Inventory

Question 1

Lower of Cost
or
Net Realizable Value

!!No Middle Value
!!Aka “FIFO Weighted Average”

Answer 1

All inventory using FIFO or Weighted Average

NRV =
Net Selling Price - “Cost to complete & Disposal Inventory “

Pick lower value between actual cost or NRV

Question 2

Weighted Average Cost Calculation

Answer 2

Average Cost per Unit=

(Cost Begin Inventory + Cost of purchase) divided by
(Begin Inventory unit +Unit Purchase

Question 3

LIFO

Answer 3

In period of rising prices, LIFO produces the lowest ending inventory, highest COGS, lowest net income.
-Greater matching of expenses and revenues.

Question 4

COGS Calculation Periodic Inventory System

Answer 4

Beginning Inventory
+ Net Cost of Purchases
= Cost of Goods Available for Sale
(-) Ending Inventory
=COGS

Question 5

Lower of Cost
or
Market

(LIFO or Retail)
**Find Middle the Value

Answer 5

LIFO or Retail Inventory Method
*Lower of Cost or Market – pick Middle Value
*Market Value is median between replacement cost,
market ceiling, and market floor.
*Market Ceiling = NRV - Cost to sell/disposal
*Market Floor= Market Ceiling(NRV) - normal profit margin
*Replacement cost= Cost to purchase the item at valuation date
*Compare middle value to original cost

Dr. Inventory Loss Market Value Decline XXX
Cr. Inventory XXX

Question 6

COGS Flow Chart

Answer 6

Income Statement:
Operating Income**
+Nonoperating Income
Taxes
=Income Continuing Operations
Discontinued Operations(net of tax)
=Net Income

Sales
!!(COGS)
=Gross Margin
(Sales/General/Administration expense)
=**Operating Income

Beginning Inventory
Net Purchases
=Goods Available for Sale
(Ending Inventory)
=!! COGS

Question 7

Gross Profit Method

Answer 7

*Used only for interim financial statement as part of periodic inventory system only
*Inventory valued at retail

Beg Inventory
+ Purchases
=COGS Available For Sale
(Less: COGS)
=Ending Inventory

Question 8

Perpetual Vs Periodic Inventory System

Answer 8

Perpetual Periodic

At time of Purchase:
Dr. Inventory XXX Dr. Purchases XXX
CR. A/P or Cash XXX Cr. A/P or Cash XXX

At time of Sale:
Dr. Cash or A/R XXX Dr. Cash or A/R XXX
Cr. Sales Revenue XXX Cr. Sales Revenue XXX

Dr. COGS XXX
Cr. Inventory XXX

At Year-End
Dr. Ending Inventory XXX
Dr. COGS(Plug) XXX
Cr. Purchase XXX

Question 9

Effects of Ending
Inventory Errors Chart

Answer 9

Overstated Understated
Ending Inventory: Ending Inventory:

Goods
Available N/A N/A
For Sale

COGS Understated Overstated

Gross
Margin Overstated Understated
Profit

Net Income Overstated Understated

Retained Earning Overstated Understated