FAR - Inventory 2 Flashcards
For manufacturers, cost of goods sold is the same as cost of goods manufactured.
FALSE
For a manufacturer, cost of goods sold essentially equals beginning finished goods inventory, plus the cost of goods manufactured, minus ending finished goods inventory.
In a periodic system, inventory is continually updated for purchases as they occur.
FALSE
In a periodic system, a purchases account is used, and the inventory account remains unchanged during the accounting period.
In practice, most sales transactions are recorded by the seller at the time of shipment and the buyer at the time of receipt.
TRUE
In practice, most sales transactions are recorded by the seller at the time of shipment and the buyer at the time of receipt.
Inventory is primarily accounted for at cost, which is the price paid or consideration given to acquire an asset.
TRUE
Inventory is primarily accounted for at cost, which is “the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.”
Purchased inventory is measured at invoice cost, net of any discounts taken.
TRUE
Purchased inventory is measured at invoice cost. Trade discounts are usually subtracted prior to invoicing. The buyer’s transportation costs for purchased goods are inventoried.
Interest costs must be capitalized as part of inventory cost in the periods in which they were incurred.
FALSE
Interest is ordinarily not capitalized as part of inventory because its incurrence is relatively remote from the purchase or manufacture of products.
If goods were sold under FOB destination, the seller includes the goods in its inventory until delivery of the goods to the buyer.
TRUE
FOB destination means title and risk of loss pass to the buyer when the seller makes a proper tender of delivery of the goods at the destination. The seller should include the goods in inventory until that time.
Herc Co.’s inventory at December 31, Year 1, was $1.5 million based on a physical count priced at cost, and before any necessary adjustment for the following:
Merchandise costing $90,000 was shipped FOB shipping point from a vendor on December 30, Year 1, and was received and recorded on January 5, Year 2.
Goods in the shipping area were excluded from inventory although shipment was not made until January 4, Year 2. The goods, billed to the customer FOB shipping point on December 30, Year 1, had a cost of $120,000.
What amount should Herc report as inventory in its December 31, Year 1, balance sheet?
- $1,500,000
- $1,590,000
- $1,620,000
- $1,710,000
$1,710,000
The inventory balance prior to adjustments was $1.5 million. The merchandise shipped FOB shipping point to Herc should be included because title passed when the goods were shipped. The goods in the shipping area should be included because title did not pass until the goods were shipped in Year 2. Thus, inventory reported at December 31, Year 1, should be $1,710,000 ($1,500,000 + $90,000 + $120,000).
Which of the following statements regarding inventory accounting systems is true?
- A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
- A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
- An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.
- An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.
2. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
The periodic inventory system calculates the cost of goods sold using the following formula: cost of goods sold = beginning inventory + purchases – ending inventory. Because inventory is not accounted for directly when goods are sold, inventory shortages will be hidden in the cost of goods sold account. An advantage of the perpetual system is that it debits the actual cost of goods sold and credits inventory for each transaction. Thus, after the end-of-period count of inventory, any overage or shortage is separately identified by a credit or debit, respectively, to the inventory over-and-short account.
On December 28, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:
Packaging for shipment
$1,000
Shipping
1,500
Special handling charges
2,000
These goods were received on December 31. In Kerr’s December 31 balance sheet, what amount of cost for these goods should be included in inventory?
$50,000
FOB destination means that title passes upon delivery at the destination, the seller bears the risk of loss during transit, and the seller is responsible for the expense of delivering the goods to the designated point. Consequently, the packaging, shipping, and handling costs are not included in the buyer’s inventory. The amount that Kerr should include is, therefore, the purchase price of $50,000.
Dell Company’s inventory at December 31, Year 1, was $1.2 million based on a physical count of goods priced at cost, and before any necessary year-end adjustments relating to the following:
Included in the physical count were goods billed to a customer FOB shipping point on December 30, Year 1. These goods had a cost of $25,000 and were picked up by the carrier on January 7, Year 2.
