F3/M3 Inventory

Question 1

FOB Shipping Point (Freight-in)

Answer 1

Title passes to buyer when delivered to common carrier

Cost of shipping is included in inventory for buyer

Question 2

FOB Destination (Freight-out)

Answer 2

Title passes to buyer when received from common carrier

Cost of shipping is a selling expense to the seller

Question 3

(T/F): If goods are sold but the buyer has the right to return the goods and the amount of returned goods cannot be estimated by the seller, the goods are included in the sellers inventory

Answer 3

True

Example: trial period

Question 4

Criteria to recognize revenue in a sale with The Right to Return

Answer 4

1. Price is fixed
2. Buyer assumes risk of loss
3. Buyer has paid some consideration
4. Product is substantially complete
5. Able to estimate amount of returns

Question 5

(T/F): Inventory should be stated at cost

Answer 5

True

Question 6

(T/F): Precious metals and farm products are stated at net realizable value, cost less costs to dispose

Answer 6

True

Question 7

(T/F): Under GAAP, you can reverse write downs of inventory

Answer 7

False, only IFRS to the extent you wrote it down

Question 8

(T/F): Losses on inventory write downs can either be debited to COGS if immaterial or reported as an write down in unusual events

Answer 8

True

Question 9

Lower of Cost and Net Realizable Value

Answer 9

IFRS - apply all the time
U.S. GAAP- FIFO or Weighted Average

NRV = Net selling price (-) costs to sell
- Market Ceiling

Question 10

(T/F): Lower of Cost or Market is U.S. GAAP only

Answer 10

True;
- only used with LIFO method

Choose middle value:

1. Replacement cost
2. Market Ceiling = NRV
   - Selling price (-) cost to dispose
3. Market Floor
   - (2.) Market Ceiling (-) profit

Question 11

Calculation of COGS under Periodic Inventory Method

Answer 11

Beginning Inventory
(+) Purchases
--------------------------------
COGAS
(-) Ending Inventory
---------------------------------
COGS

• 1 JE at time of sale, do not record COGS at sale
• Periodic = “Purchases”

Question 12

(T/F): Under the Periodic Inventory Method, purchases of Inventory are not recorded as “Inventory”, but “Purchases”

Answer 12

True;
Dr: Purchases
Cr: Cash

Question 13

(T/F): Under U.S. GAAP, the cost flow assumption used by the company does not have to have a rational relationship with the physical flow of inventory

Answer 13

True

Question 14

(T/F): IFRS prohibits LIFO

Answer 14

True

Question 15

(T/F): Ending inventory and COGS are the same under FIFO whether periodic or perpetual method is used

Answer 15

TRUE

Question 16

(T/F): Weighted Average has to be used with Periodic Inventory Method

Answer 16

True

Question 17

(T/F): Moving Weighted Average has to be a Perpetual Inventory System

Answer 17

True;

Question 18

(T/F): LIFO = Lower of Cost or Market

Answer 18

True

Question 19

(T/F): If you want to use LIFO for tax purposes, you have to use it for GAAP also

Answer 19

True; LIFO conformity rule

Question 20

(T/F): Permanent market declines in inventory should be reflected in interim financial statements

Answer 20

True

Question 21

(T/F): Agricultural products (cotton) are recorded as revenue at time produced, not sold

Answer 21

True

Question 22

(T/F): F.O.B. Destination means that title passes when received by the buyer, and that packing, shipping, and handling costs are paid by the seller.

Answer 22

True

Question 23

(T/F): Inventory includes the cost of normal spoilage and freight in

Answer 23

True

Question 24

(T/F): Net Profit Margin is taken on Net selling price, not NRV

Answer 24

True