Inventory 2.1

Question 1

what should inventory be valued at

Answer 1

lower of cost or market

Question 2

what is included in cost of inventory?

Answer 2

• 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)

Question 3

when does title transfer for FOB shipping point?

Answer 3

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

Question 4

when does title transfer for FOB destination?

Answer 4

when the goods are received by (tendered to) the buyer

Included in seller’s books until received by buyer

Question 5

does the consignor or consignee have the inventory on the balance sheet?

Answer 5

consignor has inventory on balance sheet even though consignee has possession. Consignee is just selling inventory on behalf of consignor

Question 6

types of inventory costing methods

Answer 6

• specific identification
• FIFO
• LIFO
• moving avg
• weighted avg

Question 7

FIFO (LISH), LIFO (FISH)

Answer 7

FIFO - last in still here

LIFO - first in still here

Question 8

under perpetual, what inventory method would have the same ending inventory, FIFO or LIFO?

Answer 8

FIFO

Question 9

in periods of inflation, which will have a higher COGS (and lower earnings/taxes), FIFO or LIFO?

Answer 9

LIFO

Question 10

IFRS - which inventory valuation method is not allowed under IFRS?

Answer 10

LIFO - because it always reduces taxes in periods of inflation which exists in almost all countries

Question 11

what are the 3 ways to get the price index for dollar value LIFO?

Answer 11

• simplified (given)
• double extension (extend back to base year)
• link chain (cumulative index, compare with previous year)

Question 12

how do you determine market cost under US GAAP?

Answer 12

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

Question 13

can you recover inventory losses under US GAAP?

Answer 13

no

Question 14

can you recover inventory losses under IFRS?

Answer 14

yes

Question 15

inventory estimation - gross profit method. how is it done?

Answer 15

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%)

Question 16

List the attributes of Last In First Out (LIFO).

Answer 16

1. Matching of revenues and expenses is significantly improved over FIFO;
2. Income tax advantages associated with LIFO;
3. Balance sheet presentation is less than ideal.

Question 17

List the attributes of First In First Out (FIFO).

Answer 17

1. Most closely approximates actual physical flow of goods for most companies;
2. Balance sheet valuation of inventory is at more desired current cost;
3. Matching of revenues and expenses on income statement is not ideal.

Question 18

Generally, what is replacement cost?

Answer 18

Market cost.

Question 19

List the formula to arrive at net realizable value

Answer 19

Sales price - estimated cost to complete and sell the inventory.

Question 20

How is the ceiling value of inventory calculated?

Answer 20

By reducing the sales price by the estimated cost to complete and sell the inventory.

Question 21

List the methods of recording Lower of Cost or Market.

Answer 21

Direct method or Allowance method.

Question 22

List the steps in Lower of Cost or Market (LCM) analysis.

Answer 22

1. Compute market value;

2. Value inventory at lower of cost or market.

Question 23

Define “market cost”.

Answer 23

Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.

Question 24

How is the cost of ending inventory determined?

Answer 24

Determined by applying one of the four cost flow assumptions .

Question 25

Which is always larger, margin on sales or margin on cost?

Answer 25

Margin on cost.

Question 26

List the Margin on Cost formula.

Answer 26

(Sales-Cost of Goods Sold) / Cost of Goods Sold.

Question 27

List the basic inventory equation.

Answer 27

Beginning inventory + net purchases = ending inventory cost of goods sold.

Question 28

If an inventory error is discovered in year three, what is the impact on Retained Earnings?

Answer 28

There is no impact on Retained Earnings, the error has self-corrected.

Question 29

In year one of an error, if purchases are understated, what is the impact on Retained Earnings?

Answer 29

The impact on Retained Earnings is overstated.

Question 30

If an inventory error is discovered in year two, where is the difference recorded?

Answer 30

Beginning balance of Retained Earnings.