Goods shipped FOB shipping point on December 28, Year 1, from a vendor to Dell were received on January 4, Year 2. The invoice cost was $60,000.
What amount should Dell report as inventory in its December 31, Year 1, balance sheet?
$1,260,000
The inventory account balance prior to adjustments is $1.2 million. FOB shipping point means that title to the goods normally passes to the buyer at the time of shipment. The $25,000 of goods shipped by Dell on January 7 should remain in the year-end inventory because title did not pass until after the beginning of the following year. The $60,000 worth of goods shipped to Dell prior to year end (December 28) should be included in Dell’s inventory even though they were not received until the following year (January 4). The title passed to Dell at the time of shipment. Consequently, Dell’s inventory at year end should be reported at $1,260,000 ($1,200,000 + $60,000).
The following information applied to Fenn, Inc., for the year just ended:
Merchandise purchased for resale
$400,000
Freight-in
10,000
Freight-out
5,000
Purchase returns
2,000
Fenn’s inventoriable cost for the year was
$408,000
Inventoriable cost is the sum of the applicable expenditures and charges directly or indirectly incurred in bringing all items of inventory to their existing condition and location. Thus, inventoriable cost includes the $400,000 cost of the merchandise purchased, plus the $10,000 of freight-in, minus the $2,000 of purchase returns. Freight-out is not a cost incurred in bringing the inventory to a salable condition. Consequently, the inventoriable cost for Fenn was $408,000 ($400,000 + $10,000 – $2,000). NOTE: The assumption is that purchases, freight-in, etc., are tracked in separate accounts.
Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data:
Purchases during the year
$12.0 million
Shipping costs from overseas
1.5 million
Shipping costs to export customers
1.0 million
Inventory at year end
3.0 million
What amount of shipping costs should be included in Seafood Trading’s year-end inventory valuation?
$375,000
Freight costs of acquiring inventory are included in inventory. Freight costs incurred in shipping inventory to customers are not. The freight-in costs must be prorated to ending inventory and cost of goods sold. Because the entity began operations during the year, it has no beginning inventory. Accordingly, the freight-in costs assigned to ending inventory equal $375,000 [$1.5 million freight-in × ($3 million inventory ÷ $12 million purchases)].
The following information was taken from Cody Company’s accounting records:
Increase in direct materials inventory
$15,000
Decrease in finished goods inventory
35,000
Direct materials purchased
430,000
Direct-labor payroll
200,000
Factory overhead
300,000
Freight-out
45,000
Cody had no work-in-process inventory at the beginning or end of the year. Cost of goods sold was
$950,000
The materials used equaled $415,000 ($430,000 purchased – $15,000 increase in materials inventory). Because the beginning and ending balances of work-in-process were zero, cost of goods manufactured was equal to direct materials used, direct labor, and overhead, or $915,000 ($415,000 + $200,000 + $300,000). Given that the finished goods inventory decreased by $35,000, cost of goods sold was $950,000 ($915,000 CGM + $35,000 FG decrease). Freight-out is a selling cost. It is not inventoriable and is therefore not included in cost of goods sold.
The following information pertains to Deal Corp.’s Year 2 cost of goods sold:
Inventory, 12/31/Year 1
$ 90,000
Year 2 purchases
124,000
Year 2 write-off of obsolete inventory
34,000
Inventory, 12/31/Year 2
30,000
The inventory written off became obsolete because of an unexpected and unusual technological advance by a competitor. In its Year 2 income statement, what amount should Deal report as cost of goods sold?
$150,000
Cost of goods sold equals beginning inventory plus purchases, minus write-offs, minus ending inventory. Deal’s cost of goods sold can thus be calculated as follows:
Beginning inventory
$ 90,000
Purchases
124,000
Write-off
(34,000)
Cost of goods sold
(150,000)
Ending inventory
$ 30,000