Inventory 2.1 Flashcards
what should inventory be valued at
lower of cost or market
what is included in cost of inventory?
- warehousing costs prior to sale
- insurance, repackaging, modifications
- freight-in paid by the buyer
- transportation costs paid by the seller on consignment arrangements
- DO NOT include abnormal costs for idle factory expense, unallocated fixed overhead costs, excessive spoilage, double freight, and rehandling costs (these are expensed immediately)
when does title transfer for FOB shipping point?
when the goods are given to a carrier (shipped)
included in seller’s books until shipped. if in transit at year end, the buyer owns it
when does title transfer for FOB destination?
when the goods are received by (tendered to) the buyer
Included in seller’s books until received by buyer
does the consignor or consignee have the inventory on the balance sheet?
consignor has inventory on balance sheet even though consignee has possession. Consignee is just selling inventory on behalf of consignor
types of inventory costing methods
- specific identification
- FIFO
- LIFO
- moving avg
- weighted avg
FIFO (LISH), LIFO (FISH)
FIFO - last in still here
LIFO - first in still here
under perpetual, what inventory method would have the same ending inventory, FIFO or LIFO?
FIFO
in periods of inflation, which will have a higher COGS (and lower earnings/taxes), FIFO or LIFO?
LIFO
IFRS - which inventory valuation method is not allowed under IFRS?
LIFO - because it always reduces taxes in periods of inflation which exists in almost all countries
what are the 3 ways to get the price index for dollar value LIFO?
- simplified (given)
- double extension (extend back to base year)
- link chain (cumulative index, compare with previous year)
how do you determine market cost under US GAAP?
take the middle of:
ceiling = net realizable value (selling price - disposal costs)
floor = NRV - normal profit margin
replacement cost = purchase or reproduction
use the middle of the 3 for the market and compare to cost
can you recover inventory losses under US GAAP?
no
can you recover inventory losses under IFRS?
yes
inventory estimation - gross profit method. how is it done?
beginning inventory \+ purchases = goods available for sale - ??? ending inventory = cost of goods sold
COGS estimated at xx% of sales
so ending inventory = goods avail for sale - (sales * xx%)
List the attributes of Last In First Out (LIFO).
- Matching of revenues and expenses is significantly improved over FIFO;
- Income tax advantages associated with LIFO;
- Balance sheet presentation is less than ideal.
List the attributes of First In First Out (FIFO).
- Most closely approximates actual physical flow of goods for most companies;
- Balance sheet valuation of inventory is at more desired current cost;
- Matching of revenues and expenses on income statement is not ideal.
Generally, what is replacement cost?
Market cost.
List the formula to arrive at net realizable value
Sales price - estimated cost to complete and sell the inventory.
How is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory.
List the methods of recording Lower of Cost or Market.
Direct method or Allowance method.
List the steps in Lower of Cost or Market (LCM) analysis.
- Compute market value;
2. Value inventory at lower of cost or market.
Define “market cost”.
Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.
How is the cost of ending inventory determined?
Determined by applying one of the four cost flow assumptions .
Which is always larger, margin on sales or margin on cost?
Margin on cost.
List the Margin on Cost formula.
(Sales-Cost of Goods Sold) / Cost of Goods Sold.
List the basic inventory equation.
Beginning inventory + net purchases = ending inventory cost of goods sold.
If an inventory error is discovered in year three, what is the impact on Retained Earnings?
There is no impact on Retained Earnings, the error has self-corrected.
In year one of an error, if purchases are understated, what is the impact on Retained Earnings?
The impact on Retained Earnings is overstated.
If an inventory error is discovered in year two, where is the difference recorded?
Beginning balance of Retained Earnings.
