- Cost flow assumption
- Gross profit method
What are the 3 types of “cost flow assumption”? (FAL)
- FIFO (First In, First Out) method
- Average method (moving average - perpetual system; total average - periodic system)
- LIFO (last In, First Out) method
When do companies/auditors use “gross profit method”?
- When fire/other disaster destroys either inventory or inventory records
- Auditors use it when they need an estimate of the company’s inventory (e.g., interim reports)
(Valuation) When the _______ of goods is no longer great as their _____, then a departure from the cost basis principle to measure inventory is required.
Utility; Cost
(Valuation) New valuation is accomplished by stating such goods at _____ or _______. (LCN)
Lower cost; Net realizable value (NRV)
For US GAAP, restoration is/is not permitted.
For IFRS, restoration is/is not permitted.
IS NOT;
IS
Under “Purchase” account, debit is _____, and credit is ______
Inventory; Accounts payable
Under “Allowance” account, debit is _____, and credit is ______
Accounts payable; Purchase allowance 10
Under “Returns” account, debit is _____, and credit is ______
Accounts payable; Inventory
“Allowance” and “Return” accounts are recorded when _____
Counterpart authorizes the recording (but inventory may be in buyer’s warehouse until seller takes back)
(Purchase Discount) Under “Gross Method,” debit is _______, and credit is ______.
Discount recording occurs at _____; Debit is ______, and credit is ________.
Inventory (total); Accounts payable (total) - Assumption that there is no discount
Deadline; Accounts payable; Cash and Discount taken
(Purchase Discount) Under “Net Method,” debit is ______, and credit is _____.
Inventory (discounted); Accounts payable (discounted)
(Under Net Method) “Discount Not Taken” is considered as _____
Interest expense
Both “Gross Method “ and “Net Method” are recognized by _____
GAAP
(Price determination) “Specific identification method” is used for goods that are ______ or _____
Expensive; low in quantity (“price tag method”)
“Inventory” account must be balanced with either _____ and/or ______
CGS; Ending inventory
(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.
Market value (fair value); Lower; Higher
What are the 2 methods for valuation of price? (HC)
- Historical cost (acquisition cost)
2. Current market price
What are the two types of “current market price”? (IO)
- Input market -> Replacement cost
2. Output market -> Selling price (realizable value) OR Net realizable value (NRV)
Net realizable value (NRV) = ?
Realizable value (RV) - Additional sales expenses
“Fair value” can refer to both ______ (specific by agreement) OR _____ (general)
Selling price; Current market price (one of)
When do you “Gross Profit Method” for price determination?
- Destroyed inventory/records
- Insurance costs
- Sub-periodic/interim reports
(Gross Profit Method) CGS is calculated by:
Sales x (1 - past income percentage)
- (1 - past income percentage) is past CGS
(Valuation)
Debit: ____
Credit: _____
Loss due to market decline/Loss on LCN;
Allowance for LCN
