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FAR Personal Flashcards > FAR Module 10 > Flashcards

FAR Module 10 Flashcards

0
Q

T/F

Inventory is a current asset

A

True

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1
Q

What ASC topic # covers inventory

A

330

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2
Q

T/F

Because inventory is overturned so much, it is considered a monetary asset

A

FALSE

Inventory is a non monetary asset

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3
Q

Define Inventory

A

Inventory is tangible personal property that is

1) held for sale in the ordinary course of business
2) any process of production for such sale
3) to be used currently in the production of items for sale

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4
Q

The primary basis of accounting for inventories is….

A

Cost (the cash or FV of consideration given in exchange for it)

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5
Q

Inventory cost is a function of what two variables?

A

1) the number of units included in inventory

2) The costs attached to those units

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6
Q

How is ownership usually determined in regards to inventory

A

By legal title

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7
Q

What costs should be included in inventory for a non manufacturing entity?

A

All costs necessary to prepare the goods for sale

Normal costs for:

1) freight in
2) handling costs
3) normal spoilage

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8
Q

What costs should be included in inventory for a manufacturing entity?

A

Normal costs for:

1) direct materials
2) direct labor
3) direct and indirect factory overhead

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9
Q

What entry do you make under the gross method when you purchase inventory on account?

A

Debit purchases

Credit a/p

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10
Q

What entry do you make under the gross method when you take advantage of the discount opportunity?

A

Debit a/p
Credit purchase discount
Credit cash

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11
Q

What entry do you make under the gross method when you do not take advantage of the discount opportunity?

A

Debit a/p

Credit cash

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12
Q

What entry do you make under the net method when you purchase inventory on account?

A

Debit purchases
Credit a/p

(The number amount is net of the discount. You assume upfront that you will take the discount)

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13
Q

What entry do you make under the net method when you take advantage of the discount opportunity?

A

Debit a/p
Credit cash

(Because you already set up the entry assuming you would take advantage of the discount there is no need to credit a purchase discount account)

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14
Q

What entry do you make under the net method when you do not take advantage of the discount opportunity?

A

Debit a/p
Debit purchase discount loss
Credit cash

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15
Q

Purchase Discounts Not Taken is considered what type of account?

A

This is a purchase discounts lost account, or a financial other expense. It is not part of the inventory account

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16
Q

These discounts are allowed to the entity because of it being a wholesaler, a good customer, or merely the fact that the item is on sale at a reduced price

A

Trade discounts

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17
Q

When there are multiple trade discounts, how are they accounted for?

A

In steps, using the largest trade discounts first (multiply sale amount by 50% and then multiply that result by 40% & so on)

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18
Q

T/F

Interest paid to vendors is included in the cost of inventory

A

FALSE

Under US GAAP interest paid to vendors is not included in the cost of inventory

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19
Q

What are the two systems used to record inventory

A

Periodic

Perpetual

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20
Q

Under this system inventory is counted every now and then, and then priced. The ending inventory is usually recorded in the cost of goods sold entry

A

Periodic system

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21
Q

Under this system a running total is kept of the units on hand, and possibly their value, by recording all increases and decreases as they occur.

A

The perpetual system

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22
Q

COGS formula

A 
Beginning inventory 
\+ cost of goods purchased
= cost of goods available-for-sale
- ending inventory
= cost of goods sold
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23
Q

COG Purchased formula

A 
Gross purchases 
- purchase discounts 
- purchase returns and allowances
= net purchases 
\+ freight-in/transportation-in
= COG purchased
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24
Q

T/F

Regardless of the method used, either gross method or net method, purchases are always recorded net of any allowable trade discount.

A

TRUE

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25
Q

Why must inventory be physically counted under the perpetual system at the end of the quarter or fiscal year?

A

Under the periodic system inventory is counted to calculate cost of goods sold.

Under the perpetual system inventory has been counted as a running total and therefore that running total can be used to calculate cost of goods sold. However, under the perpetual system inventory must still be physically counted to calculate shrinkage.

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26
Q

This term describes the loss of inventory due to theft, spoilage, or breakage

A

Shrinkage

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27
Q

under what system must ending inventory be physically counted to be able to calculate COGS

A

The periodic system

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28
Q

Under this inventory valuation method the seller can determine which item was sold because individual inventory lots purchased or manufactured are separately identified. When items are sold or otherwise disposed of, the actual cost of the specific item is assigned to the transaction and the ending inventory consists of the actual cost of the specific item on hand. This is usually used for high-cost items, which are individually identifiable (automobiles, appliances, jewelry, etc.)

