Inventory

Question 1

Periodic and Perpetual inventory

Answer 1

Perpetual - sophisticated system that updates as purchases are made, you know inventory balances at all times

Periodic - starting balance is carried on the books all year

Question 2

Periodic inventory debit what

Answer 2

D. Purchases
C accounts payable
No changes to the inventory balances

Question 3

End of period periodic counting, you close the purchases account

Answer 3

D inventory
C purchases

Question 4

Calculating “costs of goods purchased” periodic… you have to figure cost of goods purchased to get to costs of goods sold
Used for calculating periodic inventory

Answer 4

Gross purchases
Minus returns and discounts
Add Freight in (no freight out)
Equals cost of goods purchased

Question 5

Costs of good SOLD formula

Answer 5

Beginning inventory
Add purchase - cost of goods purchased
Equals Total available for sale
Subtract any inventory written off
Subtract ending inventory
Equals cost of goods SOLD

Question 6

Perpetual JV

Answer 6

D inventory
C accounts payable
( no “purchases” account)

Question 7

When you have a sale under perpetual- it takes 2 JVs

Answer 7

D accounts receivable
C sales

D costs of good sold
C inventory

Question 8

Under periodic- you wouldn’t know what was stolen, only that something was

Answer 8

Isn’t as accurate as perpetual

Question 9

FOB shipping point
The item after the B designates when the buyer assumes responsibility

Answer 9

Goods belong to the buyer in transit- title passes when it leaves the dock
Buyer pays shipping and it is called Freight In - this is part of the cost of the purchase

Question 10

FOB destination

Answer 10

Goods belong to the seller until the buyer receives the items (till they reach their destination)
Seller pays shipping and it is considered Freight Out

Question 11

If ending inventory is overstated then gross profit is overstated - they are connected - direct relationship

Inventory is a current asset so if it was overstated then current assets are overstated too

Answer 11

Ending inventory too high means
Cost of goods sold is too low
Inverse relationship

Question 12

Overstatement of COGS means
Understatement of net income

Answer 12

Understatement of net income means understatement of retained earnings

Question 13

Valuation of lower of cost or Net Realizable Value - what is NRV?
Used with FIFO

Answer 13

NRV is Selling price minus cost to dispose (or further processing costs)
Cost is just the cost ( not the replacement value)

Question 14

Lower of cost or Market (only used with LIFO)….what is market?

Answer 14

First look at the replacement cost
Then look at the ceiling and floor
Ceiling is the NRV
Floor is the ceiling minus the profit margin
Market has to be in the middle

Question 15

FIFO….sell the oldest goods first
Thus, Balance sheet will have the most recent purchases

Answer 15

This means balance sheet would closely reflect the replacement cost
Won’t matter whether you use periodic or perpetual

Question 16

LIFO prohibited under IFRS

Question 17

Under FIFO more cost onto the balance sheet and less on the income statement
In a period of rising prices

Answer 17

Ending inventory is higher
Cost of goods sold is lower
Net income is higher

Question 18

In a period of rising prices LIFO

Answer 18

Balance sheet inventory is lower (older items)
Cost of goods sold would be higher
Net income would be lower

Question 19

When calculating LIFO

Answer 19

Calculate total goods available for sale
Then cost of goods sold
Then subtract the two to get remaining inventory

Question 20

Dollar Value LIFO factors in?

Answer 20

Inflation
You calculate the “LIFO inventory layer” (this is IF inflation affects the beginning balance)
1 Divide ending inventory by the given price index… example 1.10
2 Subtract that from begin inventory
3 new amount gets multiplied by the price index to get the lifo layer

Question 21

Dollar value ending inventory

Answer 21

Add the lifo layer to the beginning inventory to get the new ending inventory
If the purchases are affected by inflation then multiply the purchases by the percent increase and then add that total to the beginning inventory

Question 22

Weighted average inventory

Answer 22

Take total cost of available for sale divide by total units for sale

Question 23

Moving average is used for perpetual

Answer 23

Moving average changes after each sale because the average is recalculated

Question 24

Inventory turnover ratio

Answer 24

Cost of goods sold divided by
Average inventory

Question 25

LIFO will normally result in the lowest ending inventory

Answer 25

First in first out results in lower prices sold first and higher ending inventory

Last in first out results in higher prices sold first and lower ending inventory

Question 26

Understatement of inventory means

Answer 26

Overstatement of COGS
Understatement of net income and retained earnings
(Don’t forget to include the tax calculation in the figures)

Question 27

Inventory calculations include costs needed to get the item in a state when it is ready to be sold

Answer 27

Direct and indirect materials
Overhead - ex: insurance on equip

Not advertising

Question 28

Ending inventory and gross profit are directly related

Answer 28

If ending inventory is up then gross profit is up

If you overstate ending inventory then you overstate gross profit

Question 29

Ending inventory and cost of goods sold are inversely related

Answer 29

Ending inventory is up then cost of good sold is down
Cost of good sold is down then profit is up

Question 30

Beginning inventory and ending inventory are opposites (inverse)

Beginning inventory is directly related to

Answer 30

Cost of goods sold

Question 31

Beginning inventory directly related to

Ending inventory directly related to

Answer 31

Beginning is related to COGS

Ending is related to gross profit

Question 32

Ending is overstated by 3K
Beginning is overstated by 9K
Cost of goods sold is

Answer 32

Ending is inverse to COGS understated by 3
Beginning is direct to COGS so overstated by 9
Overall overstated by 6

Question 33

If ending inventory is overstated
The effect is

Answer 33

Gross profit is overstated
Net income overstated
Stockholder equity overstated
Retained earnings overstated

Current assets overstated
COGS UNDERSTATED

Question 34

With consignment - the freight charge

Answer 34

Is included in the inventory balance calculations

Question 35

Periodic and perpetual will always result in the same dollar amount of ending inventory with

Answer 35

FIFO

Question 36

Purchase agreement for inventory and the price changes, you record:

Answer 36

If a set amount of units is pledged- you do an entry for the amount of the price change

If no set amount of units is pledged- no entry