F3 - M3 - Inventory

Question 1

What is the periodic inventory method?

Answer 1

When you buy inventory you debit purchases not inventory. Physical count of ending inventory is needed to calculate the cost of good sold. Could be annually, monthly, quarterly, etc.

Dates do not matter with periodic, we assume the amounts sold is dependent on the latest amount of units purchased under LIFO, or the earliest amounts under FIFO.

Question 2

What is the perpetual inventory method?

Answer 2

This is when you buy inventory you debit inventory, and when you sell inventory you credit COGS.

Question 3

What is the formula for determining COGS under periodic? What is the journal entry when you sell the inventory?

Answer 3

Beginning Inventory
+ Purchases (Debit)
=COGS available for sale
- Ending Inventory (physical count)
= COGS

Debit: Cash or AR and Credit Sales

Question 4

What are the journal entries for when you buy and sell inventory under perpetual?

Answer 4

When you buy:

Debit Inventory and Credit Cash or AR

When you sell:

Debit: Cash or AR and Credit Revenue

Debit COGS and Credit Inventory

Question 5

What are all the inventory valuation methods under US GAAP?

Answer 5

Specific Identification - unique goods

FIFO

LIFO

Weighted Average - Periodic system

Moving Average - Perpetual system

Dollar Value LIFO - need a price index (Ending inventory at current year cost/ ending inventory at base year cost)

Question 6

For FIFO periodic or FIFO perpetual, do you get the same COGS and ending inventory amount?

Answer 6

Yes, no matter which way they ask you to do it, you can do it one way and the same answer.

Note, this is not the same for LIFO, you will have different answers.

Question 7

What is the formula for the weighted average method?

Answer 7

Follows periodic only

Total inventory cost available/ Total number of units available

Question 8

What is the formula for the moving average method?

Answer 8

Only follows perpetual inventory system:

Total cost of inventory available after each purchase/ Total units available after each purchase

Question 9

Should inventory losses generally be recognized in the interim statements?

Answer 9

Yes, permanent declines in inventory market value should be reflected.

Question 10

For COGS, what are some other things that can go into it outside of BI+Purchases-Ending Inventory?

Answer 10

COGS include any costs that gets the inventory item ready to be sold. So the things that are also normally included are raw materials, direct labor, and factory overhead. Sometimes not all of the factory overhead is included in this calc, so watch the problem to see if that happens.

Question 11

What is the lower of cost or market when valuing inventory?

Answer 11

This is for inventory valuation, this is where the inventory will be reported at either the lower of inventory cost or market.

Cost - This is just the cost of the inventory

Market - You take three values and compare them to each other. Once you find these, you take the middle value of the three numbers. If the amount is lower than cost, than you use this number, but if it is above cost then you use cost.

Replacement cost - Cost to replace the inventory

Market ceiling NRV

Market Floor: Sales value - profit margin

Question 12

How does the weighted average COGS work?

Answer 12

This calculates the average COGS for the beginning inventory and all purchases made in the scope of the problem. You would take your total cost divided by the total units to get this amount, and then take that amount times the units you sold to get your COGS.

So if you had beginning inventory of 100 at $12, and you made a purchase of 100 units of inventory at 13, your weighted average amount would be 200 (100+100)/ 25(12+13) = $8. Take that amount times the units sold to get COGS.

Question 13

How does the moving average COGS work?

Answer 13

This calculates the average COGS but on a line by line basis. Here is an example.

If you start with Beg Inv of 30,000 at $10 and purchase 10,000 units at $12, that will get you an amount of (420,000/40,000) = 10.50. If they sold 20,000 units next, then you take 20,000*10.50.

Question 14

When you are the consignor, and you ship goods to a consignee, if the consignor pays the freight costs to get the inventory to the consignee, is this an expense, or capitalized cost to inventory?

Answer 14

You don’t expense and include the amount as inventory.

Question 15

How does the dollar value LIFO method work?

Answer 15

Dollar value LIFO uses the prices of the inventory rather than the units to determine the increase or decrease in inventory quantity.

Question 16

When the market value of the inventory is less than the purchase price, what is the impact on the financial statements? What entries do you need to make?

Answer 16

First, you have to disclose this loss in the footnotes, and then you need to make an entry for the both the balance sheet and the income statement.

You are going to recognize a loss on the income statement, and then you are going to record a liability for the accrued loss. You will not markdown the inventory amount, rather make a separate liability account for the loss.

Question 17

Things to work on?

Answer 17

Get a better understanding of dollar value LIFO. I think maybe just now that it is a method for inventory valuation, but I only had one multiple choice question on it and no sims, so my guess is it is not heavily tested.

Understanding moving weighted average better - It is perpetual only, but there is a whole sim on it. Make sure to review it and understand it, and I think I should be good.