FAR - Inventory Flashcards
On October 1, the Ajax Company consigned 100 television sets to M & R Retailers, Inc. Each television set had a cost of $150. Freight on the shipment was paid by Ajax in the amount of $200. On December 1, M & R submitted an “account sales” stating that it had sold 60 sets, and it remitted the $12,840 balance due. The remittance was net of the following deductions from the sales price of the televisions sold:
Commission
20% of sales price
Advertising
$500
Delivery and installation charges
100
What was the total sales price of the television sets sold by M & R?
$16,800
Because the television sets are on consignment from Ajax, M & R should make no accounting entry to record the receipt of the sets. The inventory should remain on the books of Ajax. A consignment-in account is used by M & R to record reimbursable expenses in connection with the consignment and sales of the consigned goods. Assuming the advertising and delivery and installation charges are expenses of Ajax, they are debits to consignment-in (reimbursable cash outlays). Moreover, the commission of 20% of the sales price due M & R should be debited to the account. The calculation of sales price is given below:
Consignment-In
Adv.
$ 500
X
Sales
Del. & inst.
100
Commission
.2X
Remit to Ajax
$12,840
$500 + $100 + .2X + $12,840
=
X
$13,440
=
X – .2X
$13,440
=
.8X
$16,800
=
X
In accounting for inventories, GAAP require departure from the historical cost principle when the utility of inventory has fallen below cost. Inventory accounted for under certain cost flow methods can be measured at the lower of cost or net realizable value (NRV). The term “net realizable value (NRV)” as defined here means
Estimated selling price minus estimated costs of completion and disposal.
Inventory measured using any cost method other than LIFO or retail (e.g., FIFO or average cost) must be measured at the lower of cost or NRV. NRV is the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation.
Which of the following statements are correct when a company applying the lower-of-cost-or-market method reports its inventory at replacement cost?
I. The original cost is less than replacement cost.
II. The net realizable value is greater than replacement cost.
- Both I and II
- II Only
- Neither I or II
- I Only
II ONLY
Market equals current replacement cost subject to a maximum and a minimum. The maximum is net realizable value, and the minimum is net realizable value minus normal profit. When replacement cost is within this range, it is used as market. Consequently, only statement II is correct.
The following information applies to the income statement of Addison Company:
Gross sales
$1,000,000
Net sales
900,000
Freight-in
10,000
Ending inventory
200,000
Gross profit margin
40%
Addison’s cost of goods available for sale is
$740,000
The gross profit (gross margin) method calculates ending inventory at a given time by subtracting an estimated cost of goods sold from the sum of beginning inventory and purchases (or cost of goods manufactured). The estimated cost of goods sold equals sales minus the gross profit. The gross profit equals sales multiplied by the gross profit percentage, an amount ordinarily determined on a historical basis. Given that the gross margin percentage is 40% of net sales, cost of goods sold must be 60% of net sales, or $540,000 ($900,000 × 60%). Goods available for sale equals cost of goods sold plus ending inventory ($540,000 + $200,000 = $740,000).
In January, Stitch, Inc., adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?
$83,000
Dollar-value LIFO determines changes in inventory in terms of dollars of constant purchasing power, not units of physical inventory. The first step is to determine the inventory layers at base-year prices by dividing current-year (year-end) cost amounts by the relevant respective annual price indexes. These layers are calculated using a LIFO assumption. The second step is to restate the layers by multiplying by the relevant indexes. In this case, the layers stated at base-year prices ($50,000 and $30,000) are given, and the relevant indexes are 1.0 for the base year and 1.1 (1 + .10) for the second year. The dollar-value LIFO measurement is $83,000.
Base layer
$50,000
× 1.0 =
$50,000
Second layer
30,000
× 1.1 =
33,000
$80,000
$83,000
A company determined the following information for its FIFO basis inventory at the end of an interim period on June 30, Year 2:
Historical cost
$80,000
Net realizable value (NRV)
77,000
Current replacement cost
76,000
Normal profit margin
2,000
The company expects that on December 31, Year 2, the inventory’s NRV will be at least $81,000. What amount of inventory should the company report in its interim financial statements under IFRS and under U.S. GAAP on June 30, Year 2?
IFRS - $77,000
GAAP - $80,000
Under U.S. GAAP, inventory that is accounted for using the FIFO method is measured at the lower of cost or net realizable value. Although the NRV is lower than the historical cost, the inventory is reported in the interim financial statements at its historical cost of $80,000 because no write-down of inventory is reasonably anticipated for the year. Under IFRS, the inventory is measured at the lower of cost ($80,000) and NRV ($77,000) for each interim reporting period. Whether a market decline is expected to be reversed by the end of the annual period is not considered. Thus, the inventory is reported at its NRV of $77,000.
On January 1, Year 4, Card Corp. signed a 3-year, noncancelable purchase contract that allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. The price is $.10 per unit, and the contract guarantees a minimum annual purchase of 100,000 units. During Year 4, the part unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31, Year 4, and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its Year 4 income statement?
$16,000
The entity must accrue a loss in the current year on goods subject to a firm purchase commitment if their market price declines below the commitment price. This loss should be measured in the same manner as inventory losses. Disclosure of the loss also is required. Consequently, given that 200,000 units must be purchased over the next 2 years for $20,000 (200,000 × $.10), and the parts can be sold as scrap for $4,000 (200,000 × $.02), the amount of probable loss for Year 4 is $16,000 ($20,000 – $4,000).
