Exam 4

Question 2

What is the difference between a merchandising company and a manufacturing company as they relate to inventory?

Answer 2

Merchandising companies have one inventory account; manufacturing companies have raw materials, work-in-process, and finished goods.

Question 3

What are the three typical classifications of inventory for a manufacturing company?

Answer 3

Raw materials, work-in-process, finished goods.

Question 4

What is a perpetual inventory system?

Answer 4

Continuously updates inventory and COGS with each purchase and sale.

Question 5

What is a periodic inventory system?

Answer 5

Updates inventory and COGS only at period-end using a physical count.

Question 6

Pros of perpetual inventory system?

Answer 6

Real-time tracking, more accurate inventory levels.

Question 7

Cons of perpetual inventory system?

Answer 7

More complex and expensive to implement.

Question 8

Pros of periodic inventory system?

Answer 8

Simpler and cheaper to implement.

Question 9

Cons of periodic inventory system?

Answer 9

Less timely data, requires physical count.

Question 10

How to calculate COGS in a periodic inventory system?

Answer 10

Beginning inventory + purchases - ending inventory.

Question 11

What is consignment?

Answer 11

Goods held by another party (consignee) but owned by consignor until sold.

Question 12

Who owns inventory on consignment?

Answer 12

The consignor retains ownership until sold.

Question 13

How do you determine ownership of inventory in transit?

Answer 13

Depends on shipping terms: FOB shipping point = buyer owns in transit; FOB destination = seller owns in transit.

Question 14

How does FIFO work?

Answer 14

First items purchased are the first sold; newest remain in ending inventory.

Question 15

How does LIFO work?

Answer 15

Last items purchased are the first sold; oldest remain in ending inventory.

Question 16

How does average cost method work?

Answer 16

Inventory cost is the weighted average of all units available for sale.

Question 17

Advantages of FIFO?

Answer 17

Higher net income during inflation, better balance sheet inventory value.

Question 18

Disadvantages of FIFO?

Answer 18

Higher taxes during inflation.

Question 19

Advantages of LIFO?

Answer 19

Lower taxes during inflation, better matching of current costs to revenue.

Question 20

Disadvantages of LIFO?

Answer 20

Lower reported income, inventory understated.

Question 21

What is the LIFO conformity rule?

Answer 21

If LIFO is used for taxes, it must also be used for financial reporting.

Question 22

What is a LIFO reserve?

Answer 22

Difference between FIFO/Avg inventory and LIFO inventory.

Question 23

Who uses LIFO reserve?

Answer 23

Companies using LIFO for external reporting.

Question 24

How is LIFO reserve calculated?

Answer 24

FIFO inventory − LIFO inventory.

Question 25

What are LIFO layers?

Answer 25

Increases in inventory under LIFO that create new cost layers.

Question 26

When does LIFO liquidation occur?

Answer 26

When older inventory layers are sold due to inventory reduction.

Question 27

Impact of LIFO liquidation?

Answer 27

Lower COGS, higher net income and taxes.

Question 28

What are LIFO pools?

Answer 28

Groups of inventory with similar characteristics for simplified LIFO accounting.

Question 29

Why are LIFO pools used?

Answer 29

To reduce recordkeeping complexity.

Question 30

What is Dollar-Value LIFO?

Answer 30

LIFO using monetary values instead of physical quantities.

Question 31

What is the purpose of LCNRV?

Answer 31

Ensure inventory is not overstated by reducing to net realizable value if lower than cost.

Question 32

What is the purpose of LCM?

Answer 32

Reduce LIFO/retail inventory to market value if below cost.

Question 33

How to determine if inventory write-down is needed?

Answer 33

Compare cost to NRV (or market); if NRV/market is lower, write down.

Question 34

How to account for inventory write-down?

Answer 34

Debit COGS or Loss; credit Inventory.

Question 35

What is a purchase commitment?

Answer 35

Contract to buy inventory in the future at a set price.

Question 36

How to account for purchase commitment losses?

Answer 36

If market < contract price, record estimated loss and liability.

Question 37

What is the Gross Profit Method?

Answer 37

Estimates ending inventory using sales and historical gross profit %.

Question 38

What is the Retail Inventory Method?

Answer 38

Estimates ending inventory by converting retail value to cost using cost-to-retail %.

Question 39

What costs are capitalized for long-term assets?

Answer 39

All costs to acquire and prepare the asset for use.

Question 40

What are intangible assets?

Answer 40

Non-physical assets like patents, trademarks, copyrights, goodwill.

Question 41

What is goodwill?

Answer 41

Excess of purchase price over fair value of net assets acquired.

Question 42

How is goodwill accounted for?

Answer 42

Not amortized; tested for impairment annually.

Question 43

How are donated assets recorded?

Answer 43

At fair value with a credit to revenue.

Question 44

What is a basket purchase?

Answer 44

Buying multiple assets in one transaction and allocating cost based on relative fair values.

Question 45

How to record sale of a long-term asset mid-year?

Answer 45

Update depreciation, then record sale: gain/loss = proceeds − book value.

Question 46

What is capitalized interest?

Answer 46

Interest added to asset cost during construction.

Question 47

How to record asset purchased using stock?

Answer 47

Record at fair value of stock or asset, whichever is more clear.

Question 48

What is the difference between expensing and capitalizing?

Answer 48

Expensing = immediate cost; capitalizing = cost added to asset value.

Question 49

How are R&D costs treated under GAAP?

Answer 49

Expensed as incurred.

Question 50

What is depreciation?

Answer 50

Allocation of asset cost over useful life.

Question 51

How to calculate straight-line depreciation?

Answer 51

(Cost − Residual value) ÷ Useful life.

Question 52

What is double declining balance?

Answer 52

Accelerated depreciation: 2 × straight-line rate × book value.

Question 53

What is sum-of-the-years-digits method?

Answer 53

Accelerated depreciation using a fraction based on asset's life.

Question 54

What is units-of-production method?

Answer 54

Depreciation based on usage or output.

Question 55

Which depreciation method has highest early depreciation?

Answer 55

Double declining balance.

Question 56

Which method gives equal depreciation each year?

Answer 56

Straight-line.

Question 57

How to record sale of PPE?

Answer 57

Update depreciation, then: gain/loss = proceeds − book value.

Question 58

What is depletion?

Answer 58

Cost allocation for natural resources.

Question 59

How to calculate depletion?

Answer 59

(Cost − Residual) ÷ Total units × Units extracted.

Question 60

What is impairment?

Answer 60

When asset’s expected cash flows < book value.

Question 61

What is the recoverability test?

Answer 61

Step 1: Are undiscounted cash flows < book value? If yes, impair.

Question 62

How to calculate impairment loss?

Answer 62

Loss = Book value − Fair value.

Question 63

How is goodwill impairment tested?

Answer 63

If fair value of reporting unit < book value, write down goodwill.

Question 64

What are post-acquisition costs?

Answer 64

Costs incurred after purchase; capitalize if future benefit, expense if not.