F3 - M3 - Inventory Flashcards
List types of inventory
- Retail
- Manufacturing
- Raw Materials
- Work in Process
- Finished Goods
When does title of goods pass from the buyer to the seller?
At the time that was noted in the agreement
If non-existing, title passes once goods have been physically delivered to the buyer
What does FOB mean?
Free On Board
Requires seller to deliver the goods to the location indicated as FOB at seller’s expense
FOB Shipping Point
Title passes to buyer when seller delivers the goods to a common carrier. (i.e., when the goods get in the truck for delivery)
FOB Destination
Title passes to buyer when the goods are delivered to the buyer
What happens if the seller ships the wrong goods (nonconforming)?
Title reverts to the seller upon rejection by the buyer
Revenue Recognition Rule
1 - Price is substantially fixed at date of sale
2 - Buyer assumes all risk of loss and are in possession
3 - Buyer has paid some form of consideration
4 - Product sold is substantially complete
5 - Amount of future returns can be reasonably estimated
Sales with a Right to Return
Can you reasonably estimate returns?
If NO - goods should be included in sellers inventory
If YES - record as a sale with an allowance for returns
Consigned Goods
Consignor = True Owner Consignee = Sales Agent ("Commissions")
Consignor includes goods in inventory because title and risk of loss remain with them until the goods are sold to a third party
Public Warehouses
Goods stored in a public warehouse and evidenced with a receipt should be included in the inventory of the company who holds the receipt.
Warehouse receipt acts as a title.
Sales with Mandatory Buyback
Occasionally, as part of a financing agreement
Seller includes goods in inventory even though title has passed to the buyer because they may be obligated to repurchase
Installment Sales
Seller retains legal title as security for the loan.
Can percentage of uncollectible debts be estimated?
If NO - sellers inventory
If YES - buyers inventory. Record as sale and set up an allowance
Valuation of Inventory
Inventory must be stated at COST.
No loss should be recognized even if replacement or reproduction costs are lower
Cost includes freight in - cost to ship to buyer.
Methods to determine cost of inventory
- First In, First Out (FIFO)
- Last In, First Out (LIFO) —> Not IFRS approved
- Average cost
- Retail Inventory
When is inventory NOT recorded at cost?
- Precious Metals and Farm Products = NRV
- If selling price is not as great as the cost (loss)
How to write down inventory
Immaterial - Increase COGS, Decreases Net Income
Material - List separately on the Income Statement and Disclose
Lower of Cost and Net Realizable Value
IFRS - Allows with use of all methods
GAAP - Can only use with FIFO and Weighted Average