F3 - M3 - Inventory Flashcards
Types of Inventory
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
General Rule
Any goods and materials company has “legal title”
Goods in Transit
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
If seller sends wrong goods
title reverts back to seller
Consigned Goods
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
Valuation of Inventory
- 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”
Valuation of Inventory - Departures from the Cost Basis – “Exception”
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
Market Value
Market Value – Middle Value of below
• US GAAP, MV is the median of an inventories items replacement costs, its market ceiling and market floor
Replacement Costs
Cost to purchase item of inventory as of the valuation date
Market Ceiling
NRV; net selling price minus costs to complete
Market floor
Market ceiling less normal profit margin; NRV – Profit
Disclosure
Substantial and Unusual disclosed in F/S
Periodic Inventory System
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
Perpetual Inventory System
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
Primary Inventory Cost Flow Assumptions
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.
