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FAR > Inventory > Flashcards

Inventory Flashcards

1
Q

What are the two main issues in accounting for inventory?

A

Determining physical quantities

Determining appropriate dollar valuation

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2
Q

Which costs are inventoriable?

A

Purchases - net of discounts

Freight - FOB Shipping point costs go to buyer, FOB Destination costs charged to seller

Warehouse expenditures

All direct materials, direct labor, and variable and fixed manufacturing overhead

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3
Q

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

A

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

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4
Q

When does ownership transfer when goods are sent FOB Destination?

A

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

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5
Q

Which costs are non-inventoriable?

A

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

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6
Q

When are discounts recorded under the gross method?

A

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

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7
Q

Under the net method, when are discounts recorded?

A

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

Unused discounts are allocated to financing expense.

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8
Q

How is gross margin calculated?

A

Gross Margin = Sales – COGS (BI + P – EI)

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9
Q

Describe the periodic inventory system.

A

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

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10
Q

Describe the perpetual inventory system.

A

Inventory count continually updated

Uses a moving-average cost flow method

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11
Q

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

A

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

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12
Q

How is inventory turnover calculated?

A

COGS / Average Inventory

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13
Q

How is Average Day’s Sales in inventory calculated?

A

365 / Inventory Turnover

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14
Q

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

A

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

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15
Q

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

A

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

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16
Q

How does misstatement of ending inventory affect Ending Retained Earnings?

A

EI Over = COGS Under = ERE Over

EI Under = COGS Over = ERE Under

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17
Q

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

A

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

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18
Q

Is FIFO balance sheet-oriented or income statement-oriented?

A

Balance sheet-oriented, since it reports EI at approximate replacement cost

May misstate income since old costs match current revenues

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19
Q

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

A

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

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20
Q

What is the LIFO Reserve?

A

Contra-inventory account

Used for companies who use LIFO for financial reporting but some other method for internal reporting

Must be adjusted to its required balance at financial statement date

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21
Q

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

A

COGAS / Total Units = Weighted Average Cost Per Unit

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22
Q

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

A

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

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23
Q

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

A

FIFO has the Lowest COGS

If COGS is Low, that means EI is High

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24
Q

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

A

FIFO has the Highest COGS

If COGS is High, that means EI is Low

25
Q

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

A

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

Market = Replacement Cost

Market Floor = Net Realizable Value - Normal Profit

26
Q

When using LCM, what results in a lower cost, applying the method to groups of items or to separate items?

A

Separate items

27
Q

When is the lower of cost or market (LCM) principle relevant?

A

If inventory is impaired or damaged, it should be valuated at the LCM

Any decline in value should be charged against revenue for the period when the decline occurred

28
Q

What is the accounting principle behind LCM?

A

Conservatism - realistically estimating future cash flows from sale of inventory

29
Q

How are acquisitions accounted for in a periodic inventory system?

A

Debited to Purchases - at any point in time, the balance in inventory reflects the beginning of the period

COGS is a residual amount after subtracting EI from (BI + net purchases)

30
Q

What is a chain discount?

A

A series of discounts, applied successively (not cumulatively)

31
Q

What is the relative sales value method?

A

A means of valuing units in a “basket purchase”/lump sum

Cost should be proportioned according to relative sales value

32
Q

What exceptions are there to valuing inventory at cost?

A

If impaired, value is lower of cost or market

Used/damaged/repossessed inventory items may be valued at replacement cost

Losses on purchase commitments

33
Q

What are losses on purchase commitments?

A

A firm promises to purchase goods at a set price in the future

Any loss resulting from (1) drop in market value or (2) contract cancellation should be recognized in the current period

Debit: Loss on Purchase Commitment
Credit: Allowance for Loss on Purchase Commitment

34
Q

What are the two ways to apply LIFO?

A

Quantity LIFO - “default”/classical application
-generally limited to small number of inventory items, since records of separate prices for each lot are required

Dollar-Value LIFO - widespread use, based on dollar value of inventory pools of similar items, rather than physical units
-based on economically similar items (respond similarly to same cost change pressures)

35
Q

In dollar-value LIFO, what is the base year dollar cost?

A

The total inventory cost for the first year of the method’s adoption (the base year) divided by the number of units

36
Q

In dollar-value LIFO, what is the price index?

A

(EI @ current-year costs) / (EI @ base-year cost) = price index for current period

37
Q

In dollar-value LIFO, when is a new layer of inventory added?

A

Whenever the EI at base-year dollars exceeds the BI

38
Q

In dollar-value LIFO, what is the calculation for a price index?

A

For each pool, (EI quantity) x (base-year unit price) = base-year amount for pool
-Sum all pools together

For each pool, (EI quantity) x (current-year unit price) = current-year amount for pool
-Sum all pools together

(current-year amount) / (base-year amount) = price index

39
Q

In dollar-value LIFO, how is ending inventory valuated for year 2?

