FAR 7 - INVENTORY

Question 1

Which costs are inventoriable?

Answer 1

• Purchases - Net of Discounts
• Freight-in (if paid by buyer)
• Warehouse costs prior to sale
• Insurance, repackaging, modifications
• Transportation costs paid by seller on consignment

Question 2

When does ownership of goods transfer when shipped FOB Shipping Point?

Answer 2

• Title passes when shipped by seller
  
  • Common carrier has received the inventory.
• Included in buyers books at year end

Question 3

When does ownership transfer when goods are sent FOB Destination?

Answer 3

• Title passes when received by the buyer
• Included in seller’s books until received by the buyer

Question 4

Which costs are non-inventoriable?

Answer 4

• Sales Commissions
• Interest on liabilities to vendors
• Shipping expense to customers

Question 5

When are discounts recorded under the gross method?

Answer 5

Under the gross method, discounts are recorded only when used.

Question 6

Under the net method, when are discounts recorded?

Answer 6

Under the net method, discounts are recorded whether used or not.Unused discounts are allocated to financing expense.

Question 7

How is gross margin calculated?

Answer 7

Gross Margin : Sales - COGS (BI + P - EI)

Question 8

Describe the periodic inventory system.

Answer 8

Inventory is physically counted usually at the end of the year.

• Inventory purchases are debited to Purchases account.
• No adj to inventory until the end of the period & ending inventory has been physically counted
• COGS is the plug

JE at the time of purchase:

DR: Purchases

CR: A/P

JE at Year End:

DR: Ending Inventory

DR: COGS (plug)

CR: Purchases

Question 9

Describe the perpetual inventory system.

Answer 9

Inventory count continually updatedUses a moving-average cost flow method

• Purchases are debited to Inventory account.

At time of Purchase:

DR: Inventory

CR: A/P

As Sales Occur:

DR: A/R or Cash

CR: Sales Rev

DR: COGS

CR: Inventory

Question 10

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Answer 10

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Question 11

How is inventory turnover calculated?

Answer 11

COGS / Average Inventory

Question 12

How is Average Day’s Sales in inventory calculated?

Answer 12

365 / Inventory Turnover

Question 13

Under a consignment system, who holds the consigned goods in inventory?

Answer 13

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Inventory Costs of Consignor:

• Cost of goods
• Freight paid on shipments to consignee
• Warehouse costs
• Advertising
• In-transit insurance

Question 14

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

Answer 14

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Note: When goods are sold, sales price is given to the consignor after deducting any reimbursable costs and commissions earned by the consignee.

Question 15

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 15

EI Over : COGS Under : ERE OverEI Under : COGS Over : ERE Under

Question 16

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

Answer 16

COGAS / Total Units : Weighted Average Cost Per Unit

Question 17

How does FIFO’s COGS relate to LIFO’s in a time of changing prices?

Answer 17

FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.

Question 18

How do FIFO and LIFO change in a period of falling prices?

Answer 18

FIFO has the Highest COGSRemember: FIFO, that silly cat, got High from Catnip and is Falling off the couchIf COGS is High, that means EI is Low

Question 19

FIFO

vs

LIFO

(Effects in Periods of Rising Prices)

Answer 19

FIFO: Highest Ending Inv, Lowest COGS, Highest Net Inc

COGS = Understated

NI = Overstated

Ending Inv = OK

LIFO: Lowest Ending Inv, Highest COGS, Lowest Net Inc

COGS = OK

Profits = OK

Ending Inv = Understated

Question 20

Dollar Value LIFO

Steps

Answer 20

1. Ending Inventory / Inflation Factor = Ending Inv @ Base
2. Subtract Base (beg inv) from Ending Inv @ Base
3. Difference is multiplied by Inflation Factor = Layer
4. Layer + Beginning Inventory = Ending Inventory
5. If there’s a difference in Ending Inv, reduce Ending Inventory

DR: COGS

CR: Inventory

A. Find out the increase in ending inventory at base year $

B. Multiply the increase in inventory at base year $ by the price index which equals the layer added for the year.

C. Add layer to Ending Inv = Ending Inventory

D. Adjust Ending Inv if there are any differences

Question 21

Dollar Value LIFO:

Price Index Formula

(Inflation Factor)

Answer 21

Price Index = Ending Inventory / Ending Inv @ Base

Question 22

LCM - Market Rule

Inventory will be reported at the lower of COST OR MARKET RULE vale.

Answer 22

Market = middle of 3 numbers

1. Ceiling = NRV (selling price - disposal costs)
2. Floor = NRV - normal Profit Margin
3. Replacement Cost - purchase or reproduction value

If market is lower than cost, write down Inventory

DR: Loss on Inventory due to market decline

CR: Inventory

Question 23

How are inventories reported under IFRS?

2 Ways

Answer 23

Lower of cost or net realizable value

Note: In IFRS, LIFO is not allowed.

Question 24

Retail Inventory Methods

Conventional Retail Method

Answer 24

Beginning Inventory (Retail)

+ Mark ups

=Goods Avail for Sale

• Mark Downs

= Ending Inventory (Retail)

x C/R % (Goods avail for sale @ Cost / GAFS @ Retail)

= Ending Inventory @ Cost

Question 25

Inventory Turnover

Answer 25

The inventory turnover ratio is calculated by either dividing Sales by Inventory or dividing Cost of Goods Sold by Average Inventory. In an inflationary economy, inventory valued under FIFO will be higher and cost of goods sold lower than inventory valued under LIFO. A higher inventory value results in a higher denominator in the Sales / Inventory ratio and a lower cost of goods sold results in a lower numerator in the Cost of Goods Sold / Average Inventory ratio.

Question 26

Inventory Costing Methods

FIFO

vs.

LIFO

Answer 26

FIFO - First in, First out

• Closely relates to actualy physical flow of goods.
• Perpetual & Periodic inventory systems are the same.

LIFO - Last in, First out

• Better represents the flow of cash.
• Perpetual & Periodic inventory systems are different.

Question 27

Inventory Estimation Methods

Gross Profit Method

Answer 27

Beggining Inventory

+ Purchases

= Goods Avail For Sale

• Ending Inventory

= Cost of Goods Sold (COGS) [180]***

Gross Profit % = Gross Profit/Sales [40%]

COGS% = COGS/Sales [60%]

so if Sales = 300(60%) = 180***