F4- Inventory Flashcards
Which costs are inventoriable?
Purchases - Net of Discounts, Freight, Warehouse expenditures
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller’s inventory until it reaches the buyer
Which costs are non-inventoriable?
Sales Commissions
Interest on liabilities to vendors
Shipping expense to customers
How is gross margin calculated?
Gross Margin : Sales - COGS (BI + P - EI)
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period
Weighted-average cost flow method is used.
Describe the perpetual inventory system.
Inventory count continually updated
Uses a moving-average cost flow method
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
How is inventory turnover calculated?
COGS / Average Inventory
How is Average Day’s Sales in inventory calculated?
365 / Inventory Turnover
Under a consignment system, who holds the consigned goods in inventory?
The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
Under a consignment system, does the consignee hold consignment inventory in their own inventory?
No. Consignment goods are maintained in the inventory of the consignor, not the consignee.
What effect does overstatement or understatement of inventory have on ending retained earnings?
Misstatement of beginning inventory does NOT have an effect on ending retained earnings.
Misstatement of ENDING inventory does have an effect on retained earnings.
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over : COGS Under : ERE Over
EI Under : COGS Over : ERE Under
Which costs are included in COGS ‘first’ under the FIFO system?
- The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes.
- If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1
This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes
Which costs are included in COGS under the LIFO system?
- The last (newest) inventory you have in stock is the first inventory you record for COGS purposes.
- If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units : Weighted Average Cost Per Unit
How does FIFO’s COGS relate to LIFO’s in a time of changing prices?
FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.
How do FIFO and LIFO change in a period of rising prices?
FIFO has the Lowest COGS
If COGS is Low, that means EI is High
How do FIFO and LIFO change in a period of falling prices?
FIFO has the Highest COGS
If COGS is High, that means EI is Low
Under a Lower of Cost or Market, how is Market Ceiling Calculated?
- Same As ‘Net Realizable Value’
~ Selling Price - Selling Costs
Types of Inventories Held for Re-Sale
- Retail Inventory: Resold in substantially the same form in which it purchased
- Raw Materials Inventory: held for use in the production process.
- W.I.P Inventory : In Production but incomplete
- Finished Goods Inventory: Production inventory that is complete & ready for sale.
Goods & Materials Included in Inventory
- Has legal title
- Typically follows possession of the goods.
- Exceptions & special applications apply
Goods in Transit
- Title passes from the seller to the buyer in the manner & under the conditions explicitly agreed upon by the parties.
Shipment of non-conforming Goods
- Seller’s Inventory
- The title reverts to the seller upon rejection by the buyer
If buyer has the Right to Return the goods, included in the seller’s inventory if
- The amount of the goods likely to be returned CANNOT be estimated.
- Can be estimated, transactions will be recorded as a sale with an allowance for estimated returns recorded.
Cosigned Goods
- The Seller delivers goods to an agent to hold & sell on the consignor’s behalf.
- Include the cosigned goods in its inventory b/c title & risk of loss is retained by the cosigner even though the consignee possesses the goods.
Inventory Cost Valuation
- The price paid or consideration given to acquire an asset.
- Cost is the sum of the expenditures & charges, Direct & Indirect, in bringing goods to their required condition or location.
Selling Expenses
- Marketing Costs
- Freight out
- Abnormal spoilage
- Idle plant capacity costs should not be considered a part of inventory costs.
Lower of Cost or Market
[US GAAP]
- When the utility of goods is no longer as great as their cost.
- Recognize Loss in Current period
- Reversal of inventory write-downs- Prohibited
(US GAAP)
Lower of Cost Inventory
[IFRS]
- Cost is the sum of the expenditures & charges
- Direct & Indirect
- In bringing goods to their required condition or location.
Net Realizable Value Inventory
[IFRS]
- Item’s net selling price less the costs to complete & dispose of the inventory.
- Recognize loss in the current period
- Reversal of Inventory Write-downs
Periodic Inventory System
- Quantity of inventory is determined only by physical count, at least annually.
- Doesn’t keep running total of inventory balance.
Perpetual Inventory System
- Record for each item of inventory is updated for each purchase & each sale as they occur.
- Keeps running total of inventory balances.
FIFO Method
- First costs transferred to COGS
- Ending Inv. includes most recently incurred costs thus approximates replacement costs.
- Ending inv. the same with either periodic or perpetual system.
Moving Average Method
- Computes the Weighted Avg. cost after each purchase by the total units available after each purchase.
LIFO Method used for Tax Purposes:
- It must also be used in the GAAP financial statements.
The Yr-end Price Index is multiplied by the LIFO layer at the Base Year Cost to calculate:
- The LIFO layer Added at Dollar-Value LIFO.
Under a Lower of Cost or Market, how is Market Price calculated?
- The Replacement Cost
- Middle Number Betwn Market Ceiling & Floor
Under a Lower of Cost or Market, how is Market Floor Calculated?
Net Realizable Value - Normal Profit
