F-4 INVENTORIES

Question 1

Q: When does the title to goods pass for each of the following?

F.O.B. destination

F.O.B. shipping point

C.O.D.

Consigned goods

FAR 4-18

Answer 1

• F.O.B. destination—When received by buyer.
• F.O.B. shipping point—When given to a common carrier.
• C.O.D.—When received and paid for by buyer.
• Consigned goods—When sold to a third party by consignee.

Question 2

INVENTORIES – LCM (U.S. GAAP)

Q: How is market calculated in the U.S. GAAP lower-of-cost-or-market method?

FAR 4-19

Answer 2

Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.

• Ceiling—Net realizable value (estimated net selling price less completion and disposal costs).
• Floor—Net realizable value minus normal profit margin.

Question 3

INVENTORIES – LOWER-OF-COST-OR-NET-REALIZABLE-VALUE (IFRS).

Q: How is net realizable value calculated in the IFRS lower-of-cost-or-net realizable-value method?

FAR 4-20

Answer 3

• Net realizable value is the net selling price less completion and disposal costs.

NRV = Net Selling Price - disposal/completion cost.

Question 4

Q: Explain the difference between periodic and perpetual inventory methods.

FAR 4-21

Answer 4

Periodic

• The quantity of inventory is determined only by physical count.
• Ending inventory is physically counted and priced.

Perpetual

• Inventory is updated for each purchase and for each sale.
• Keeps a running total of inventory balances.

Question 5

Q: : Name several cost flow methods for inventory.

FAR 4-22

Answer 5

• Specific identification
• FIFO
• LIFO (unit and dollar value)

Averaging

• Weighted average (associated with periodic).
• Moving average (associated with perpetual).
• Gross profit
• Retail

o Conventional retail
o Cost retail
o FIFO/Cost
o LIFO/Cost
o Dollar value LIFO/Cost

Question 6

Q: Name several retail inventory methods.

FAR 4-23

Answer 6

• Conventional retail.
• Cost retail.
• FIFO/Cost.
• LIFO/Cost.
• Dollar value LIFO/Cost.

Question 7

Q: When are losses on firm purchase commitments recognized?

FAR 4-24

Answer 7

Losses are recognized in the period when the price declines.

DR.—Estimated loss on purchase commitment.

   CR.—Estimated liability on purchase commitment.

Question 8

Q: Describe an inventory consignment arrangement.

Also, how are the consigned goods carried on the parties’ balance sheets?

FAR 4-25

Answer 8

• Consignor gives goods to consignee for sale to third parties.
• Title to the goods remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.

Question 9

Q: During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income?

Which inventory method is prohibited under IFRS?

FAR 4-26

Answer 9

Both ending inventory and net income will be lower when LIFO is used during a period of rising prices.

LIFO = Lowest

*LIFO is prohibited under IFRS.