Inventory

Question 1

Which costs are inventoriable?

Answer 1

• Purchases - Net of Discounts
• Freight In paid by the Buyer
• Warehouse expenditures
• Insurance, Repackaging
• Transportation costs paid by seller on consignments

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
Abnormal costs for idle factory expenses
Financing costs

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.
This is the most acceptable method.

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, warehousing costs, in-transit insurance.

Question 14

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 14

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

Question 15

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

Answer 15

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 16

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

Answer 16

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 17

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

Answer 17

COGAS / Total Units : Weighted Average Cost Per Unit

Question 18

How does FIFO change in a period of rising prices?

Answer 18

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 19

How do FIFO change in a period of falling prices?

Answer 19

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 20

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

Answer 20

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs
Market : Replacement Cost
Market Floor : Net Realizable Value - Normal Profit

Question 21

FIFO Characteristics:

Answer 21

• Inventory on the books is considered most recent purch.
• FIFO results in highest ending inventory
• Lowest COGS
• Highest Net Income
• Closely relates to actual flow of goods
• Perpetual and Periodic are the same

Question 22

LIFO Characteristics:

Answer 22

• Most recent costs are expensed and matched with current revenues (matching)
• Inventory on books is considered to be goods acquired 1st
• In periods of rising prices - LIFO = lowest ending inventory, highest COGS, and lowest Net Income
• Better represents flow of cash
• Perpetual and Periodic are different

Question 23

What is the purpose of LIFO for financial reporting purposes?

Answer 23

-LIFO is an attempt to approximate the replacement cost
-Known as the Capital Maintenance Concept - presumes that a company that wishes to remain a going concern must maintain a basic level of investment in the assets that comprise the business
-True cost of of an item that has been sold is the cost of replacing the inventory
(LIFO is as close as that)

Question 24

When costs are increasing, which method understates costs of goods sold (overstating net income)?

Answer 24

FIFO

Question 25

When costs are increasing, which method understates inventory?

Answer 25

LIFO

Question 26

Moving Average (Perpetual)

Answer 26

Computes average after each purchase

Question 27

Dollar Value LIFO:

Answer 27

• related items are grouped in pools

- an overall price index is used to appx. changes in invent.

Question 28

Benefits of using Dollar Value LIFO vs LIFO

Answer 28

• only necessary to track annual layers of costs and price indexes for each inventory pool, instead of detailed
• reduces the possibility that older inventory layers will be liquidated and reported in COGS - since reductions in one type of inventory will be offset by another type

Question 29

Two Figures needed to configure Dollar Value LIFO

Answer 29

Total Current Cost of inventory in the pool at the EOY (replacement cost or ending inventory under FIFO)

Price Index indicating overall price level compared to the base date

Question 30

What accounting principle does reporting inventory at lower of cost or market abide by?

Answer 30

Conservatism

Question 31

Commissions paid to consignees are recorded as what on the Income Statement?

Answer 31

Selling Expense

Question 32

If Ending Inventory is understated, what is the affect on Net Income?

Answer 32

Net Income will be understated because COGS is overstated:

Beg + Purchases - Ending = COGS