F3 M3 Inventory

Question 1

___ in inventory market value should be reflected in interim financial statements in the period incurred.

Answer 1

Permanent declines in inventory market value

Question 2

Gold, silver, and other precious metals, and meat and some agricultural products are valued at ____.

Answer 2

Net realizable value

Question 3

With agricultural products, revenue is recognized at ____ and not at time of sale.

Answer 3

Time of production

Question 4

The cost of shipping, packaging, and handling are costs for the (buyer/seller) with FOB destination?

Answer 4

Seller, title passes when received by the buyer

Question 5

The cost of shipping, packaging, and handling are costs for the (buyer/seller) with FOB shipping?

Answer 5

Buyer, title passes when it gets on the truck

Question 6

How does this affect COGS?

Understatement of beginning inventory

Answer 6

Understatement of COGS, this is the first line of the COGS calculation

Question 7

How does this affect COGS?

Overstatement of ending inventory

Answer 7

Understatement of COGS, if you overstate the ending inventory you’re saying you have more on hand thus meaning you sold less and had less cost

Question 8

Under US GAAP, ___ method most closely approximates the current cost for cost of goods sold.

Answer 8

LIFO, last in is the first out

Question 9

Under US GAAP, ___ method most closely approximates the current cost of ending inventory.

Answer 9

FIFO, the most recent purchases remain in ending inventory

Question 10

How do you compute the moving average?

Answer 10

Computer the weighted average costs after each purchase (total cost of inventory available after each purchase / total units available after each purchase).

Question 11

Under this method of inventory cost calculation a new weighted-average cost is computed after each purchase and issues are priced at the latest weighted average cost.

Answer 11

Moving average method

Question 12

Under ____ method, inventory is measured in dollars and is adjusted for changing in price levels.

Answer 12

Dollar-value LIFO

Question 13

How do you calculate a price index

Answer 13

Ending inventory current year cost / ending inventory at base year cost

Question 14

To compute the LIFO layer added in the current year at dollar-value LIFO, the calculation is:

Answer 14

LIFO layer at base year cost (what was added this year) is multiplied by the internally generated price index

Question 15

What is the gross profit margin mean?

Answer 15

Total revenue minus COGS = Gross profit
Gross profit margin means that the % is how much the gross profit is of the total revenue (i.e. 25% gross profit margin; the reverse is that 75% is COGS.)

Question 16

FIFO periodic and FIFO perpetual will (always/never) result in the same dollar valuation of ending inventory.

Answer 16

Always

Question 17

What are the steps to using the price index to calculate dollar-value LIFO inventory?
Jan 1 Inventory valued at $500,000
Price index is 1.10
Dec 31 inventory valued at $577,500 current year cost
Dec 31 inventory valued at $525,000 base year cost

Answer 17

Calculate the base year layer (525-500) = $25,000
Take the layer times the price index $27,500
Add the layer to the beginning inventory $527,500

Question 18

With a ______ system, the quantity of inventory is determined only by physical count, usually at least annually. Therefore, units of inventory and the associated costs are counted and valued at the end of the accounting period and the cost of inventory sold and inventory shortages cannot be easily distinguished.

Answer 18

Periodic

Question 19

Which US GAAP inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

Answer 19

FIFO

Question 20

When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, the loss must be recognized _____. A ____ must be recognized on the balance sheet and a description of the losses must be described in the footnotes.

Answer 20

Recognized at the time of the decline in price

Liability

Question 21

Under the lower of cost or net realizable value rule, what are the two options and how are they calculated?

Answer 21

Lower of cost = the current inventory basis (not the replacement cost)

Net realizable value = the selling price less costs to complete and sell.

The inventory would be valued at the lower of the two

Question 22

How does excluding goods from ending inventory affect retained earnings? Walk it through from assets to retained earnings.

Answer 22

Assets are understated, causing an overstatement of COGS, which results in an understatement of net income and retained earnings

Question 23

Until the inventory is sold, the consignor or the consignee will include the inventory in their ending inventory.

Answer 23

Consignor

Question 24

In Jan, Stitch Inc adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increase 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?

Answer 24

$83,000

$50,000 + ($30,000 x (1+10%))

Under dollar value LIFO we must restate this increase by the appropriate price-level index. Do not adjust the original $50,000

Question 25

How do you calculate the market value in the lower of cost and market?

Answer 25

It is the middle value of replacement cost, net realizable value, and net realizable value les normal profit margin

Question 26

Which inventory valuation method does IFRS require?

Answer 26

Lower of cost or market

REMEMEBER: IFRS says market is = net realizable value

Question 27

How will ending inventory balance being overstated by $1,000 affect COGS and retained earnings?

Answer 27

COGS will be understated by $1,000

Retained earnings will be overstated by $1,000

Question 28

At the end of Y1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of Y2, the inventory was still on hand and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for Year 2 to properly report the inventory value?

Answer 28

Remember that IFRS uses the lower of cost or NRV. In Y1 the NRV was lower. In Y2 the NRV is higher than the inventory cost. So we need to get back to the $100.
We need to debit inventory by $20 and credit expense for $20.

Question 29

A loss is only recorded under a purchase commitment in which the purchaser is obligated to _____.

Answer 29

Purchase a fixed number of units

Keep an eye out for wording of the question

Question 30

When doing a physical count of inventory, which of these should be included in our inventory?
A. 1,000 units of inventory shipped and billed to a customer, FOB destination
B. 6,000 units of inventory held on consignment for one of our suppliers
C. Both
D. Neither

Answer 30

D

Question 31

If beginning inventory is understated how does that affect COGS?

Answer 31

COGS is understated

Question 32

If beginning inventory is overstated how does that affect COGS?

Answer 32

COGS is overstated

Question 33

If ending inventory is understated how does that affect COGS?

Answer 33

COGS is overstated

Question 34

If ending inventory is overstated how does that affect COGS?

Answer 34

COGS Is understated

Question 35

If ending inventory is overstated how does that affect Retained earnings?

Answer 35

Retained earnings is overstated

Question 36

If ending inventory is understated how does that affect Retained earnings?

Answer 36

Retained earnings is understated

Question 37

A loss is only recorded under a purchase commitment in which the purchaser is obligated to _____.

Answer 37

Purchase a fixed number of units

Question 38

When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, 3 things must be in the financial statements of the purchaser:

Answer 38

The loss must be recognized at the time of the decline
A liability must be recognized on the balance sheet
A description of the losses must be described in the footnotes

Question 39

Calculate net realizable value

Answer 39

Selling price - costs to complete and sell

Question 40

In the lower of cost or net realizable value formula, the cost is equal to the _____.

Answer 40

Inventory, current cost, not the replacement cost