Inventory

Question 1

How to calculate weighted average

Answer 1

Divide total unit cost by total number of units

Question 2

Typical Entries for periodic inventory

Answer 2

Purchase of merchandise
Dr. Purchases
Cr. Cash/Accounts Payable

Paid delivery charge on merchandise
Dr. Transportation Cost
Cr. Cash

Returned damaged goods
Dr. Accounts Payable/cash
Cr. Purchase returns & allowance

Paid for merchandise & received a cash discount
Dr. Accounts Payable
Cr. Purchase discount
Cr. Cash

Sold merchandise on account
Dr. Accounts receivable
Cr. Sales

Question 3

Periodic end of year closing entry for inventory

Answer 3

Dr. Ending Inventory
Dr. Purchase returns & discounts
Dr. Purchase discounts
Dr. Costs of goods sold
Cr. Beginning inventory
Cr. Purchases 
Cr. Transportation in

Question 4

What does decrease & increase of raw materials mean

Answer 4

Decrease of raw materials means it was added to the amount purchased and vice versa

Question 5

What does increase & decrease in finished goods mean

Answer 5

Costs incurred for the period that went to inventory that wasn’t sold so if they weren’t sold then COGS needs to decrease and vice versa

Question 6

Typical Entries for Perpetual Inventory

Answer 6

Purchase of Inventory on account
Dr. Inventory
Cr. Accounts Payable

Delivery charges
Dr. Inventory
Cr. Cash

Return of damages goods
Dr. Accounts Payable
Cr. Inventory

Paid for inventory & received a cash discount
Dr. Accounts payable
Cr. Inventory
Cr. Cash

Sold merchandise on account
Dr. Accounts receivable
Cr. Sales
Dr. Cost of Goods Sold
Cr. Inventory

Question 7

Periodic Inventory & COGS

Answer 7

Since they calculate COGS at the end of the period rather than perpetually; COGS really ends up being inventory no longer with the company and it includes shrinkage

Question 8

Conversion Index

Answer 8

Ending inventory in current year dollars divided by ending inventory is base year dollars

Question 9

What value should you use for inventory allocation with a group of inventory items (relative sales method)

Answer 9

Use the replacement cost, not the carrying value to calculate

Question 10

Gross Margin Method

Answer 10

Sales - Cost = Margin

If margin is 40% then COGS is 60% which is what you most likely will need to calculate question on gross margin method

Question 11

Retail Method Structure

Answer 11

Beginning Inv.
Purchases 
Freight-In
(Purchase Returns)
Markups
(Abnormal Shortage)
*Goods Available (Cost to Retail)*
(Markdowns)
(Sales)
Sales Returns
(Employee Discounts)
(Normal Shortage)
*Ending Inventory*

Question 12

Retail Method Ending Inventory at cost

Answer 12

Ending inventory Retail multiplied by cost to retail ratio

Question 13

Retail method COGS

Answer 13

Subtract inventory at cost by retail method inventory at cost

Question 14

Cost flow assumptions

Answer 14

FIFO & Average Cost use lower of cost or net realizable value

LIFO use lower of cost or market

IFRS uses lower of cost or

Question 15

Another equation for inventory errors

Answer 15

Beginning Inventory + Purchases = Ending Inventory + COGS

If ending inventory is understated then COGS is overstated decreasing Net income that year, but because ending inventory is understated, next years beginning inventory is understated which means COGS is understated to balance the equation

Question 16

When are losses on purchase commitments recorded

Answer 16

When contract is irrevocable and the contract cost is more than the current market value of items in the contract

Question 17

Purchase commitment journal entires

Answer 17

Dr. Loss on purchase commitment
Cr. Liability on purchase commitment

Payment date
Dr. Liability on purchase commitment
Dr. Loss on purchase commitment
Dr. Inventory
Cr. Cash(contract amount)