Inventory

Question 1

Define Inventory.

Answer 1

inventory includes property held for resale, property in the process of production, and property consumed in the process of production.

Question 2

Is inventory a current or noncurrent asset?

Answer 2

Inventories are always current assets to the seller even though they may be noncurrent assets to the buyer.

Question 3

What items are included in inventory

Answer 3

Goods in transit (FOB destination if seller and FOB shipping point if buyer) Goods on Consignment, frienght in, taxes, material handling costs and packaing costs, fixed overhead, direct material, labor and variable overhead

subtract out any purchase discounts and returns and allowances.

do not include any interest fees

Question 4

What is FOB Shipping point?

Answer 4

means title passes at the shipping point (the selling company’s warehouse), therefore the goods belong to the purchaser as soon as it is loaded on a common carrier

Question 5

What is FOB Destination?

Answer 5

means that title to the goods transfers to the buyer when the goods reach the destination

Question 6

What is the Retail Inventory Method?

Answer 6

The retail inventory method, which is really a family of related methods, is based on three basic calculations.

First, ending inventory at retail is calculated or counted at year-end.

Second, the cost-to-retail ratio is calculated.

Third, the ending inventory at retail is multiplied by the cost-to-retail ratio to arrive at estimated inventory at cost.

EI(cost) = EI(retail) X Cost to retail ratio

Question 7

What is the Original Selling Price?

Answer 7

Cost plus initial markup

Question 8

What are the Net Additional Markups in the retail inventory method? ?

Answer 8

A net increase in the original selling price. This amount is added only in the retail column and before computing the cost-to-retail ratio.

Question 9

What are net additional mark downs in the retail inventory method?

Answer 9

A net decrease in the original selling price.

This amount is subtracted only from the retail column and before computing the cost-to-retail ratio.

Question 10

How is Transportation In treated in the retail inventory method?

Answer 10

Added in the cost column only, before computing the cost-to-retail ratio.

Question 11

How is Purchase Discounts treated in the retail inventory method?

Answer 11

Subtracted in the cost column only, before computing the cost-to-retail ratio.

Question 12

How is Purchase Returns and Allowances treated in the retail inventory method?

Answer 12

This amount is subtracted in both the cost and retail columns before computing the cost-to-retail ratio

Question 13

How is Employee Discounts treated in the retail inventory method?

Answer 13

This amount is subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio.

Question 14

How is Normal Spoilage treated in the retail inventory method?

Answer 14

Shown at retail value, subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio.

Question 15

How is abnormal casualty loss treated in the retail inventory method?

Answer 15

Shown at both cost and retail, the amount of merchandise available for sale has declined. Reduce the cost and retail value of goods available for sale before computing the cost-to-retail ratio

Question 16

What is Dollar Value Lifo Retail?

Answer 16

Shown at both cost and retail, the amount of merchandise available for sale has declined. Reduce the cost and retail value of goods available for sale before computing the cost-to-retail ratio

Question 17

What are the two steps for Dollar Value LIFO Retail?

Answer 17

1. DV LIFO is first applied to inventory at retail only
2. the FIFO retail method cost-to-retail ratio is applied to this retail layer yielding the increase in cost at current prices. Finally, this cost layer is added to beginning inventory at DV LIFO cost to yield ending inventory at DV LIFO cost.

Question 18

What is the basic steps in Dollar Value LIFO Retail?

Answer 18

BI DV LIFO $ 100.00
EI(retail, FIFO) = $285.00
EI(retail, base-year dollars) = $285(1.00/1.08) = $263.89
Increase in EI(retail, base-year dollars) = $263.89 - $145 = $118.89
Increase in EI(retail, FIFO) = $118.89(1.08/1.00) = $128.40
Increase in EI(cost, FIFO) = $128.40(.6383)* 81.96
EI DV LIFO $181.96

Question 19

What does a counterbalancing error mean?

Answer 19

If it is never discovered, retained earnings automatically corrects itself, and with the new count of inventory at the end of the second year, the error disappears. However, the errors in the two years’ financial statements do not automatically correct and would be present in the comparative statements

Question 20

What happens if the inventory error is never discovered?

Answer 20

1. 1st year: purchases are understated, CGS understated, net income overstated, ending retained earnings overstated.
2. 2nd year: purchases are overstated, CGS overstated, net income understated, ending retained earnings is correct (error has counterbalanced).
3. But the errors remain in both years’ statements shown comparatively with later statements.

Question 21

What happens if the inventory error is discovered in year 2?

Answer 21

Retained earnings at the beginning of year 2 is corrected by this entry, and year 1’s income (and any other accounts affected) would be corrected in the year 1 statement reported comparatively with year 2.

Question 22

What happens if the inventory error is discovered in year 3?

Answer 22

No entry is needed because retained earnings is correct - the error has counterbalanced. The statements for years 1 and 2 would be corrected if shown comparatively with year 3.

Question 23

What is a purchase commitment?

Answer 23

Companies often commit (in a contract) to the purchase of materials to lock in the unit price of an item needed for production or resale in order to aid in cash flow budgeting and to protect against price increases. Sometime the market price of the item declines below the contract price. The accounting for this price decline depends on whether the contract can be revised in light of the changing market conditions

Question 24

How do you treat the loss on a purchase commitment when the contact can be modified?

Answer 24

In this case, the loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the loss is not probable given that the contract can be revised.

Question 25

How do you treat the loss on a purchase commitment when the contact cannot be modified?

Answer 25

In this case, the loss must be accrued because the loss is probable and estimable

Question 26

Does IFRS value inventory at LCM?

Answer 26

No, lower of cost or net realizable value

Question 27

Does IFRS allow LIFO?

Answer 27

No, its prohibited