F3 M3 Flashcards
FOB shipping point = title passes to customer when it gets shipped (buyer pays for
shipping)
FOB destination = title passes to customer when it arrives to customer (seller pays for
shipping; this is a selling exp)
If a seller has a financing arrangement where they will have to buy back the inv (forward
contract - think of an operating lease) w/a buyer, then the seller still holds the goods in
their inv
Inv is recorded at cost (replacement cost; this is the price paid or consideration given to
acquire an asset)
Inventory costs for a period include any costs required to get an inv item in a state where
it is ready to be sold (COGS include direct labor cost, raw material costs, and
manufacturing overhead)
Freight-out is not a part of inv COGS
Insurance on equipment and indirect materials/labor are included in inventory cost on
the BS
Gold, silver, and other precious metals are recorded at NRV (costs to complete and
dispose of materials)
If there is a loss on inv, it should be recorded at lower of cost or market (LIFO or retail
inv method), or lower of cost and NRV (It is only used for FIFO or WA; this is to be
conservative and not overstate inv)
Market in lower of cost or market means current replacement cost
When doing lower of cost or market, choose the middle # between replacement costs,
market ceiling (NRV), and market floor (NRV - normal profit). Then, compare this to the
actual cost of the item. Choose the lower of the two. If the market price is the lower
price, I would create a JE to debit inv loss and credit inv
When doing lower of cost and NRV, choose the lower of the cost or NRV
Periodic inv method does an inv count at least once a year, (usually at YE) so it doesn’t
keep a current total of inv balances
Beg inv + purchases = COGA4S - EI = COGS
Differences between periodic and perpetual: Periodic does not record COGS when a
good is sold (they only record it at YE using the equation above), and when inv is
purchased in the periodic method, debit purchases instead of inv
FIFO w/rising prices: EI is highest, COGS is lowest, and NI is highest
LIFO w/rising prices: EI is lowest, COGS is highest, and NI is lowest
Finding COGS and EI in FIFO can be done by either plugging number into the equation
or by doing the math (always do periodic since it is super easy and will give the same
results as perpetual)
Ending inv and COGS are same whether a perpetual or periodic inv system is used
(ONLY FIFO)
Weighted avg method: COGSA4S / units A4S (these #’s are the total inv available)
When I need to find COGS in this method, multiply # of goods sold x calculated #
When I need to find EI in this method, multiply # of EI x calculated #
Weighted avg gives a dif EI and COGS amt than FIFO and is ONLY used for FIFO
periodic
Ending inv and COGS are not the same for periodic and perpetual for LIFO
Perpetual = LIFO, FIFO, moving avg and periodic = LIFO, FIFO, and weighted avg
If a firm enters into a purchase commitment which will be carried out in the future, and at
YE, the price of the inv that the firm bought in the purchase commitment has decreased
(and is expected to stay at the decreased price when the commitment is carried out in
the future), I must record a debit to estimated loss of purchase commitment and a credit
to estimated liability on purchase commitment
A loss is only recorded in a purchase agreement in which the purchaser is obligated to
purchase a fixed number of units. Until that happens, no loss is made on the books if the
market value for the inv is lower than what was agreed upon in the K (ex: a cust is
expected to buy 50-70 units of inv)
Gross profit method is used for interim FS
