Inventory Flashcards
What is inventory and where does it appear in a set of F/S?
inventory is merchandise held by an entity for resale purposes, and it appears as a current asset on the balance sheet.
What is the FOB point?
What is the significance of the FOB point when preparing F/S?
the FOB point is the point at which the title changes hands on a sale.
FOB Destination - title changes when the buyer receives
FOB Shipping point - title changes when it leaves the seller
the FOB point is important because it marks the moment when the transactions should be reported. For the seller, A/R and sales increase. If a perpetual system is in use, COGS also increases and inventory decreases. For the buyer, inventory increases at the FOB point, as well as A/P.
What costs are included in the reported cost of inventory?
it includes all normal and necessary expenditures to get the merchandise into position and condition to be sold.
invoice price
sales taxes paid (only non refundable)
freight-in
How is COGS calculated
Where does COGS appear in the F/S?
What is gross profit?
COGS = Beginning Inventory + Purchases - ending inventory
COGS is an expense on the income statement
Gross Profit is the sales revenue less COGS
Based on the FOB point, who pays shipping costs for an inventory purchase?
FOB destination - seller owns and pays shipping costs
FOB shipping point - buyer owns and pays shipping costs
An entity in Kansas City sells a piano to an entity in Portland, ME. As the shipment passes through Philadelphia, the piano falls off the truck and is destroyed.
Which party suffers this loss?
FOB Destination - seller owns and bears loss
FOB shipping point - buyer owns and bears loss
What are the 2 methods to account for purchase discounts?
Gross method - purchase and payable booked at full value. if discount is taken purchase discount is set up to record the difference. this is a contra asset to inventory purchases
Net method - purchase and payable booked at discounted amount. if discount is not taken then a loss is recognized to record difference
What is the purpose of a trade discount?
If inventory is bought with a retail price of $1,000 based on a trade discount of 40/20, what is paid?
How is a trade discount reported?
A trade discount is a way to set a price, especially when one store sells to another.
The $1,000 would first be reduced by a 40% discount, or $400. The remaining $600 would then be reduced by 20% discount to arrive at a price of $480.
Trade discounts are not separately recorded. Instead, the A/R and the sale would be recorded at $480.
What is consignment inventory?
consignment inventory is owned by one party (a consignor), but held for sale by another party (a consignee)
Inventory is bought by A for $800 and shipped to Z to hold on consignment, in hopes of selling it for $1,100.
What is recorded by both companies?
A reports the inventory at its cost of $800.
Z has no cost connection with the inventory and thus reports nothing.
Inventory is bought by A for $800 and shipped to Z to hold on consignment. At the time of the transfer, A reported a sale for the retail price of $1,100 and removed the inventory from its accounts.
By how much would the current assets of A be overstated?
the overstatement would be A/R $1,100 less inventory cost $800 so overstatement would be $300
An entity is applying the lower of cost or market to inventory. In this situation, what is meant by market?
in most cases, the market value is judged to be its replacement cost
In applying lower of cost or market to inventory, replacement cost is normally used as market value. However, if replacement cost is above a “ceiling” or below a “floor” figure, then the ceiling or floor figures are used as boundaries for the market value.
How are the floor figure and the ceiling figure determined?
the ceiling for the market value is the net realizable value of the inventory. sales price less any cost necessary to sell the merchandise.
the floor figure is the net realizable value, less any normal profit margin.
How does overstatement of inventory impact reported net income?
Ending inventory overstatement results in the same error in Net income, overstatement
How does an overstatement of inventory in year 1 impact the reported NI in year 2?
year 1 error will carry over into an overstatement of beginning inventory which has an opposite error in NI understatement
