Inventories Flashcards
Under US GAAP and during periods of inflation, perpetual inventory system and periodic inventory system will result in the same dollar amount of ending inventory under what inventory valuation method?
FIFO
What type of expense is “freight-out”?
Selling expense
What type of expense is “freight-in”?
Capitalized as part of inventory
What inventory valuation method requires estimates of price-level changes for specific inventories?
Dollar-value LIFO
When applying lower of cost or market to total inventory, groups of similar items, or each item, which generally results in the lowest inventory amount?
Applying to each item separately
LIFO reserve
The difference between inventory on the LIFO method versus any other cost method
Dollar-value LIFO ending inventory
Dollar value base layer plus the current year base layer times the conversion factor
Four types of inventories held for resale
- Retail inventory
- Raw materials inventory
- Works in process inventory
- Finished goods inventory
Retail inventory
Finished goods only
Re-sold in substantially the same form in which it was purchased
Raw materials inventory
Inventory being held for use in production process
WIP inventory
Inventory that is in production but incomplete
Finished goods inventory
Production inventory that is complete and ready for sale
General rule for goods and materials in which company has legal title
Should be included in inventory
Title passing for goods in transit
Title passes from seller to buyer in the manner and under the conditions explicitly agreed upon by parties
What if no conditions are explicitly agreed upon ahead of time for goods in transit?
Title passes from seller to buyer at the time and place where the seller’s performance regarding delivery of goods is complete
F.O.B
“free on board”
FOB shipping point
Buyer’s inventory (buyer pays)
Title passes to the buyer when the seller delivers the goods to common carrier
“Freight in” added to cost of inventory
FOB destination
Seller’s inventory (seller pays)
Title passes to the buyer when the buyer receives the goods from the common carrier
What happens if the seller ships the wrong goods (shipment of nonconforming goods)?
The title reverts to the seller upon rejection by the buyer (seller’s inventory)
What happens if goods are sold but the buyer has the right to return the goods?
GR. The goods should be included in the seller’s inventory if the amount of goods likely to be returned cannot be estimated (no sale yet)
What if the buyer has the right to return but amount of goods likely to be returned can be reasonably estimated?
Transaction will be recorded as sale w/an allowance for estimated returns recroded
What conditions must be met for revenue from a sales transaction where buyer has right to return to be recognized at the time of sale?
- Sales price substantially fixed at date of sale
- Buyer assumes all risk of loss b/c goods are in buyer’s possession
- Buyer has paid some form of consideration
- Product sold is substantially complete
- Amount of future returns can be reasonably estimated
Consignment arrangement
Seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor’s behalf
Seller = true owners and inventory costs include shipping cost to sonsigned
Who has title of inventory in public warehouses
The company holding the warehouse receipt (warehouse receipt evidences title even though owner does not have physical possession)
Who includes inventory in sales with a mandatory buyback in their FS?
The seller (even though title has passed to buyer)
Who includes the inventory in their FS if goods are sold on an installment basis and the seller still retains legal title as security for the loan?
Included in seller’s inventory if percentage of uncollectible debts cannot be estimated
If can be estimated, transaction accounted for as a sale and allowance recorded
Under US GAAP, what should inventory be stated at?
At cost (if evidence indicates cost will be recovered with an approximately normal profit on sale)
Cost
Price paid or consideration given to acquire an asset
What method are used to determine the cost of inventory
FIFO
LIFO
Average cost
Retail inventory method
When would there be a departure from the cost basis principle of measuring inventory?
SP < Cost
When the utility of goods is no longer as great as their cost
Lower of cost or market OR Lower of cost or net realizable value
What is the purpose of reducing inventory to lower of cost or market/NRV?
To show the probable loss sustained (conservatism) in the period in which the loss occurred (matching principle)