A

(year 2 base-year amount) - (year 1 base-year amount) = year 2 layer

(year 2 layer) x (year 2 price index) = valuation

Year 1 layer still is the year 1 base-year amount

40
Q

In dollar-value LIFO, how is ending inventory valuated for year 3 (etc.)?

A

(current-year base-year amount) - (previous years’ layers) = current-year layer

Multiply each year by its respective price index, sum to receive EI valuation

41
Q

In dollar-value LIFO, what happens if the base-year amount decreases in a subsequent year?

A

The layers are shed off accordingly (most recent layers shed first), and then each layer is multiplied by its respective price index

42
Q

How does the link-chain method for Dollar-Value LIFO inventory differ in computing its indices?

A

The link-chain method affects the cost index.

For double-extension method, price indices = (current year amount) / (base year amount)

For link-chain method, the link-chain cost index = (previous-year cost change index) x (current-year cost change index)

43
Q

What are two inventory estimation methods?

A

Gross Margin Method

Retail Method

44
Q

How do you valuate dollar-value LIFO inventory with the link-chain method?

A

(Inventory at current cost) / (inventory at base-year cost) = current-year link-chain cost index

Inventory layers = (inventory at base-year cost) - (previous year’s inventory at base-year cost)
-First year’s inventory layer is the base-year inventory

Layers are multiplied by their respective link-chain cost index and added to the base-year to get that year’s LIFO inventory

45
Q

What are two different average inventory methods?

A

Weighted average (periodic)

Moving average (perpetual)

46
Q

What is the gross margin method?

A

Uses GM percentage (as a % of net sales) to calculate COGS, and thus to calculate EI (since COGS = BI + NP - EI)

Not GAAP

Used to:

  • verify accuracy of year-end physical count
  • estimate EI and COGS for interim reporting
  • estimate losses from theft and fires/floods
47
Q

What does the retail method require?

A

Records of BI and purchases for the period, both at cost and retail

Additional markups and markdowns

Sales for the period

48
Q

What are three different ways to apply the retail method?

A

Weighted Average, LCM

LIFO Retail

Dollar-Value LIFO Retail

49
Q

How do you calculate EI using the Weighted Average, LCM method?

A

Calculate CGAS at cost (BI + NP) and retail (BI + NP + markup)
-Get cost/retail ratio

CGAS @ retail
- sales
- markdowns
= EI @ retail
x cost/retail ratio
= EI @ cost
50
Q

What is the “LCM” component of the Weighted Average, LCM method?

A

CGAS includes markups but not markdowns

-causes cost/retail ratio to be lower

51
Q

What is the difference between the Weighted Average, LCM method and the LIFO Retail method?

A

LIFO retail generates two different cost/retail ratios, one for BI and another for purchases, but none for CGAS

LIFO retail includes markdowns in the CGAS

52
Q

How do you calculate the cost of EI using the LIFO Retail method?

A

(purchases @ cost) / (net purchases @ retail (including markups and markdowns)) = purchases cost/retail ratio

For retail:
BI
\+ purchases
\+ markups
- markdowns
= CGAS
- net sales
= EI

(EI at retail) - (BI at retail) = Purchases Inventory Layer

(BI @ cost) + [(Purchases Layer) x (Purchases cost/retail ratio)] = EI at cost

53
Q

How do you calculate the cost of EI using the Dollar-Value LIFO Retail method?

A 
Retail EI
/ price index
= retail EI at base-year dollars
- retail BI
= incremental base-year layer @ retail
x price index
= incremental current-year layer @ retail
x purchases cost/retail ratio
= incremental current-year layer @ cost
\+ BI @ cost
= EI @ cost
54
Q

How do you calculate the cost of EI using the FIFO Retail method, ignoring the LCM component?

A

(Purchases @ retail) + (markups) - (markdowns) = Net purchases @ retail

(Purchases @ cost) / (net purchases @ retail) = Purchases cost/retail ratio

Net purchases @ retail
\+ BI @ retail
= CGAS @ retail
- Sales
= EI @ retail
x Purchases cost/retail ratio
= EI @ cost
55
Q

What is the main difference between the LIFO Retail method and the FIFO retail method?

A

For the FIFO Retail method, the goods in BI are charged to COGS, not included in the EI. Therefore, only the purchases cost/retail ratio is relevant, not the BI cost/retail ratio.

56
Q

Do losses on purchase commitments result in reductions in inventory?

A

No, you simply need to recognize a loss

57
Q

In the retail inventory method, what would be used in calculating both cost and retail amounts of goods available for sale?

A

Purchase returns

58
Q

If a retail inventory method is described as “conventional,” what does that mean?

A

It uses LCM, so don’t include markdowns in calculating CGAS

FAR (26 decks)

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