chapter 6

Question 1

To determine the amount of inventory to report on a company’s Statement of Financial Position, we need to consider the following factors

Answer 1

Determine goods owned by the company
Physically count the inventory

Question 2

goods in transit should be included where?

Answer 2

included in the inventory of the company that has legal title to the goods.

Question 3

what is consignment ?

Answer 3

Consignment is an arrangement between two parties where one company (the consignee) tries to sell inventory on behalf of the company that owns the inventory (the consignor).

Question 4

who legally owns the goods? the consignee or consignor?

Answer 4

consignor still owns the goods because it has legal title to them, so should be included in their inventory

Question 5

what are the rules of ownership to goods in transit?

Answer 5

fob destination:Goods sold or purchased and shipped FOB destination will belong to the seller until they reach their destination.
fob shipping point: Goods sold or purchased and shipped FOB shipping point belong to the buyer after the seller ships the goods.

Question 6

what are the different methods companies use to allocate the inventory and cost of goods sold:

Answer 6

Specific identification
First in first out (FIFO)
Weighted average

Question 7

what is specific identification?

Answer 7

when cost are assigned to inventories and cost of goods sold based on the actual cost of each item. can be expensive and time consuming

Question 8

what does IRFS say about specific identification?

Answer 8

states that this method should only be used for “inventories of items that are not ordinarily interchangeable”. In other words, each item is different (ex. customized) and can be distinguished from the other items in inventory (ex. with serial numbers). if not met, company should use fifo or average method
can be used if items are not homogeneous or interchangeable

Question 9

what is the FIFO method?

Answer 9

the oldest items in inventory will be allocated to cost of goods sold first, with the newest items being left in ending inventory.

Question 10

what is the weighted average method?

Answer 10

Uses a weighted average to allocate inventory costs to cost of goods sold and ending inventory. The weighted average is computed based on the total cost of goods available for sale divided by the total number of units available for sale.

Question 11

what is the moving average method (from weighted average)?

Answer 11

when a perpetual system is used, the weighted average will need to be recalculated after each sale.

Question 12

when should a company use the specific identification approach?

Answer 12

If a company has goods that are separately identifiable

Question 13

what are advantages of specific identification?

Answer 13

• Results in actual cost of goods sold and inventory presented on financial statements
• Tracks the actual physical flow of inventory

Question 14

what are advantages of fifo?

Answer 14

• Ending inventory based on current costs which is normally closest to replacement cost (and more relevant to some users)
• Approximates physical flow of goods for most retail businesses

Question 15

what are advantages of average cost?

Answer 15

• Cost of goods sold includes more current costs to better match sales (which are reported at current prices) so some users may find gross profit more relevant
• Approximates physical flow of goods for some companies
• Smooths effects of price changes as the weighted average is recalculated after each purchase

Question 16

when making mistakes accounting for inventory, what does the mistake impact

Answer 16

Statement of Financial Position (inventory) and the Statement of Income (cost of goods sold).

Question 17

what are some common inventory errors?

Answer 17

Incorrectly counting and determining ending balance of inventory
Recording purchases in the wrong period

Question 18

when does recording the purchase of inventory in the wrong time period happen

Answer 18

This usually happens when the company fails to record purchased goods that it owns but has not yet received.

Question 19

recording the purchase of inventory in the wrong time period would affect which two accounts

Answer 19

inventory and accounts payable

Question 20

if purchase of inventory is recoded to early,

Answer 20

inventory is overstated, a/p is overstated, cogs is unaffected, net income is unaffected, retained earnings is unaffected

Question 21

how should inventory be valued?

Answer 21

IRFS AND ASPE says that inventory should be valued at the lower of cost and net realizable value (LCNRV).

Question 22

what is net realizable value?

Answer 22

is defined as the selling price less any costs to sell.

Question 23

what is LCNRV?

Answer 23

a basis for stating inventory at the lower of its original cost and its net realizable value at the end of the period

Question 24

to apply the LCRNV rule, what are the steps?

Answer 24

1. Determine the cost for each type of inventory, using specific identification, FIFO, or average cost.
2. Determine the NRV of each type of inventory.
3. Compare the NRV of each type of inventory to its cost.
4. Determine if cost exceeds NRV.If cost exceeds NRV, adjust for this difference by debiting the Cost of Goods Sold account and creditingthe Inventory account. Note that this entry is similar to the entry to record shrinkage.

Question 25

what is the journal entry of valuing inventory?

Answer 25

debit cogs
credit inventory

Question 26

In the notes to the statements, companies are required to disclose the following (reporting inventory)

Answer 26

total amount of inventory, cost of goods sold, cost formula(s) used, amount of write-downs to NRV or reversals and the amount of any inventory pledged as security.

Question 27

what is inventory turnover (inventor ratios)

Answer 27

measures the number of times (on average) inventory is sold during a period and is calculated as cost of goods sold ➗ average inventory.

Question 28

what is days in inventory?

Answer 28

measures how long inventory is being held for and is calculated as 365 days ➗ Inventory turnover.

Question 29

is it better to have a higher inventory turnover and a higher days in inventory?

Answer 29

a higher inventory turnover and lower days in inventory will be better because it means a company is managing their inventory well.

Question 30

what is the formula for weighted average cost?

Answer 30

cost of goods available for sale/ units available for sale

Question 31

if inventory is understated, then…

Answer 31

cogs is overstated, gross profit Is understated, income before income tax is understated and retained earnings are understated