Inventory Flashcards
Info
Started on 26 August 2014 @9.00 PM
Total questions 79
To do at a time 14,
Practice session 91
Which of the following statements is false regarding inventory costing methods?
under FIFO, current purchases usually become part of ending inventory rather than cost of goods sold and thus do not affect current income. Under LIFO, however, current purchases are normally included in cost of goods sold and thus net income could be affected by controlled purchases.
Hint
IFRS does not use the ceiling or floor amounts.
IFRS requires inventory to be reported at the lower of cost or net realizable value (LCNRV). This method requires net realizable value to be calculated as the estimated selling price less estimated costs of completion and estimated costs to sell. Therefore, the NRV is $95,000 ($98,000 — $3,000). The lower of cost or net realizable value is determined by comparing the cost of $100,000 to the NRV of $95,000, and using the lower amount. Inventory should be reported at $95,000.
Hint
Transportation to consignees 5,000 555,000
Cost of goods available for sale 677,000
In accounting for a long-term construction contract using the percentage-of-completion method, the amount of income recognized in any year would be added to
Construction in progress.
This answer is correct. When revenue is recognized, the following entry is made:
Construction in progress xxx
Income on long-term contract xxx
Inventory valuation in IFRS
Under IFRS, inventory is valued at lower of cost or net realizable value.
When the double extension approach to the dollar-value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. Which of the following correctly states how components are used in the calculation of this index number?
In the numerator, the ending inventory at current year cost, and, in the denominator, the ending inventory at base-year cost.
This answer is correct because the index number used to convert the current year’s inventory layer is calculated as follows:
Index = Ending inventory at current year cost
Ending inventory at base-year cost
This index indicates the relationship between current and base year prices as a percentage. When multiplied by a new layer (which is the increase in inventory in base-year dollars), the index will convert the layer to current year dollars.
The percentage-of-completion method of accounting for long-term construction-type contracts is preferable when
Estimates of costs to complete and extent of progress toward completion are reasonably dependable.
the percentage-of-completion method for long-term contracts is preferable over the completed-contract method when estimates of cost to complete and extent of progress made toward completion are reasonably dependable. Under the percentage-of-completion method, income would be periodically recognized as the contract is completed.
Hint
Designated market for comparison to cost is the middle value of the replacement cost, the ceiling/net realizable value (selling price less cost to sell and costs to complete), and the floor (ceiling less a normal profit margin)
When progress billings are sent on a long-term contract, what type of account should be credited under the completed-contract method and percentage-of-completion method?
Completed-contract Percentage-of-completion
Revenue Revenue
Revenue Contra asset
Contra asset Revenue
Contra asset Contra asset
Under the percentage-of-completion method, income is recognized periodically on the basis of the percentage of the job that is complete. The completed-contract method recognizes income from the job only when the contract is completed. This is the only difference in accounting for the two methods. For both methods, when progress billings are sent, “Billings on construction in progress” is credited for the amount billed. This is shown on the balance sheet as a contra account to Construction in progress.
Need to understand.
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of
Total costs incurred to date to total estimated costs.
The amount is computed as the ratio of total costs incurred to date to the total estimated costs.
From a theoretical viewpoint, which of the following costs would be considered inventoriable?
all costs incurred to acquire goods or to prepare them for sale are inventoriable. Freight-in is a cost incurred to acquire goods, and warehousing is a cost incurred to store goods awaiting sale. Therefore, both freight-in and warehousing are inventoriable costs.
The following information is available for Cooke Company for year 2:
Net sales $1,800,000
Freight-in 45,000
Purchase discounts 25,000
Ending inventory 120,000
The gross margin is 40% of net sales. What is the cost of goods available for sale?
Gross margin is 40% of net sales ($1,800,000), or $720,000. Therefore, cost of goods sold is $1,080,000 ($1,800,000 net sales less $720,000 gross margin). Finally, cost of goods available for sale is $1,200,000 ($1,080,000 cost of goods sold plus $120,000 ending inventory). The amounts for freight-in ($45,000) and purchase discounts ($25,000) are not necessary for the computation.
