FAR-2.1: Inventory

Question 1

what should inventory be valued at

Answer 1

lower of cost or market

Question 2

what is included in cost of inventory?

Answer 2

• warehousing costs prior to sale
• insurance, repackaging, modifications
• freight-in paid by the buyer
• transportation costs paid by the seller on consignment arrangements
• DO NOT include abnormal costs for idle factory expense, unallocated fixed overhead costs, excessive spoilage, double freight, and rehandling costs (these are expensed immediately)

Question 3

when does title transfer for FOB shipping point?

Answer 3

when the goods are given to a carrier (shipped)

included in seller’s books until shipped. if in transit at year end, the buyer owns it

Question 4

when does title transfer for FOB destination?

Answer 4

when the goods are received by (tendered to) the buyer Included in seller’s books until received by buyer

Question 5

does the consignor or consignee have the inventory on the balance sheet?

Answer 5

consignor has inventory on balance sheet even though consignee has possession. Consignee is just selling inventory on behalf of consignor

Question 6

types of inventory costing methods

Answer 6

• specific identification
• FIFO
• LIFO
• moving avg
• weighted avg

Question 7

does FIFO better represent actual costs on balance sheet or income statement

Answer 7

balance sheet

Question 8

does LIFO better represent actual costs on balance sheet or income statement

Answer 8

Income statement

Question 9

under perpetual, what inventory method would have the same ending inventory, FIFO or LIFO?

Answer 9

FIFO

Question 10

in periods of inflation, which will have a higher COGS (and lower earnings/taxes), FIFO or LIFO?

Answer 10

LIFO

Question 11

IFRS - which inventory valuation method is not allowed under IFRS?

Answer 11

LIFO - because it always reduces taxes in periods of inflation which exists in almost all countries

Question 12

what are the 3 ways to get the price index for dollar value LIFO?

Answer 12

• simplified (given)
• double extension (extend back to base year)
• link chain (cumulative index, compare with previous year)

Question 13

how do you determine market cost under US GAAP?

Answer 13

take the middle of:
ceiling = net realizable value (selling price - disposal costs)
floor = NRV - normal profit margin
replacement cost = purchase or reproduction
use the middle of the 3 for the market and compare to cost

Question 14

can you recover inventory losses under US GAAP?

Answer 14

no

Question 15

can you recover inventory losses under IFRS?

Answer 15

yes

Question 16

inventory estimation - gross profit method. how is it done?

Answer 16

beginning inventory
\+ purchases
= goods available for sale
- ??? ending inventory
= cost of goods sold

COGS estimated at xx% of sales
so ending inventory = goods avail for sale - (sales * xx%)

Question 17

inventory estimation - retail inventory method. are net markups or net markdowns or both included in the cost to retail percentage?

Answer 17

only net markups

Question 18

inventory estimation - retail inventory method. what is the formula/method for deriving ending inventory at cost

Answer 18

beginning inventory
\+ purchases
\+ freight in
\+ Net Markups
= goods available for sale (both cost and retail)
calculate cost ratio (cost / retail)

goods avail
- Net Markdowns
= sales price of goods avail for sale
- losses
- sales @ retail
= ending inventory @ retail
x cost ratio
= ending inventory at cost

Question 19

IFRS - what inventory valuation method is not allowed

Answer 19

LIFO

Question 20

IFRS - what inventory method is required for inventory of goods that are not interchangeable or goods that are produced and segregated for specific projects?

Answer 20

specific ID

Question 21

IFRS - Under US GAAP, inventory is valued at the lower of cost or market. What is the valuation method under IFRS?

Answer 21

lower of (original) cost or Net Realizable Value (LCNRV)

Question 22

IFRS - how are biological assets and agricultural produce measured and valued?

Answer 22

biological assets - fair value minus estimated sales costs

agricultural produce - fair value minus costs to sell at harvest

Question 23

IFRS - can interest be capitalized on items that are routinely manufactured?

Answer 23

yes, if there is a lengthy production period to prepare the goods for sale

Question 24

when accounting for a long-term construction contract using percentage of completion method, the income recognized goes to what account?

Answer 24

Construction in progress