A firm’s ending inventory balance was overstated by $1,000. Which of the following statements is correct according to a periodic inventory system?
The retained earnings were overstated by $1,000.
Cost of goods sold (COGS) equals beginning inventory, plus purchases during the period, minus ending inventory. Thus, a $1,000 overstatement of the ending inventory results in a $1,000 understatement of cost of goods sold. The $1,000 understatement of COGS results in a $1,000 overstatement of gross profit, and $1,000 overstatement of retained earnings.
A company determined the following values for its inventory as of the end of the fiscal year:
Historical cost
$300,000
Current replacement cost
280,000
Selling price
308,000
Normal profit margin
13,000
Cost to sell
10,000
What amount should the company report as inventory on its year-end balance sheet under the following cost methods?
LIFO - $285,000
FIFO - $298,000
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or market (LCM). Market is the current cost to replace inventory, subject to certain limitations. Market cannot be greater than a ceiling equal to net realizable value (NRV) of $298,000 ($308,000 estimated selling price – $10,000 cost of disposal). It cannot be less than a floor equal to NRV reduced by a normal profit margin of $285,000 ($298,000 NRV – $13,000 normal profit margin). Because the current replacement cost ($280,000) is lower than the floor ($285,000), market is $285,000. Thus, under the LIFO method, the inventory is reported at $285,000, which is lower than the $300,000 cost. Inventory accounted for using the FIFO method (or any cost method other than LIFO or retail) is measured at the lower of cost or net realizable value (NRV). Thus, under FIFO method, the inventory is reported at its NRV of $298,000, which is lower than the $300,000 cost.
Stone Co. had the following consignment transactions during December:
Inventory shipped on consignment to Beta Co.
$18,000
Freight paid by Stone
900
Inventory received on consignment from Alpha Co.
12,000
Freight paid by Alpha
500
No sales of consigned goods were made through December 31. Stone’s December 31 balance sheet should include consigned inventory at
$18,900
In a consignment, the consignor ships merchandise to the consignee, who acts as agent for the consignor in selling the goods. The goods are in the physical possession of the consignee but remain the physical property of the consignor and are included in the consignor’s inventory. Costs incurred by a consignor on the transfer of goods to a consignee are inventoriable. Thus, Stone’s inventory account should include $18,900 equal to the $18,000 inventory shipped to Beta on consignment and the $900 associated freight charges.
Sackett Corporation had a beginning inventory of 10,000 units, which were purchased in the prior year as follows:
Units
Unit Price
September
4,000
$2.00
October
4,000
$2.10
December
2,000
$2.30
In the current year, Sackett purchases an additional 12,000 units (7,000 in June at $2.50 and 5,000 in November at $2.70) and sells 16,000 units. Using the FIFO method, what is Sackett’s ending inventory?
$16,000 (5,000 @ $2.70 and 1,000 @ $2.50)
Under FIFO, the first goods purchased are assumed to be the first sold. Using FIFO, all of the 10,000 units of inventory in beginning inventory were sold and 6,000 (16,000 sold – 10,000 beginning inventory) of the units purchased in June for $2.50 each were sold. This leaves in ending inventory 1,000 units purchased in June for $2.50 each and all 5,000 units purchased in November for $2.70 each.
Which of the following is true regarding inventory adjustments as a result of write-down below cost under IFRS?
Reversals of adjustments are allowed in a subsequent period.
Both IFRS and U.S. GAAP require the cost of inventory to be written down if the utility of the goods is impaired. Under IFRS, inventories are measured subsequent to initial recognition at the lower of cost and net realizable value (NRV), with NRV assessed each period. Unlike U.S. GAAP, IFRS permit inventory to be written up to the lower of cost and NRV if previously written down. The reversal is permissible only to the extent of the prior write-down.
The following information was derived from the current year accounting records of Clem Co.:
Clem’s
Clem’s Goods
Central
Held By
Warehouse
Consignees
Beginning inventory
$110,000
$12,000
Purchases
480,000
60,000
Freight-in
10,000
Transportation to consignees
5,000
Freight-out
30,000
8,000
Ending inventory
145,000
20,000
Clem’s cost of sales was
$512,000
Cost of sales is equal to beginning inventory, plus purchases, plus additional costs (such as freight-in and transportation to consignees) necessary to prepare the inventory for sale, minus ending inventory. Cost of sales for inventory in the central warehouse and for inventory held by consignees are calculated below:
Central
Warehouse
Consigned
Inventory
Inventory
Beginning inventory
$110,000
$12,000
Purchases
480,000
60,000
Freight-in
10,000
Transportation to consignees
5,000
Cost of sales
(455,000)
(57,000)
Ending inventory
$145,000
$20,000
Hence, total cost of sales equals $512,000 ($455,000 + $57,000). Freight-out is a selling cost. It is not included in the determination of cost of sales.
Cost of Sales=?
=Beginning Inventory + Purchases + Additional Costs necessary to prepare the inventory for sale (Freight-In & Transportation to Consignees) - Ending Inventory
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
