FAR 4 - Inventories Flashcards
What is F.O.B. shipping point?
What is F.O.B. destination?
F.O.B. shipping point is when BUYER pays for shipping. Inventory passes to buyer when seller delivers goods to common carrier. BUYER PAYS - BUYER’S INVENTORY
F.O.B. destination is when SELLER pays for shipping and title passes when buyer receives goods from carrier. SELLER PAYS - SELLER’S INVENTORY UNTIL GOODS RECEIVED BY BUYER
If seller sells wrong goods? Who’s inventory does it go in?
If seller sells to buyer wrong goods, it goes in seller’s inventory.
If goods are sold to buyer but goods likely to be returned cannot be estimated - is that a sale?
If goods are sold to buyer but goods likely to be returned can be estimated - is that a sale?
If goods are sold to buyer, but you cannot estimate returns on sale - NO SALE
If goods are sold to buyer, but you can estimate returns on sales - SALE
Who is consignor and who is consignee?
The consignor is the TRUE OWNER. The consignor delivers goods to the consignee to hold and sell on the consignor’s behalf.
How should inventory be valued? General Rule
How should inventory be valued? Exception
1) GR: Inventory should be valued at COST, if you think it will be sold at a PROFIT.
2) Exception: If you think inventory will be sold at a LOSS.
Inventory should be valued at:
Lower of Cost or Market
or
Lower of Cost and Net Realizable value
How should inventory be measured under if it does not use LIFO?
How should inventory be measured under if it does use LIFO?
IMPORTANT *** MEMORIZE
If inventory will be sold at a loss and does not use LIFO, use LOWER of COST and NRV - LIKE IFRS
If inventory will be sold at a loss and uses LIFO, use LOWER of COST and MARKET
Does IFRS allow LIFO?
No IFRS does not allow the use of LIFO
Does IFRS use Lower of Cost and Market or Lower of Cost and NRV?
IFRS measures all inventory at Lower of Covst and NRV.
How are gold, silver, and other precious metals, meat, and agricultural products measured at?
Gold, silver, other precious metals, meat, and agricultural products are measured at NET REALIZABLE VALUE.
How do you write-down inventory?
If it is material - it should be identified and separately disclosed in the income statement. -in unusual and infrequent
If it is NOT material - the write-down should increase COGS.
Difference between U.S. GAAP and IFRS for recoveries of write-downs.
Under U.S. GAAP you cannot recover write-offs of inventory.
Under IFRS you can recover write-offs of inventory but to the extent of the original write-down - recorded as a reduction of total inventory costs on COGs.
How do you define Lower of Cost or Market under U.S. GAAP?
- Market is the middle value of replacement cost, market ceiling, and market floor
1) Replacement cost - cost to purchase the item of inventory at the valuation date
2) Market Ceiling - OR NRV - item’s selling price minus cost to dispose
3) Market Floor - NRV minus normal profit margin.
How do you find COGS calculation?
Beginning Inventory \+Purchases (net of returns and discounts) = Cost of goods available for sale - Ending inventory = COGS
Difference between periodic and perpetual inventory system?
Periodic uses purchases - at the end of accounting period.
Perpetual there is no purchases - updated for each purchase and each sale as they occur.
What happens if ending inventory is understated? What happens if ending inventory is overstated?
If EI is overstated - THEN COGS is understated, and Gross profit is overstated.
If EI is understated - Then COGS is overstated, and gross profit is understated.
