FAR - Inventory/Fixed Assets

Question 1

Dollar value LIFO inventory method: 2009, company’s ending inventory had base year cost and end of year cost of 300k. In 2010, the EI was 400k base year cost and 440 end of year cost. What is the dollar value LIFO inventory cost reported at 2010 BS?

Answer 1

410k: Since the EI of 2010 base year cost is >2009, a layer has been added. This increase in base year cost has to be restated using the price index in effect at the time each layer is added. The 2010 price index is the EI of end of year cost over base year cost which is 1.1. Thus, we add the 2009 (300k at 1.0 price index) + 2010 (100 layer increase *1.1 price index) = 410k

Question 2

Inventory cost method: If the inventory cost is such that NRV>NRV less normal profit margin > original cost > replacement cost. What should it be priced at using lower of cost or market method?

Answer 2

Original cost. Under lower of cost or market, the market cost is replacement cost IF it is lower than NRV and higher than NRV less normal profit margin. Since replacement is below the floor, the floor is the market value. Original cost is less than floor so it is used.

Question 3

Inventory costs: Company pays for product. Which of the following should be included in the cost of inventory as a result of this purchase - freight-in, cost of materials and labor to bring product to saleable condition, insurance cost during transit of purchased goods?

Answer 3

All included. Inventory costs include all costs necessary to prepare goods for sale. For merchandising, these include purchase price of goods, freight in, insurance, warehousing, and any costs necessary to get the goods to point of sale - EXCEPT interest on loans obtained to purchase goods.

Question 4

Periodic vs Perpetual: If company wants to maximize its inventory carrying amount at end of year, given that inventory prices are expected to increase overall, what inventory method (perpetual or periodic) and cost or market application (total inventory OR individual item) should be used?

Answer 4

Perpetual and Total inventory.
The perpetual moving average method, the cost of sales throughout the year are determined as the average cost of purchases up to the time of sale. Periodic weighted average calculates cost per item as the weighted average of all units purchased throughout the year. When prices are rising, the perpetual results in lower COGS and higher EI because the cost of items sold in the year are lower.
Total inventory because market values lower than cost are offset against market values higher than cost.

Question 5

IFRS requires inventory valued at lower of cost or NRV. Which should be reported - historical cost at 100k, estimated selling price at 98k, estimated costs to complete and sell 3k, replacement cost 90k

Answer 5

95k. NRV is the estimated selling price less estimated costs of completion and costs to sell.

Question 6

How do you calculate inventory turnover?

Answer 6

COGS / Average inventory

Question 7

Are in transit insurance premiums AND advanced commissions for consigned goods included in inventory costs?

Answer 7

Inventoriable costs include all costs necessary to prepare goods for sale. It includes the in transit insurance premium. Commissions are selling expenses and are not costs required to ready goods for sale.

Question 8

The following were in Company’s inventory account at year end: what should be removed

• merchandise out on consignment at sales price of 14k, including 40% markup on selling price
• goods purchases, in transit, shipped FOB shipping point of 12k
• goods held on consignment by company of 9k

Answer 8

The merchandise out on consignment should be priced at cost, reduce the markup of 5.6k (READ CAREFULLY).
The goods purchases FOB shipping point are ok as title has transferred.
Inventory held on consignment is considered inventory of the consignor not the company. They are in consignors inventory until sold, then moved to COGS. It is never in the consignees inventory or COGS

Question 9

What are the double extension method and link chain method?

Answer 9

Both are variations of dollar value LIFO - bases inventory in dollars in inventory instead of units, uses price index in the year in which layer is added.

Inventory values are extended at beginning of year prices for link chain and at base year prices for double extension.
Link chain is appropriate for situations where inventory has rapid tech changes. Link chain should only be used when double ext method is impractical.

Question 10

Company started in year as a importer and exporter, imported from one place and transshipped/ exported to one other place. What amount of shipping costs should be included in ending inventory?
Purchases 12M, Import ship costs 1.5M, Export ship costs 1M, Inventory at year end 3M

Answer 10

3/12 * 1.5M = 375k
Export shipping costs/freight out (noninventoriable) are a selling expense and not included. **Shipping costs(incl transportation to consignees) or freight in necessary to get the inventory to point of sale is recorded in inventory. Company should put a proportionate amount of the shipping costs.

COGS only includes those costs associated with bringing goods to the point of sale and converting the goods into a salable condition. COGS does not include sales commissions.

Question 11

Cost 12
Est selling price 13.6
Est disposal cost .2
Normal gross margin 2.2
Replacement cost 10.9
Using LCM, what should inventory be valued at?

Answer 11

11.20

Original cost > market (in this case, market is NRV less margin)

Ceiling = NRV = 13.4 (13.6-.2)
12 original cost
11.20 (NRV-normal profit = 13.6-.2-2.2)
Floor
10.9 replacement cost

Question 12

Under IFRS, how are biological assets valued?

Answer 12

Biological assets (agricultural inventory) is exempt from lower of cost or NRV. They are carried at FV less costs to sell at a point in time.

Question 13

What is IFRS stance on LIFO and FIFO and specific identification

Answer 13

LIFO is not allowed, FIFO is allowed

Specific identification can only be used for certain inventory valuation

Question 14

Company uses completed contract method. Started contract with price of 600k in 2009, finished in 2010. Given actual costs, estimated remaining costs, billed to customer, and received to customer - solve for gross profit in 2010

Answer 14

Take total received from customer less total costs for both years. Customer billings or payments do not impact this.

Question 15

True or false

1. If inventory quantities are to be maintained, part of earnings must be invested (plowed back) in inventories when FIFO is used during rising prices
2. LIFO tends to smooth out the NI patterns since it matches current COGS with current revenue, when inventories are constant quantities.
3. When using LIFO, and inventory is not maintained, reduce stock below normal, there may be matching of old costs with current revenue.
4. The use of FIFO permits some control by mgmt over the amount of NI for a period through controlled purchases, and not true for LIFO.

Answer 15

4 is false - LIFO allows control as mgmt can control current purchases into COGS and in turn NI

Question 16

The calculation of income recognized in the 3rd year of a 5 year construction contract using % of completion method include ratio -

Answer 16

Total costs incurred to date to total ESTIMATED costs

Question 17

How do you calculate cost of goods available for sale when using FIFO

Answer 17

Same way regardless of cost flow method. Cost flow method only impacts allocation of costs between EI and COGS.
Cost of goods avail for sale = BI + Purchases

Question 18

How are progress billings on a long term contract recognized under completed contract and under % of completion methods? Revenue OR contra asset

Answer 18

Both are contra asset.
Completed is revenue at end and % has revenue at periodic on the basis of the % of job complete. When progress billing is sent, Billings on Construction in progress is credited for amount billed - shown on BS as contra account to Construction in progress