FAR 13

Question 1

What are the different ways to value inventory

Answer 1

lower of cost or NRV

lower of cost or market

Question 2

How do you valuate inventory under FIFO and average-cost method and LIFO

Answer 2

• These both use lower of cost or NRV

LIFO- LCM

Question 3

How do you calculate NRV

Answer 3

NRV = selling price - cost of completion

Question 4

Lower of cost or market

Answer 4

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

Question 5

When do you recognize an impairment loss on inventory and the JE

Answer 5

• 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

Question 6

What is casualty Loss on Inventory

Answer 6

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

Question 7

What happens when prices are rising in cost of inventory

Answer 7

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

Question 8

What is LIFO Liquidation

Answer 8

This is when the oldest layer of cost is reduced because more units were sold in the current years than purchased

Question 9

What is the gross margin method

Answer 9

Sales - cost = margin
100-70 = margin of 30

Therefore COGS is 70% of sales and margin is 30%

Question 10

What is the inventory equation

Answer 10

begin Inventory
\+ purchases
= Goods available for sale
- Ending Inventory
= COGS

Question 11

Purchase commitments - what do you do if there is a loss and terms can be modified? What is the terms can’t be modified?

Answer 11

• 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

Question 12

How is Inventory valued under IFRS

Answer 12

• Inventor is valued ar lower of cost or NRV
• LIFO is not allowed
• Reversal of Inventory is allowed under IFRS

Question 13

What is the difference between FOB destination and shipping point

Answer 13

FOB destination = the ownership stay with seller until goods are delivered

FOB shipping point = ownership transfers to buyer when goods are shipped

Question 14

What is included in inventory costs:

Answer 14

• Purchase returns
• Freight in (shipping costs to get the inventory to the warehouse
• Sales tax on acquisition
• Insurance on transit

Question 15

What is excluded from cost of inventory

Answer 15

• Freight -out (selling expense)

- Interest on purchase - this is financing

Question 16

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

Answer 16

• You need to include it back into your inventory because it is not delivered to the carrier

Question 17

How do you estimate how much shipping costs to include in inventory at the end of the period

Answer 17

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

Question 18

What types of shipping costs are considered selling costs and not included in inventory or cost of sales

Answer 18

The costs of shipping goods to customers is a selling expense

Question 19

How do you calculate gross margin and net profit on items sold on consignment (2/3)

Answer 19

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

Question 20

How do you calculate the COGS using the conventional retail method

Answer 20

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