F3-M3 Inventory Flashcards
Explain the difference between Perpetual vs. periodic?
Perpetual is continuous recording (any transactions, you reflect as it happens) while periodic is a recording on a “periodic basis” which is oftentimes on a monthly basis. Periodic ignores dates when a transaction happens and adjusts based on the final outcome of all transactions during the period.
What is Dollar Value LIFO?
Dollar Value LIFO uses the prices of inventory, rather than units, to determine increases and decreases in inventory quantity.
Items to consider:
1. You need to consider the base value (the value of the inventory at the end of the current year if it had been purchased at the end of last year).
2. Since the inventory increase occured in the current year (bought this year), then you have to account for the increase and mark it up to the current year inventory prices (or simply – the dollar value).
Most important consideration in calculating cost of sales for consignment goods?
Always consider to allocate the COS (including freight) in proportion to the inventories sold for calculating the profits. Expenses are recorded in full.
How to calculate Market in Lower of Cost vs. Market?
Market value is the middle value of replacement, market ceiling (NRV) and market floor
How to Calculate Net realizable value (NRV) which is also called “Market ceiling”?
NRV is calculated as the selling price, minus the completion and disposal costs of the inventory.
How to calculate Market “floor” value
NRV minus the normal profit
Which inventory valuation method should the company choose if operating in an inflationary environment for financial accounting and tax purposes to retain the most cash in the business
LIFO method results in the lowest ending inventory because older inventory costs remain on the balance sheet, with more recent (and higher) inventory costs reflected in the cost of goods sold on the income statement. When prices are increasing, recording inventory under LIFO results in a higher cost of goods sold, which is reflective of the inflationary prices. A higher cost of goods sold matched against sales revenue results in the lowest net income among the inventory methods, thereby minimizing the impact of taxes and saving cash.
A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. What is the accounting treatment for the loss and the impact to the FS?
When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.