A

Specific identification

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29
Q

T/F

The average cost flow assumption can be used under both the periodic and perpetual systems

A

TRUE

Under the periodic system it is known as “weighted average”. Under the perpetual system it is known as “moving average”

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30
Q

How do you calculate ending inventory under weighted average (periodic)

A

1) Take units purchased & multiply by cost per unit. Do this for all purchases
2) Total units & total costs
3) Divide total costs by total units to find cost/unit
4) Multiply ending inventory (purchases - sales) by cost/unit

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31
Q

How do you calculate ending inventory under FIFO (periodic)

A

FIFO means the first units in were sold first. Therefore the ending inventory will consist of the newest or last purchased inventory.

1) figure out ending inventory (purchases - sales)
2) take the ending inventory units out of the most recent (last) purchase lines
3) multiply those units by their corresponding unit cost (the purchase price)
4) total the costs

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32
Q

How do you calculate ending inventory under LIFO (periodic)

A

LIFO means the last units in were sold first. Therefore the ending inventory will consist of the oldest or first purchased inventory.

1) figure out ending inventory (purchases - sales)
2) take the ending inventory units out of the oldest (first) purchase lines
3) multiply those units by their corresponding unit cost (the purchase price)
4) total the costs

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33
Q

In a market of rising prices, your ending inventory will be higher under which method between FIFO & LIFO?

A

FIFO

As prices raise higher your later purchases have a higher inventory balance. If using FIFO your cheaper, earlier inventory goes out first and your later, more expensive inventory remains in your ending inventory. LIFO is the opposite; your later, more expensive inventory goes out first leaving your cheaper, earlier inventory in your ending inventory balance

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34
Q

Between FIFO & LIFO, which has an income statement focus & why?

A

LIFO

Better matching of expenses to revenues (COGS is comprised of current costs) and more conservative approach

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35
Q

Between FIFO & LIFO, which has a balance sheet focus & why?

A

FIFO
The most recently purchased inventory is on the inventory account. It is the most recent, most accurate picture of the inventory account

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36
Q

T/F

Under the perpetual system of inventory timing of purchases and sales does not matter

A

FALSE

timing does not matter under the periodic system. Under the perpetual system timing matters a lot!

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37
Q

How is calculating FIFO under the perpetual system different from calculating FIFO under the periodic system

A

There is no difference

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38
Q

How is calculating LIFO under the perpetual system different from calculating LIFO under the periodic system

A

Under the perpetual system you cannot simply net purchases against sales and calculate ending inventory at the end. You must recalculate the balance at the time of sales and then continue on with purchases until the end of the period when you can calculate final numbers.

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39
Q

How do you calculate ending inventory under moving average (perpetual)?

A

At the time of each sale you must recalculate the average cost by dividing total cost by total units.

At the end you multiply the ending units by the most recent average cost.

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40
Q

In the phrase “Lower of Cost or Market” what does “cost” mean?

A

Cost is the ending inventory amount based on the valuation method (FIFO, LIFO, or weighted/moving average)

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41
Q

Why is LCM used?

A

More conservative approach

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42
Q

When determining market, what is the replacement cost limited to?

A

Ceiling, which is Net Realizable Value (price - selling costs & costs to complete sale)

Floor, which is NRV - Normal Profit

43
Q

If replacement cost is greater than the ceiling or less than the floor what does “market” equal?

A

Market will equal the ceiling (if replacement cost is greater than the ceiling) or the floor (if replacement cost is less than the floor)

44
Q

T/F

The floor limitation on market prevents recognition of more than normal profit in future periods if market is less than cost

Likewise, the ceiling limitation on market prevents recognition of a loss in future periods if market is less than cost

A

TRUE

45
Q

T/F

Cost or market applied to individual items will always be as low as, and usually lower than, cost or market applied to the inventory as a whole. It will be the same when all items at market or all items at costs are lower.

A

TRUE

46
Q

T/F

Once inventory has been written down there can be recovery from the write down before the units are sold.

A

FALSE

Once inventory has been written down there can be no recovery from the write down until the units are sold.

47
Q

Methods of recording write-down:

A

1) the entry to establish ending inventory can be made using the market figure. This includes the loss in COGS, overstating COGS. The loss is not separately disclosed
2) Debit the inventory account for the actual cost (not market) of goods on hand & then make the following entry to recognize the market decline:

Loss due to market decline
Inventory

48
Q

This results from legally enforceable contracts to purchase specific quantities of goods at fixed prices in the future.

A

Purchase commitments

49
Q

How does a loss on purchased commitments occur

A

When there is a decline in market value below the contract price at the balance sheet date and the contracts are noncancelable, an unrealized loss has occurred and, if material, should be recorded in the period of decline

50
Q

What is the entry to show a loss on purchased commitments

A

Debit estimated loss on purchase commitments

Credit accrued loss on purchased commitments

51
Q

T/F

The loss on purchase commitments can change (increase or decrease) until the inventory is received and these changes should be continually updated in journal entries

A

TRUE

52
Q

A loss on purchase commitments will be posted on the …. And the accrued loss will be shown on the ….

