FAR - Inventory

Question 1

Which costs are inventoriable?

Answer 1

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 2

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

Answer 2

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Question 3

When does ownership transfer when goods are sent FOB Destination?

Answer 3

FOB Destination keeps the items in the seller’s inventory until it reaches 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 counted at certain times throughout the period

Weighted-average cost flow method is used.”

Question 9

Describe the perpetual inventory system.

Answer 9

“Inventory count continually updated

Uses a moving-average cost flow method”

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.

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.

Question 15

What effect does overstatement or understatement of inventory have on ending retained earnings?

Answer 15

“Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.”

Question 16

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 16

“EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under”

Question 17

Which costs are included in COGS first under the FIFO (first in first out) system?

Answer 17

“The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes”

Question 18

Which costs are included in COGS under the LIFO (last in first out) system?

Answer 18

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Question 19

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

Answer 19

COGAS / Total Units : Weighted Average Cost Per Unit

Question 20

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

Answer 20

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

Question 21

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

Answer 21

“FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High”

Question 22

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

Answer 22

“FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low”

Question 23

Under a Lower of Cost or Market, how are the benchmarks calculated?

Answer 23

“Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit”