FAR 13 Flashcards
What are the different ways to value inventory
lower of cost or NRV
lower of cost or market
How do you valuate inventory under FIFO and average-cost method and LIFO
- These both use lower of cost or NRV
LIFO- LCM
How do you calculate NRV
NRV = selling price - cost of completion
Lower of cost or market
This is the house:
compare cost to:
ceiling - NRV (selling price - cost of completion)
replacement cost
Floor - NRV - profit margin
take the middle of the three and compare to cost - this is LCM
When do you recognize an impairment loss on inventory and the JE
- If your inventory is being carried at cost (lower than make or NRV) and NRV declines below cost - the inventory is written down
dr. Loss on inventory write down
cr. Inventory $20,000
What is casualty Loss on Inventory
If you have a loss of inventory but were able to recover some of it and get insurance - then the loss you recognize is only the amount not covered by each:
Lost $50,000 worth of inventory due to flood
You sold some damaged inventory for $5,000
You got insurance for $30,000
You recognize loss of $15,000
50,000 - 5,000 - 30,000 = 15,000
What happens when prices are rising in cost of inventory
FIFO - COGS is the lowest, provides the highest net income, and highest ending inventory
LIFO - COGS is the highest, net income is the lowest, and have lowest ending inventory
What is LIFO Liquidation
This is when the oldest layer of cost is reduced because more units were sold in the current years than purchased
What is the gross margin method
Sales - cost = margin
100-70 = margin of 30
Therefore COGS is 70% of sales and margin is 30%
What is the inventory equation
begin Inventory \+ purchases = Goods available for sale - Ending Inventory = COGS
Purchase commitments - what do you do if there is a loss and terms can be modified? What is the terms can’t be modified?
- If yes can be modified - the potential loss id disclosed in a footnote, but doesn’t have to be modified
- If can’t be modified then the loss if probably and must be accrued and recognized on the balance sheet
How is Inventory valued under IFRS
- Inventor is valued ar lower of cost or NRV
- LIFO is not allowed
- Reversal of Inventory is allowed under IFRS
What is the difference between FOB destination and shipping point
FOB destination = the ownership stay with seller until goods are delivered
FOB shipping point = ownership transfers to buyer when goods are shipped
What is included in inventory costs:
- Purchase returns
- Freight in (shipping costs to get the inventory to the warehouse
- Sales tax on acquisition
- Insurance on transit
What is excluded from cost of inventory
- Freight -out (selling expense)
- Interest on purchase - this is financing
What do you do if you have merchandize in you shipping area that is about to be shipped to a customer FOB shipping point, but was not delivered to the carrier yet as of the balance sheet date
- You need to include it back into your inventory because it is not delivered to the carrier
How do you estimate how much shipping costs to include in inventory at the end of the period
Use percentages:
Purchases during year: $12M
Shipping costs: $1.5M
Inventory at end of year: $3M
This is 25% of purchases so take 25% of shipping costs: 25% * 1.5 = $375,000
What types of shipping costs are considered selling costs and not included in inventory or cost of sales
The costs of shipping goods to customers is a selling expense
How do you calculate gross margin and net profit on items sold on consignment (2/3)
Gross Margin:
Cost of items shipped to consignee (2/3 * 72,000 = 48,000)
Profit on 2/3 sold = $80,000
Freight to ship items to consignee selling cost 2/3 * $7,500)
Gross margin: 80,000 -48,000 -7,500 = $27,000
Net Profit:
Gross margin
- advertising costs
- commission
= Net profit
27,000
-4,500
-8,000
= $14,500
How do you calculate the COGS using the conventional retail method
beginning inventory at cost is compared to beginning inventory at retail which includes retail price and markups:
beg. Inventory: $600 beg Inventory at retail: $920 = markups $40 Total of $920 + $40 = $960 = a cost to retail percentage of 62.5%
600/960 = 62.5%
Ending inventory at retail: Beginning inventory at retail: $960 - Sales $780 - markdowns $60 =$120 Ending inventory at lower of cost or market = $120 *62.5% = $75,000
COGS is purchases - ending inventory at lower of cost or market:
$600,000 - $75,000 = $525,000