A

Income statement

Balance sheet

53
Q

Accrued Loss on purchase commitments is what kind of account?

A

A liability account

54
Q

Which cost flow assumption usually does not parallel the physical flow of goods

A

LIFO

55
Q

T/F

In periods of rising prices LIFO increases tax liability due to a higher reported income (resulting from lower cost of goods sold)

A

FALSE

In periods of rising prices LIFO reduces tax liability due to the lower reported income (resulting from the higher cost of goods sold)

56
Q

T/F

LIFO smooths fluctuations in the income stream relative to FIFO because it matches current costs with current revenues

A

TRUE

57
Q

What is the LIFO conformity rule

A

If LIFO is used for tax purposes it must also be used for financial reporting purposes

58
Q

What is the purpose of the LIFO reserve account

A

When a company uses LIFO for external reporting purposes and another inventory method for internal purposes, a LIFO reserve account is used to reduce inventory from the internal valuation to the LIFO valuation.

59
Q

What type of account is the LIFO reserve account?

A

A contra account to inventory

60
Q

When an entry is made to debit/credit the LIFO reserve account, what account is on the other side of that entry?

A

COGS

61
Q

What is dollar value LIFO

A

Dollar value LIFO is LIFO applied to pools of inventory items rather than to individual items.

62
Q

What are the benefits to using dollar value LIFO

A

The cost of keeping inventory records is less

Involuntary liquidation of LIFO layers is less likely to occur

63
Q

What is the formula for the conversion price index in regards to dollar value LIFO

A

EI at end of year prices / EI at base year prices

64
Q

What are the 4 Steps to doing a Dollar Value LIFO problem?

A

1) divide nominal year (current costs) EI by conversion price index to get EI at base year prices
2) look at change in each result to find base year layers (how much has EI gone up/down since year 1 under the base year column?)
3) convert base year layers (increase/decreases) to nominal prices by multiplying them by conversion price index
4) add them all up

65
Q

Under this method ending inventory is estimated by using the gross profit percentage to convert sales to cost of goods presumed sold

A

Gross profit method

66
Q

T/F

The gross profit method is acceptable for either tax or annual financial reporting purposes

A

FALSE

Since ending inventory is only estimated, the gross profit method is not acceptable for either tax or annual financial reporting purposes

67
Q

What is the gross profit method useful for since it is not acceptable for tax or annual financial reporting purposes

A

To estimate ending inventory for internal use, for use in interim financial statements, and for establishing the amount of loss due to the destruction of inventory by fire, flood, or other catastrophes

68
Q

Formula for gross profit

A

Net sales - COGS = gross margin/gross profit

69
Q

If the situation is FOB shipping point and the goods are in transit, whose inventory should include the goods?

A

The buyer, because title passes to the buyer when the carrier receives the goods

69
Q

If the situation is FOB destination point and the goods are in transit, whose inventory should include the goods?

A

The seller. Until the goods are received by the buyer, the title does not pass. Title passes to the buyer when the goods are received at their final destination

71
Q

Under FOB destination point, who bears the costs of transporting the goods?

A

The seller bears all costs of transporting goods to the buyer under FOB Destination. Thus includes packaging, shipping, insurance, and handling costs

72
Q

In an consignment relationship, the consigned goods are the property of who?

A

The consigned goods remain the property of the consignor until sold

73
Q

Under FOB shipping point, who bears the costs of transporting the goods?

A

The buyer bears all costs of transporting goods to the buyer under FOB Shipping. This includes packaging, shipping, insurance, and handling costs

74
Q

What are the sales agents of consignors called

A

Consignees

75
Q

T/F

A proportionate share of freight costs incurred in shipping goods to a consignee are not included in the consignors inventory

A

FALSE

A proportionate share of freight costs incurred in shipping goods to a consignee ARE included in the consignors inventory

76
Q

When should consignment sales revenue be recognized and by whom?

A

Consignment sales revenue should be recognized by the consignor when the consignee sells the consignment goods to the ultimate customer. No revenue is recognized at the time the consignor ships the goods to the consignee.

