FAR 7 - INVENTORY Flashcards
IFRS requires inventory to be carried at what value?
the lower of cost or net realizable value
**When there are multiple items, compare the cost vs NRV for each item separately
How do you calculate net realizable value?
Sales price reduced by costs to complete the units and costs required to sell the units
How do you use the average pricing method to determine the value of inventory?
Example:
1/1 Beg inv 10 units at $3
1/5 Purch. 5 units at $4
1/15 Purch. 5units at $5
1/20 Sales at $1/unit, 10 units
At what price would you report the cost of goods sold on the income statement?
Under the average pricing method, you would pro rata each portion of units over the total number of units and then multiply that result by the dollar cost for that portion.
Then you would add each dollar amount up, and use that sum to multiply against the number of units sold to determine the cost of goods sold.
(I.e.,
step 1: 10+5+5= 20 total units. (10/203)+(5/204)+(5/20*5)= X
step 2: X times 10 units sold = COGS)
How is the inventory turnover ratio calculated?
Inventory turnover ratio is COGS/Avg Inventory
In an inflationary economy, under which valuation method would inventory be valued lower?
in an inflationary economy, inventory valued under LIFO will be lower (which means cost of goods sold would be higher) than inventory valued under FIFO.
**Under an inflationary economy, prices are rising. Under LIFO, all of the most recently bought items are sold first, which means all of the most expensive items bought under inflation would be sold first (higher cost of goods sold), and all the cheaper items bought before inflation would be left in inventory (lower inventory value). Under FIFO, it’s the opposite effect.
Under the perpetual method, purchases and sales are recognized as they ____
occur
Under the periodic method, it is assumed that all sales occurred at _______
the end of the period
Under GAAP, inventory is valued at ____
lower of cost or market (ceiling/floor method)
Under IFRS, is LIFO an acceptable method of inventory valuation?
No, LIFO cannot be used under IFRS
Under periods of rising prices (inflation), LIFO will result in the lowest value of inventory, highest cost of goods sold. Since IFRS does not allow LIFO, what method under IFRS would yield the lowest inventory value?
Since LIFO cannot be used under IFRS, weighted average will result in the lowest inventory value under periods of inflation
Should Inventory that has been shipped F.O.B. destination still be included in an inventory count?
Yes, since it is f.o.b. destination. The inventory still belongs to the entity until the other party receives it
Should inventory held on consignment for another party still be included in an inventory count?
No, inventory held on consignment for another party still belongs to that party and shouldn’t be included in an inventory count
When goods are held on consignment, are the goods included in the consignee’s inventory?
No, the consignee has custody of the goods but not ownership.
The goods should not be included in the consignee’s inventory and are not reported as cost of sales.
In dollar value LIFO, how do you compute the index used to convert the current year’s inventory layer?
Ending inventory at current year cost / Ending inventory at base year cost
Which inventory valuation method produces the same dollar amount result in ending inventory in both periodic and perpetual inventory system?
FIFO
**Since FIFO assumes that ending inventory consists of the most recent purchases, the FIFO cost flow assumption leads to the same ending inventory balance under both the perpetual and periodic systems
