FAR 2C - Inv Flashcards
What are the main inventory cost flow assumptions?
LIFO, FIFO, Average Cost, and Specific Identification are the primary methods for determining the cost flow of inventory.
What is Dollar-Value LIFO, and how is it calculated?
Dollar-Value LIFO approximates LIFO using dollar amounts rather than physical units.
Multiply the base-year layer by the price index to adjust inventory to the current dollar value.
What is FOB Shipping Point?
The buyer takes ownership of the goods when they leave the seller’s dock, and the buyer is responsible for shipping costs and risks.
What is FOB Destination?
The seller retains ownership of the goods until they are delivered to the buyer, and the buyer records inventory when received.
How is inventory measured under FIFO and Average Cost methods?
Inventory is measured at the lower of cost and net realizable value (NRV).
What is the ceiling and floor in the LIFO lower of cost or market (LCM) method?
The ceiling is NRV, and the floor is NRV minus a normal profit margin.
How are inventory and COGS determined under the periodic inventory system?
Inventory and COGS are determined at the end of the period based on a physical count.
COGS = Beginning Inventory + Purchases - Ending Inventory.
What is the key difference between LIFO and FIFO in a perpetual inventory system?
Under LIFO, perpetual results in a lower ending inventory than periodic. Under FIFO, perpetual and periodic systems produce the same ending inventory.
How are Freight In and Freight Out costs treated?
Freight In is capitalized as part of inventory costs and included in COGS when inventory is sold, while Freight Out is classified as a selling expense.
What is the gross profit method, and when is it used?
The gross profit method estimates ending inventory without a physical count and is typically used for interim reporting.
What is the perpetual inventory system?
The perpetual system continuously tracks inventory levels as units are received and sold.
What is the periodic inventory system?
The periodic system calculates inventory and COGS at the end of the period based on a physical count.
How is the COGS calculated under the periodic inventory system?
COGS = Beginning Inventory + Purchases - Ending Inventory
How does LIFO affect the calculation of inventory in the perpetual system?
LIFO results in a lower ending inventory under the perpetual system compared to the periodic system due to the timing of purchases and sales.
What is the retail method of inventory valuation?
The retail method converts retail prices to cost using a cost-to-retail ratio and can be applied under LIFO, FIFO, or average cost.
What is the treatment for goods owned on consignment in the consignor’s inventory?
Goods owned by the consignor (e.g., XYZ) on consignment should be included in the consignor’s inventory until sold.
What is the treatment for goods held on consignment in the consignee’s inventory?
Goods held by the consignee (e.g., XYZ) on consignment should be excluded from the consignee’s inventory, as they are owned by another entity.
What is LIFO’s designated market in lower of cost or market (LCM) valuation?
The designated market under LIFO is the replacement cost, as long as it falls between the ceiling (NRV) and the floor (NRV minus normal profit margin).
How is the retail method calculated?
1) Calculate the cost-to-retail ratio.
2) Determine ending inventory by subtracting sales, normal losses, and markdowns from retail.
3) Multiply ending inventory at retail by the cost-to-retail ratio.
How is the weighted average cost per unit calculated?
Weighted Average Cost per Unit = Total Cost of Units Available for Sale / Total Units Available for Sale.
If total units available for sale = 1,000 units and total cost = $5,000, then the weighted average cost per unit is $5.
LIFO Periodic Method (COGS Calculation): Formula:
COGS = Total Units Sold × Cost of Most Recent Purchases
If 100 units are sold, and the last purchase was at $10 per unit, then COGS = 100 × $10 = $1,000.
LIFO Inventory Calculation (Layers): Formula:
Inventory = Oldest Layer × Unit Cost + Newer Layer × Unit Cost
If 50 units are left from the first layer at $8/unit and 30 units from the second layer at $9/unit, inventory = (50 × 8) + (30 × 9) = $670.
Average Cost Method for Inventory: Formula:
Weighted Average Cost per Unit = Total Cost of Goods Available for Sale / Total Units Available for Sale
If total cost of goods available is $5,000 for 1,000 units, weighted average cost = $5,000 / 1,000 = $5 per unit.
Lower of Cost or Market (LCM) - LIFO Designated Market: Formula:
LCM = Replacement Cost, but limited by the NRV ceiling and NRV minus normal profit margin as the floor
If NRV is $50, normal profit margin is $10, and replacement cost is $40, then LCM = $40 because it’s between the ceiling ($50) and the floor ($40).
How is dividend income from preferred stock treated for an investor?
Dividend income from preferred stock is recognized separately from equity method earnings. It represents a fixed return based on ownership and is recorded as dividend income on the income statement.
How does LIFO affect inventory valuation versus equity trading?
For inventory, LIFO affects both the income statement (through COGS) and the balance sheet (as older inventory remains at outdated prices). In equity trading, LIFO influences capital gains or losses on the income statement, but securities are still marked to fair value on the balance sheet
How does LIFO influence gains or losses in inventory accounting vs. equity trading?
In inventory accounting, LIFO affects the cost of goods sold (COGS), influencing gross profit and net income. In equity trading, LIFO impacts capital gains or losses on the income statement, but does not affect gross profit or operational results.
How should an investor account for preferred dividends when calculating share of earnings from an investee?
If the investee has cumulative preferred stock, the investor must deduct preferred dividends (whether declared or not) before calculating its share of earnings or losses.
What are indicators of significant influence over an investee?
Indicators include representation on the board of directors, participation in policy-making, material intercompany transactions, interchange of managerial personnel, and technological dependency