77
Q

T/F

The percentage of sales that the consignor must pay to the consignee as commission will be netted against the sales revenue recognized by the consignor

A

FALSE

sales commission made by the consignee will be recorded as a selling expense by the consignor and will not be netted against the sales revenue recognized by the consignor

78
Q

Formula for Inventory turnover ratio

A

COGS/Avg Inventory

79
Q

Formula for Number of Days Supply in Avg Inventory

A

365/Inventory Turnover

80
Q

This formula measures the number of times inventory was sold and reflects inventory order and investment policies

A

The inventory turnover

81
Q

This formula measures the number of days inventory is held before sale. It reflects on the efficiency of inventory policies

A

The number of days supply in average inventory

82
Q

Under the completed contract method, when/how do you recognize income

A

Only when the contract is complete do you recognize income in its entirety

83
Q

Under the percentage of completion method, when/how do you recognize income

A

1) total costs incurred to date/total estimated costs to complete
2) calculate Gross Profit (contract price - total estimated costs to complete)
3) multiply 1 * 2
4) 3 is your profit. Subtract the previous years profit recognized to avoid duplicating recognized profit

84
Q

What is the journal entry to recognize costs of construction?

Under this situation you are the construction company and you spent money on the construction project. This is to recognize the money you spent.

A

Debit construction in progress inventory (for the costs incurred each year - the actual cost to date)

Credit cash or payables

85
Q

What is the journal entry to recognize progress billings in construction?

Under this situation you are the construction company and you spent money on the construction project. This is to recognize the bill you wrote to your client.

A

Debit A/R

Credit Billings on Contracts

86
Q

In accounting for a long-term construction contract using the percentage of completion method, the progress billings on contract account is what kind of account

A

A Contra current asset account

87
Q

“Billings on contracts” is what type of account?

A

Contra account to Construction in Progress

88
Q

What is the journal entry to recognize collections on billings in construction?

Under this situation you are the construction company and you spent money on the construction project. This is to recognize the payment of the bill you wrote to your client.

A

Debit cash

Credit A/R

89
Q

What happens to the income on construction account?

A

It is eventually closed to the income summary account

90
Q

T/F

when using the two methods (completed contract method versus percentage of completion method) you may recognize different amounts of income at the end of a contract

A

FALSE

the timing of recognition is the difference between the two methods. The amount of income is the same no matter what method is used

91
Q

To close the accumulated account balances and recognize income at the end of a construction contract, what entry is done

A

For both methods you:

Debit Billings on Contract (to close out all billings)
Debit CIP Inv. (to recognize revenue)
Credit Construction in Process Inventory (to close out the inventory)
Credit Income on Construction (to recognize revenue)

The amounts will differ but the accounts used will be the same

92
Q

T/F

anytime the construction in process inventory is larger than the billings on contract, this is considered to be an asset

A

FALSE

it is a liability

93
Q

T/F

For both the percentage of completion and completed contract method, when you suspect that there may be a loss you must immediately recognize that loss in full even if it has not yet occurred or if only part of the loss occurred

A

TRUE

This follows conservatism

94
Q

What is the journal entry to recognize income in construction?

A

Under the completed contract method there is no entry until the very end.

Under the percentage of completion method you:
Debit Construction in process inventory
Credit income on construction

95
Q

With IFRS what cost flow assumption is not allowed?

A

LIFO

96
Q

Under IFRS, what replaces LCM?

A

IFRS uses LCNRV. Therefore there is no ceiling or floor; this method is simpler.

97
Q

Under IFRS what is the exception to the LCNRV rule? How is the exception treated?

A

Agricultural/biological inventories, which are carried at FV less costs to sell at harvest point

98
Q

How is NRV calculated under IFRS?

A

Estimated selling prices - estimated costs of completion & sale (basically the same as US GAAP)

99
Q

Under US GAAP there is no capitalization of interest for inventories allowed. How is this different under IFRS?

A

Under IFRS interest costs can be capitalized if there is a lengthy production period to prepare the goods for sale

101
Q

Per the codification, what is considered a normal capacity of production facilities

A

Normal capacity refers to a range in production levels that will vary based on business and industry specific factors

102
Q

How should unallocated fixed overhead costs be treated

A

They should be recognized as an expense in the period in which they occurred

103
Q

When manufacturing inventory what is the accounting treatment for abnormal costs

A

Any abnormal costs for freight, handling costs, and wasted material are required to be treated as current period charges and not a part of inventory cost

104
Q

Which inventory costing method approximates most closely the current cost for cost of goods sold

A

LIFO

105
Q

Which inventory costing method approximates most closely the current cost for ending inventory

A

FIFO

106
Q

Under IFRS, the specific identification method of accounting for inventory is required for what

A

Inventory items that are not interchangeable and goods that are produced and segregated for specific purposes/projects

107
Q

What are the only two accounts that are debited to the Construction in Progress Account & how is this helpful?

A

Construction expense and profit are the only two accounts debited to the construction in progress account.

This is helpful because if not enough information is given in a problem to perform the regular computation of recognizing profit, profit can be computed indirectly by subtracting expenses from ending balances

FAR Personal Flashcards (34 decks)

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