Inventory

Question 1

Which costs are inventoriable?

Answer 1

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 2

When does ownership of goods transfer when shipped FOB Shipping Point?

Answer 2

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Question 3

When does ownership transfer when goods are sent FOB Destination?

Answer 3

FOB Destination keeps the items in the seller’s inventory until it reaches the buyer

Question 4

Which costs are non-inventoriable?

Answer 4

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

Question 5

When are discounts recorded under the gross method?

Answer 5

Under the gross method, discounts are recorded only when used.

Question 6

Under the net method, when are discounts recorded?

Answer 6

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

Question 7

How is gross margin calculated?

Answer 7

Gross Margin : Sales - COGS (BI + P - EI)

Question 8

Describe the periodic inventory system.

Answer 8

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

Question 9

Describe the perpetual inventory system.

Answer 9

Inventory count continually updated

Uses a moving-average cost flow method

Question 10

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Answer 10

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Question 11

How is inventory turnover calculated?

Answer 11

COGS / Average Inventory

Question 12

How is Average Day’s Sales in inventory calculated?

Answer 12

365 / Inventory Turnover

Question 13

Under a consignment system, who holds the consigned goods in inventory?

Answer 13

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Question 14

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

Answer 14

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Question 15

What effect does overstatement or understatement of inventory have on ending retained earnings?

Answer 15

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.

Question 16

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 16

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

Question 17

Which costs are included in COGS first under the FIFO (first in first out) system?

Answer 17

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

Question 18

Which costs are included in COGS under the LIFO (last in first out) system?

Answer 18

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Question 19

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

Answer 19

COGAS / Total Units : Weighted Average Cost Per Unit

Question 20

How does FIFO’s COGS relate to LIFO’s in a time of changing prices?

Answer 20

FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.

Question 21

How do FIFO and LIFO change in a period of rising prices?

Answer 21

FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High

Question 22

How do FIFO and LIFO change in a period of falling prices?

Answer 22

FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low

Question 23

Under a Lower of Cost or Market, how are the benchmarks calculated?

Answer 23

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

Question 24

Weighted Average

Answer 24

Total Cost
_______________
Total units

Question 25

Simple average

Answer 25

Total unit costs/# of units costs

Question 26

Moving average

Answer 26

moves each time inventory is added or subtracted

Question 27

Write down of inventory entry

Answer 27

Loss due to market decline

Inventory

Question 28

Purchase Commitments - Journal entry

Answer 28

if there is decline and the contract is non cancellable:

Estimated loss on Purchase Commitment
Accrued Loss on Purchase Commitment

Upon receipt of goods:

Inventory
Accrued Loss on PC
Cash

Question 29

Effect of Inventory write off due to obsolescence

on the Cost of Goods Sold account

Answer 29

Decreases cost of goods sold

JE: CR to Inventory so it decreases COGS since COGS is a credit entry in the Inventory T account

Question 30

Purchase Discounts Lost

Answer 30

is a finance charge if not taken
if net method is used - this account is only recognized if the discount is not taken

Purchase Discount Lost
Cash

Question 31

In inventories, fixed overhead is based on the

Answer 31

normal capacity of the production facilities which is the range that may vary based on business and industry specific factors

Question 32

Unallocated fixed overhead cost is accounted for as

Answer 32

expense when incurred

Question 33

In manufacturing inventory, what is the treatment of abnormal freight in costs?

Answer 33

expense for the period

Question 34

Inventory system with highest ending inventory

Answer 34

perpetual method applied to total inventory even with lcm applied

Question 35

How to compute the LIFO reserve account

Answer 35

always remember that LIFO reserve is a contra account to inventory
Get the new target first and adjust to the new target
LIFO Reserve Contra: Cost of Goods Sold

Question 36

Inventory valuation that gives the lowest ending inventory is

Answer 36

LIFO

Question 37

In periods of rising prices, applying the LCM rule and weighted average or moving average, what is the valuation which gives the highest ending inventory?

Answer 37

Perpetual method - total inventory