FAR 7 - INVENTORY Flashcards
Which costs are inventoriable?
- 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
When does ownership of goods transfer when shipped FOB Shipping Point?
- Title passes when shipped by seller
- Common carrier has received the inventory.
- Included in buyers books at year end
When does ownership transfer when goods are sent FOB Destination?
- Title passes when received by the buyer
- Included in seller’s books until received by the buyer
Which costs are non-inventoriable?
- Sales Commissions
- Interest on liabilities to vendors
- Shipping expense to customers
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.Unused discounts are allocated to financing expense.
How is gross margin calculated?
Gross Margin : Sales - COGS (BI + P - EI)
Describe the periodic inventory system.
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
Describe the perpetual inventory system.
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
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
How is inventory turnover calculated?
COGS / Average Inventory
How is Average Day’s Sales in inventory calculated?
365 / Inventory Turnover
Under a consignment system, who holds the consigned goods in inventory?
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
Under a consignment system, does the consignee hold consignment inventory in their own inventory?
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.
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over : COGS Under : ERE OverEI Under : COGS Over : ERE Under
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units : Weighted Average Cost Per Unit
How does FIFO’s COGS relate to LIFO’s in a time of changing prices?
FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.
How do FIFO and LIFO change in a period of falling prices?
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
FIFO
vs
LIFO
(Effects in Periods of Rising Prices)
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
Dollar Value LIFO
Steps
- Ending Inventory / Inflation Factor = Ending Inv @ Base
- Subtract Base (beg inv) from Ending Inv @ Base
- Difference is multiplied by Inflation Factor = Layer
- Layer + Beginning Inventory = Ending Inventory
- 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
Dollar Value LIFO:
Price Index Formula
(Inflation Factor)
Price Index = Ending Inventory / Ending Inv @ Base
LCM - Market Rule
Inventory will be reported at the lower of COST OR MARKET RULE vale.
Market = middle of 3 numbers
- Ceiling = NRV (selling price - disposal costs)
- Floor = NRV - normal Profit Margin
- 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
How are inventories reported under IFRS?
2 Ways
Lower of cost or net realizable value
Note: In IFRS, LIFO is not allowed.
Retail Inventory Methods
Conventional Retail Method
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
Inventory Turnover
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.
Inventory Costing Methods
FIFO
vs.
LIFO
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.
Inventory Estimation Methods
Gross Profit Method
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***
