Chapter 4 Section 2: Inventories Flashcards
What if the seller ships the wrong goods?
The title reverts back to them upon rejection of the buyer. It should not be included in buyer inventory, even if they still have them.
What happens in a sale with a right to return?
If the amount of returns cannot be estimated, do not record a sale.
If the amount of returns can be estimated, record a sale and an allowance account.
Explain the parties in a consignment arrangement.
Who owns the goods?
The seller is the consignor. They deliver goods to the consignee, an agent who will sell on the consignor’s behalf.
The consignor is the owner of the goods, even if the consignee has them in their warehouse.
Are reversals of write-downs allowed under GAAP or IFRS?
GAAP: no
IFRS: yes, up to the amount of the original write down
How is inventory reported under IFRS?
Lower of cost or NRV
Cost = historical cost
NRV = GAAP ceiling = price - costs to sell
What are the two inventory systems?
Periodic and Perpetual
What is the formula for the periodic inventory system?
Beginning inventory \+ Purchases = Cost of goods available for sale - Ending inventory = COGS
Define the perpetual inventory system
The inventory record for each item is updated for each purchase and sale as they occur. It keeps a running total of all inventory balances.
Which inventory method is prohibited under IFRS?
LIFO
Under FIFO, what two numbers are the same, regardless of the use of perpetual or periodic?
Ending inventory and COGS
So use periodic to go faster on the test
Define the weighted average method
At the end of the period, the average cost of each item is the weighted average of the costs of all items in inventory.
The weighted average is determined by dividing total costs by total units of inventory, including beginning in both.
Required periodic system.
Define the moving average method
Computes the weighted average cost after each purchase by dividing the total cost of inventory after the purchase by the units available.
Requires perpetual system.
Define the dollar-value LIFO method
Inventory is measured in dollars and adjusted for changing price levels.
If the price index is not supplied, divide ending inventory at current year cost by ending inventory at base year cost.
What is the format used for calculating dollar value LIFO?
Date @ base yr cost @ current yr cost @ $ LIFO
The $ LIFO layer = LIFO layer at base year cost x index
What if you expect a loss on a firm purchase agreement?
Report it immediately.
