INVENTORIES

Question 1

What are inventories?

Answer 1

Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale in the form of materials and supplies, to be consumed in the production process or in rendering a service.

Question 2

What are the classes of inventories?

Answer 2

Inventories are categorized into:

a. Inventories of a TRADING CONCERN
b. Inventories of a MANUFACTURING CONCERN

Question 3

What goods are includible in the Inventory account of an entity?

Answer 3

All goods to which AN ENTITY HAS TITLE TO shall be included in the inventory, regardless of location.

Goods in transit and sold FOB destination - seller still owns the goods up until the goods have been delivered to the buyer.

Goods in transit sold FOB shipping point - buyer has ownership over the goods when the goods are transferred by the seller to the shipping company (upon shipment).

Goods out on consignment or are in the hands of salesmen are INCLUDIBLE.

Goods out on approval or trial by customers are INCLUDIBLE.

Installment contracts involving inventory may have different terms as to ownership of the goods.

Question 4

Under FOB destination, who is legally responsible for freight charges and other expenses?

Answer 4

The seller.

Question 5

Under FOB shipping point, who is legally responsible for freight charges and other expenses?

Answer 5

The buyer.

Question 6

What is freight collect?

Answer 6

This means that the freight is not yet paid, and the carrier will collect from the buyer. It is similar to FOB shipping point.

Question 7

What is freight prepaid?

Answer 7

This means that the seller has already prepaid the freight costs. This is similar to FOB destination.

Question 8

What is Free alongside (FAS)?

Answer 8

A seller who ships FAS must bear the expenses and risk involved in delivering the goods TO THE DOCK, and the buyer bears the cost of loading and shipment and THE TITLE PASSES TO THE BUYER WHEN THE CARRIER TAKES POSSESSION OF THE GOODS.

This is similar to FOB shipping point.

Question 9

What is Cost, insurance and freight (CIF)?

Answer 9

The buyer agrees to pay in lump sum the the cost of goods, insurance, and freight charge. The title and risk of loss shall pass to the buyer upon delivery of the goods to the carrier. This is similar to FOB shipping point.

Question 10

What is Ex-ship?

Answer 10

Seller who delivers ex-ship bears all expenses and risk of loss until the goods are received by the buyer. This is similar to FOB destination.

Question 11

What is consignment?

Answer 11

Consignment is a method of marketing goods in which the owner transfers physical possession of certain goods to an agent called the consignee who sells them on the owner’s behalf. It is included in the CONSIGNOR’S inventory.

Question 12

How is inventory stated in the FS?

Answer 12

As a ONE LINE ITEM under CURRENT ASSETS.

Question 13

How is inventory accounted for?

Answer 13

Inventory is accounted for using EITHER:

1. Periodic system
2. Perpetual system

Question 14

Explain trade and cash discounts.

Answer 14

Trade discounts are deductions from the list price in order to arrive at the INVOICE PRICE. This is NOT RECORDED.

Cash discounts are DEDUCTIONS FROM THE INVOICE PRICE when payment is made within the discount period. CASH DISCOUNTS ARE RECORDED.

Question 15

What are the methods of recording cash discounts?

Answer 15

1. Gross method - purchases and accounts payable are recorded at gross
2. Net method - purchases and accounts payable are recorded at net

Question 16

What are the cost of inventories?

Answer 16

The cost of inventories shall comprise:

1. Cost of purchase
2. Cost of conversion
3. Other costs incurred in bringing the inventories to their present location and condition

Question 17

T or F
Foreign exchange differences which arise directly from acquisition of inventories are INCLUDED as cost of purchase of inventory.

Answer 17

FALSE.

Question 18

What PAS governs Inventories?

Answer 18

PAS 2

Question 19

How shall the cost of inventories be measured subsequently with regards to its cost flow?

Answer 19

The cost of inventory shall be determined by using EITHER:

1. FIFO METHOD
2. WEIGHTED AVERAGE METHOD

Question 20

What is the FIFO method?

Answer 20

The FIFO method assumes that goods first purchased are first sold, and the goods remaining at year end are the most recently purchased or produced.

Question 21

What is the weighted average method?

Answer 21

The weighted average method means that the cost of inventory is restated whenever there is a purchase or purchase return. It is either:

1. PERIODIC
2. PERPETUAL (Moving average method)

Question 22

How shall inventories be measured at subsequently?

Answer 22

Inventories shall be measured AT THE LOWER OF COST OR NET REALIZEABLE VALUE.

Question 23

What is net realizable value?

Answer 23

NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal.

Question 24

T or F
Inventories are written down to NRV on a class basis.

Answer 24

FALSE. Inventories are written down to NRV on an INDIVIDUAL or ITEM BY ITEM BASIS.

Question 25

What are the 2 methods used in accounting for inventory write down?

Answer 25

1. Direct or CoGS method - measured at LCNRV
2. Allowance or loss method - at cost, and any loss on inventory is accounted for separately (allowance for inventory writedown)

Question 26

T or F
PAS 2 requires the disclosure of the amount of any inventory writedown and the amount of any reversal of inventory writedown.

Answer 26

True.