F3 - M3 - Inventory

Question 1

Types of Inventory

Answer 1

goods must be periodically counted, valued and recorded; 4 types

• Retail Inventory – resold in the same form it was purchased
• Manufactured
  o Raw Materials Inventory – Held for use
  o Work in Process (WIP) – in production but not complete
  o Finished Goods Inventory – in production and complete for sale

Question 2

General Rule

Answer 2

Any goods and materials company has “legal title”

Question 3

Goods in Transit

Answer 3

Are “we” buyer or seller

o Title Passes; sellers performance is complete
 FOB Shipping Point: Title passes when common carrier: Freight In
 FOB Destination: Titles passes when buyer receives the goods from common carrier

Question 4

If seller sends wrong goods

Answer 4

title reverts back to seller

Question 5

Consigned Goods

Answer 5

True owner; sales agent, “commission”, trying to sell it upon your behalf;

Consignor should include consigned goods in inventory because title and risk of loss is retained by the consigner

Question 6

Valuation of Inventory

Answer 6

• Stated at its costs, “at cost”, expected “profit” to recover costs; no loss is replacement or reproduction costs are lower; includes freight in
• Departures from the Cost Basis – “Exception”

Question 7

Valuation of Inventory - Departures from the Cost Basis – “Exception”

Answer 7

o Precious metals, meat and other agricultural products are valued at NRV; net selling price less costs of disposal
o Lower of costs or market and lower of cost and NRV – Loss on sale expected
 When cost is greater then NRV or market value
o Recognize loss in current period; GAAP, write down of inventory is reflected in COGS, unless material amount and should be separate
o Reversal of Inventory Write Downs – US = NO, IFRS = Yes
o Lower of Cost and NRV - IFRS = ALL; US GAAP = FIFO and WA
o NRV = Selling Price less costs to complete
o Lower of Cost or Market (US GAAP Only) – LIFO / Retail
o Market Value – lower of cost or market; current replacement costs does not exceed NRV

Question 8

Market Value

Answer 8

 Market Value – Middle Value of below

• US GAAP, MV is the median of an inventories items replacement costs, its market ceiling and market floor

Question 9

Replacement Costs

Answer 9

Cost to purchase item of inventory as of the valuation date

Question 10

Market Ceiling

Answer 10

NRV; net selling price minus costs to complete

Question 11

Market floor

Answer 11

Market ceiling less normal profit margin; NRV – Profit

Question 12

Disclosure

Answer 12

Substantial and Unusual disclosed in F/S

Question 13

Periodic Inventory System

Answer 13

Periodic Inventory System – 1 JE at time of sale; quantity of inventory is determined only by physical count; actual cist if COGS determined after each physical inventory by “squeezing” the difference between beginning inventory plus purchases less ending inventory

Beginning Inventory
\+ Purchases
= COGS Available for Sale
- Ending inventory
= COGS

Question 14

Perpetual Inventory System

Answer 14

2 JEs at the time of sale; updated for purchase and sales as they occur; actual COGS is determined and recorded with each sale; running total of inventory balances

Dr Cash
Cr Sales
Dr COGS
Cr Inventory

Question 15

Primary Inventory Cost Flow Assumptions

Answer 15

US GAAP, cost flow assumption, LIFO, FIFO, WA, is not required to have rational relationship with physical inventory; depends on companies agenda. IFRS is based on order in which products are sold relative they were put in inventory.

Question 16

Specific Identification Method

Answer 16

cost of each item in inventory is uniquely identified to that item

Question 17

FIFO

Answer 17

First In, First Out Method – Sell old; unsold newest; ending inventory and COGS are the same whether a periodic or perpetual inventory system; selling the old cheap one, lower expense, higher profit;

Question 18

Weighted Average Method

Answer 18

Periodic

End of period, average cost of each item in inventory

Total Cost of Inventory / Total # of Units Inventory Available

Ex: $40,250 COGAF / 9,000 units = $4.4722 per unit

Question 19

Moving Average Method

Answer 19

Perpetual

Computes weighted average after each purchase

Question 20

LIFO

Answer 20

Last In, First Out; ending inventory includes oldest costs; Only US, not allowed with IRFS; Does not relate to actual flow of company since oldest are usually sold first

Used for tax purposes; in GAAP F/S

Better match for expenses and revenues - current costs and current revenues, only if current

Question 21

Periods of Rising Prices

Answer 21

LIFO results in the lowest ending inventory, highest COGS and lowest net income

Question 22

LIFO Layers

Answer 22

LIFO periodic does not equal perpetual

Question 23

Comparison - Period of rising prices

Answer 23

Periodic
FIFO - High Ending Inventory, Low COGS
Weighted Average - Middle Ending Inventory, Middle COGS
LIFO - Low ending inventory, high COGS

Perpetual uses moving average and generally has higher ending inventory and lower COGS than periodic

Question 24

Dollar Value LIFO

Answer 24

Estimate of changes in price levels required

Measured in DOLLARS and ADJUSTED for changes in price levels

Price Index = Ending inventory at CURRENT year cost / ending inventory at BASE year cost

Question 25

Gross Profit Method

Answer 25

Quarterly and periodic only; interim

Determine the inventory cost for the interim F/S

Gross profit percentage is known and used to calculate cost of sales, back in COGS

Example: 20% Gross Margin, Gross sales 200,000 so COGS is 160,000, ending inventory 40,000

Question 26

Firm Purchase Commitments

Answer 26

Lock prices, if prices are expected to rise

Legally enforceable agreement to purchase a specified amount of goods in the future

Not always winners… price could fall