FAR 2C - Inv

Question 1

What are the main inventory cost flow assumptions?

Answer 1

LIFO, FIFO, Average Cost, and Specific Identification are the primary methods for determining the cost flow of inventory.

Question 2

What is Dollar-Value LIFO, and how is it calculated?

Answer 2

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.

Question 3

What is FOB Shipping Point?

Answer 3

The buyer takes ownership of the goods when they leave the seller’s dock, and the buyer is responsible for shipping costs and risks.

Question 4

What is FOB Destination?

Answer 4

The seller retains ownership of the goods until they are delivered to the buyer, and the buyer records inventory when received.

Question 5

How is inventory measured under FIFO and Average Cost methods?

Answer 5

Inventory is measured at the lower of cost and net realizable value (NRV).

Question 6

What is the ceiling and floor in the LIFO lower of cost or market (LCM) method?

Answer 6

The ceiling is NRV, and the floor is NRV minus a normal profit margin.

Question 7

How are inventory and COGS determined under the periodic inventory system?

Answer 7

Inventory and COGS are determined at the end of the period based on a physical count.

COGS = Beginning Inventory + Purchases - Ending Inventory.

Question 8

What is the key difference between LIFO and FIFO in a perpetual inventory system?

Answer 8

Under LIFO, perpetual results in a lower ending inventory than periodic. Under FIFO, perpetual and periodic systems produce the same ending inventory.

Question 9

How are Freight In and Freight Out costs treated?

Answer 9

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.

Question 10

What is the gross profit method, and when is it used?

Answer 10

The gross profit method estimates ending inventory without a physical count and is typically used for interim reporting.

Question 11

What is the perpetual inventory system?

Answer 11

The perpetual system continuously tracks inventory levels as units are received and sold.

Question 12

What is the periodic inventory system?

Answer 12

The periodic system calculates inventory and COGS at the end of the period based on a physical count.

Question 13

How is the COGS calculated under the periodic inventory system?

Answer 13

COGS = Beginning Inventory + Purchases - Ending Inventory

Question 14

How does LIFO affect the calculation of inventory in the perpetual system?

Answer 14

LIFO results in a lower ending inventory under the perpetual system compared to the periodic system due to the timing of purchases and sales.

Question 15

What is the retail method of inventory valuation?

Answer 15

The retail method converts retail prices to cost using a cost-to-retail ratio and can be applied under LIFO, FIFO, or average cost.

Question 16

What is the treatment for goods owned on consignment in the consignor’s inventory?

Answer 16

Goods owned by the consignor (e.g., XYZ) on consignment should be included in the consignor’s inventory until sold.

Question 17

What is the treatment for goods held on consignment in the consignee’s inventory?

Answer 17

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.

Question 18

What is LIFO’s designated market in lower of cost or market (LCM) valuation?

Answer 18

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).

Question 19

How is the retail method calculated?

Answer 19

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.

Question 20

How is the weighted average cost per unit calculated?

Answer 20

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.

Question 21

LIFO Periodic Method (COGS Calculation): Formula:

Answer 21

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.

Question 22

LIFO Inventory Calculation (Layers): Formula:

Answer 22

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.

Question 23

Average Cost Method for Inventory: Formula:

Answer 23

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.

Question 24

Lower of Cost or Market (LCM) - LIFO Designated Market: Formula:

Answer 24

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).

Question 25

How is dividend income from preferred stock treated for an investor?

Answer 25

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.

Question 26

How does LIFO affect inventory valuation versus equity trading?

Answer 26

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

Question 27

How does LIFO influence gains or losses in inventory accounting vs. equity trading?

Answer 27

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.

Question 28

How should an investor account for preferred dividends when calculating share of earnings from an investee?

Answer 28

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.

Question 29

What are indicators of significant influence over an investee?

Answer 29

Indicators include representation on the board of directors, participation in policy-making, material intercompany transactions, interchange of managerial personnel, and technological dependency