FAR 4-2: Inventories

Question 1

When does the title to goods pass for each of the following?

• F.O.B. destination
• F.O.B. shipping point
• C.O.D.
• Consigned goods

Answer 1

• F.O.B. destination: When received by buyer
• F.O.B. shipping point: When given to a common carrier
• C.O.D.: When received & paid for by buyer
• Consigned goods: When sold to a third party

Question 2

How is market calculated in the U.S. GAAP LCM method?

Answer 2

Market generally means current replacement cost, provided the current replacement cost does NOT exceed the market ceiling or fall below the market floor

• Ceiling: NRV (estimated net selling price less completion & disposal costs)
• Floor: NRV minus allowance for normal profit margin

Question 3

How is NRV calculated in the IFRS LCNRV method?

Answer 3

NRV is the net selling price less completion & disposal costs

Question 4

Explain the difference between periodic & perpetual inventory methods

Answer 4

Periodic:

• The quantity of inventory is determined only by physical count
• Ending inventory is physically counted & priced

Perpetual:

• Inventory is updated for each purchase & for each sale
• Keeps a running total of inventory balances

Question 5

Name several cost flow methods for inventory

Answer 5

• Specific identification
• FIFO
• LIFO (unity & dollar value)
• Averaging: Weighted average (associated with periodic) & Moving average (associated with perpetual)
• Gross profit
• Retail: Conventional retail, Cost retail, FIFO/Cost, LIFO/Cost, Dollar value LIFO/Cost

Question 6

Name several inventory methods

Answer 6

• Conventional retail
• Cost retail
• FIFO/Cost
• LIFO/Cost
• Dollar value LIFO/Cost

Question 7

Describe the conventional retail method

Answer 7

• Approximate LCM valuation of physical count
• Beginning inventory, purchases, markups, & markup cancellations are included in cost to retail ratio
• Example on flashcard 4-24

Question 8

Describe the LIFO cost retail inventory method

Answer 8

• Approximates original cost
• Net markups & net markdowns are included in cost to retail ratio; beginning inventory is excluded
• Example on flashcard 4-25

Question 9

Describe the FIFO cost retail inventory method

Answer 9

• Net markups & net markdowns are included in cost to retail ratio; beginning inventory is excluded
• Example on flashcard 4-26

Question 10

When are losses on firm purchase commitments recognized?

Answer 10

Losses are recognized in the period when the price declines

Dr. Estimated loss on purchase commitment
Cr. Estimated liability on purchase commitment

Question 11

Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties’ balance sheets?

Answer 11

Consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor, therefore the consigned items stay on the balance sheet of the consignor.

Question 12

During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory & reported net income? Which inventory method is prohibited under IFRS?

Answer 12

*Both ending inventory & net income will be lower when LIFO is used during a period of rising prices

LIFO = Lowest

*LIFO is prohibited under IFRS