Inventory

Question 1

The Lower of cost or market (LCM) for inventory may be applied to?

Answer 1

1. Single item
2. Category
3. Total inventory

Question 2

How IS LCM applied under the LIFO method

Answer 2

Compared the values below and choose the middle value.
1. Ceiling (Net realizable value)
2. Replacement cost
3. Floor ( Net realizable value - Profit margin)

If the middle value is lower than the original cost an impairment is recognized on inventory.

Question 3

Under LCM method how is Market ceiling (Net realizable value) calculated?

Answer 3

Value of inventory
(-) cost of disposition
(-) cost to complete
(=) Net realizable value

Question 4

Under LCM method how is Market floor calculated?

Answer 4

Net realizable
(-) Normal profit margin
(=) Market floor

Question 5

How IS LCM applied under the FIFO method

Answer 5

Compared the values below and choose the middle value.
1. Ceiling (Net realizable value)
2. Floor ( Net realizable value - Profit margin)

If the middle value is lower than the original cost an impairment is recognized on inventory.

Note that FIFO method does not consider Replacement cost.

Question 6

What is one the disadvantage of using a periodic inventory accounting system?

Answer 6

Cost of goods sold includes the cost of inventory sold and shortage of inventory (if any).

Question 7

What is a periodic inventory accounting system?

Answer 7

Is a system use to determine the current inventory levels and calculate the cost of goods by performing physically inventory counts (most likely at year end or month end).

Question 8

What is a perpetual inventory accounting systems?

Answer 8

Is a system that tracks inventory levels in real time.

Question 9

What is the impact of overstated ending Inventory on the P&L?

Answer 9

1. COGS is understated.
2. Gross profit is overstated.
3. Net income is overstated.

Question 10

What is the impact of understated ending Inventory on the P&L?

Answer 10

1. COGS is overstated
2. Gross profit is understated
3. Net income is understated