F3-M3-Inventory

Question 1

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

FOB Destination
FOB Shipping Point
Consigned Goods

Answer 1

1. FOB Destination - When received by buyer.
2. FOB Shipping Point - When given to a common carrier
3. Consigned goods - When sold to a third party by consignee

Question 2

Under US GAAP, how is market calculated in the lower of cost or market method

Answer 2

In the lower of cost or market method, “market” generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.

1. Ceiling-Net realizable value (estimated net selling price less completion and disposal costs).
2. Floor - Net realizable value minus normal profit margin.`

Question 3

How is net realizable value calculated in the lower of cost and net realizable value method?

Answer 3

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

Question 4

Explain the difference between periodic and perpetual inventroy methods

Answer 4

Periodic:
1. The quantity of inventory is determined only by physical count.
2. Ending inventory is physically counted and priced.

Perpetual:
1. Inventory is updated for each purchase and for each sale.
2. Keeps a running total of inventory balances.

Question 5

When are losses on firm purchase commitments recognized?

Answer 5

Losses are recognized in the period in which the price declines.

Dr Estimated loss on purchase commitment
Cr Estimated liability on purchase commitment.

Question 6

Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties’ balance sheets?

Answer 6

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

Question 7

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

Answer 7

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

LIFO = Lowest

Question 8

Name several cost flow methods for inventory

Answer 8

1. Specific Identification
2. FIFO
3. LIFO (specific goods and dollar value)
4. Averaging
   a. Weighted average
   (associated with periodic)
   b. Moving average
   (associated with
   perpetual)