FAR 3 - M3 INVENTORY

Question 1

FIFO periodic and perpetual inventory system

results in

Answer 1

the same ending inventory cost

Question 2

Treatment of goods held on consignment

Answer 2

goods are included in the ending invy of the consignor

Question 3

Treatment of sale of goods held on consignment

Answer 3

goods are included in the COGS of the consignor

Question 4

Effect of FIFO on cogs and net income

Answer 4

Low COGS

Higher Net income

Question 5

Effect of dollar value LIFO on ending inventory

Answer 5

lowest ending inventory valuation because last in-first out
so LIFO goods are out first
FIFO makes up the ending inventory or higher end invy

Question 6

What is PERPETUAL inventory system

Answer 6

PERPETUAL - changes in inventory is recorded at the time of transaction

Question 7

What is PERIODIC inventory system

Answer 7

PERIODIC - physical count of inventory

Question 8

Which costing method produce a lower inventory turnover during inflation or rising prices?

Answer 8

FIFO
because COGS is low
End invy is high

cogs 1000
———- ——— = 1/2 or 50% inventory
ave inventory 2000

ex: COGS 1000
ave invy 2000

if cogs is higher 2000
———– = 100% turnover
2000

Question 9

Average pricing calc

Answer 9

Beg invy 10000* $3 = 30000
purch 1/2 5000 *4 = 20000
purch 1/3 5000 * 5 = 25000
sold 20000 units
————
75000

$75000 / 20000 total units = $3.75
ending invy (20000 - 10000 sold) = 10000 units * $3.75
= $37,500

Question 10

Moving average

Answer 10

Beg invy 40000 * $5 = $200,000
sold 35000 * $5 = 175,000
———————————————–
bal 5000 * $5 = 25,000
purch 20000 * $8 = 160,000
—————————————————
end invy 25000 * $7.4 = 185000

$185000 / 25000 = $7.4

Question 11

What do you recognize when the purchase price committed is higher than the market price of the goods?

Answer 11

recognize liability

committed purch price $5M
market price $3M
liability $2M

liability is recorded when the buyer is OBLIGATED to purchase

Question 12

Net realizable value calc

NRV

Answer 12

NRV = Selling price

less; Cost to complete or sell

Question 13

Lowere of Cost or MV

Answer 13

Rule of thumb: Compare Floor, Ceiling, Repl cost
Get the middle amount and compare with cost; use the lower amount

Cost LIFO 400,000

Market:
SP                 408000
cost to sell   (  20000)
                     ----------------
  NRV                    388000
less normal
profit margin   (60000)
                    -------------------
Market             328000

Replacement cost 360000

Middle amount - 360000
——————
LOWER 360000
LOSS 40000

Question 14

When do you recognize revenue when you sell AGRICULTURAL products and precious metals?

Answer 14

At the time of production (NOT at the time of sale)