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Financial Accounting and Reporting > Inventory > Flashcards

Inventory Flashcards

1
Q

What is included in the cost of inventory?

A

Anything that helps get the inventory in the condition for its “intended” use such as the following:

  • warehousing cost prior to sale
  • insurance, repackaging, modifications
  • freight-in paid by the buyer
  • transportation paid by the seller on consignment arrangements.
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2
Q

What’s not included in inventory cost?

A
  • abnormal cost for idle factory expense
  • unallocated fixed overhead cost
  • excessive spoilage
  • double freight
  • rehandling cost

Note: they should all be expensed immediately.

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3
Q

Whose inventory is it on FOB shipping point terms?

A

Buyers inventory. So it is included in the buyers inventory at year end.

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4
Q

Whose inventory is it on FOB destination?

A

It’s still the sellers inventory until the buy receives the goods. Therefore the goods are still accounted for in the sellers books at year end as inventory.

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5
Q

How should financing cost of inventory be accounted for?

A

Those cost are NOT a part of inventory and should be expensed immediately as interest expense.

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6
Q

If goods are purchased at terms 2/10 net 30; at what amount is inventory recorded?

A

it would be recorded at 2% less than the invoice amount. If the payment is made after the 10 days making the entity lose the discount then the discounted difference is recorded as a financing expense and not included in inventory.

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7
Q

What are selling expenses?

A
  • freight out paid by the seller
  • sales commissions

Note: these are recognized at the time of sale & are consistent with the matching principle.

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8
Q

Consignor?

A
  • Potential seller of goods
  • includes inventory in their B/S
  • Cost incurred by consignor in transferring goods to the consignee are considered inventory costs until sold
  • ***the cost of the goods
  • ***freight paid on shipments to consignee
  • ***warehousing costs
  • ***advertising
  • ***in-transit insurance
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9
Q

consignee?

A
  • Potential buyer of goods b/c they selling the goods on behalf of an entity and earning a commission for selling these goods
  • ***items are not included in his inventory balance
  • ***has possession, but not ownership of goods
  • ***when sold, the sales price is given to the consignor after deducting any reimbursable costs and commissions earned by the consignee.
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10
Q

How is COGS calculated?

A 
Beg Inventory
\+ net purchases
=goods available for sale
-ending inventory
=cost of the goods sold
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11
Q

How is Operating Income calculated?

A 
Sales
-cost of goods sold
=gross margin 
-selling and general admin exp
=operating income
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12
Q

What is periodic inventory system?

A

inventory quantity is determined by a physical count usually done at year-end.

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13
Q

What is the journal entry for in a periodic inventory system

A

At the time of purchase:
Debit: Inventory
Credit: Accounts Payable

At year end:
Debit: Ending Inventory
Credit: Purchases
Plug: cost of goods sold..it will either be a debit or credit to make the entry balance.

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14
Q

Periodic Inventory Systems have what characteristics?

A

No adjustment is made to inventory until the end of the period when a physical inventory count is made and ending inventory is calculated.

COGS is the plug and the exact amount of inventory shortage is not known because it is buried in the COGS sold amount.

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15
Q

What is a perpetual inventory system?

A

its an ongoing real time inventory system that allows the entity to know the quantity on hand at any point in time. All inventory purchases are debited to inventory.

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16
Q

What is the journal entry for inventory accounted for under the perpetual inventory method?

A

At the time of purchase:
Debit: Inventory
Credit: Accounts Payable

As sales occur:
Debit: Accounts receivable
Credit: Sales Revenue
Debit: Cost of goods sold (at cost)
Credit: Inventory (at cost)
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17
Q

what are the steps to reconcile inventory from the recorded amount to the physical count?

A
  1. Begin w/the recorded amount
  2. add goods held on consignment
  3. add goods sold fob shipping point and set aside but included in the count
  4. subtract goods in transit that were sold fob destination
  5. subtract goods in transit that were purchased fob shipping point

the result should be equal to the physical count (any differences will be due to errors or fraud

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18
Q

what are the steps to reconcile inventory from the physical count to recorded amounts?

A
  1. Begin with the physical count
  2. add goods in transit that were purchased fob shipping point
  3. add goods in transit that were sold fob destination
  4. subtract goods sold fob shipping point that are set aside but included in the count
  5. subtract goods held on consignment

the result should be equal to the amount recorded & any differences will be due to errors or fraud.

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19
Q

What is specific identification?

A
  • must be able to identify each unit sold
  • used when inventory is few in number very expensive and can be clearly identified, very heterogeneous items (lots of different items)
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20
Q

In a period of rising prices what does FIFO inventory result in?

A
  • highest ending inventory b/c the remaining inventory on hand is presumed to consist of the most recent purchases,
  • it also yields the lowest cost of goods sold and the highest net income because the price of the goods sold are at the older amounts which makes the cost of goods sold expense lower and when you have lower expenses then it increases net income.
21
Q

what are some assumptions of the FIFO inventory valuation method?

A
  • FIFO assumes that goods are sold in the order of acquisition
  • closely relates to the actual physical flow of goods
  • first items acquired are the first items sold (FIFO)
  • Last items acquired are still here in ending inventory (LISH)
  • perpetual and periodic inventory systems are the same
22
Q

In a period of rising prices what does LIFO inventory result in?

A

LIFO results in the lowest ending inventory (because the inventory left consist of the items that are the oldest & old pricing) and the highest cost of goods sold so lowest net income.

23
Q

What principle is LIFO consistent with?

A

Matching principle of matching current expenses w/current revenues

24
Q

what are some assumptions of LIFO inventory valuation method?

A
  • better represents the flow of cash
  • last items acquired are the first items sold (LIFO)
  • First items acquired are still her in ending inventory (FISH)
  • perpetual & period inventory systems are different (in the LIFO method of inventory valuation)
25
Q

What is the capital maintenance concept that LIFO is based on?

A

the most recently acquired item as the cost of goods sold is an attempt to approximate the replacement cost of the item.
-the concept presumes that a company that wishes to remain a going concern must maintain a basic level of investment in the assets that comprise the business.

26
Q

what is the LIFO conformity rule?

A

if LIFO is used for tax purposes then it must be used for financial reporting purposes. Remember LIFO yields a lower net income than FIFO.

27
Q

what is the summary effect of FIFO inventory costing method?

A

If cost are going up the following is the affect on FIFO inventory:
COGS=understated
Net Income=Overstated
Ending Inventory=OK
Balance Sheet = OK
Income Statement = its not ok b/c its overstated

28
Q

what is the summary effect of LIFO inventory costing method?

A

If cost are going up the following is the affect on LIFO inventory:

COGS=OK
Profits=OK 
Income Statement=Fairly presented
Ending Inventory=Understated
Income Statement=OK
Balance Sheet=not OK
29
Q

What is an advantage of using dollar value LIFO or regular LIFO?

A
  • record keeping cost under dollar value LIFO is substantially lower than traditional LIFO
  • reduces the probability that older inventory layer amounts will be liquidated and reported in cost of goods sold.
30
Q

what two figures are needed when applying dollar value LIFO

A
  • total current cost of the inventory in the pool at the end of each year (this would usually be the replacement cost or the ending inventory under the FIFO approach)
  • a price index indicating the overall price level compared to the base date (the date the method was first adopted)

See example on page 7-8 in Roger study book

31
Q

what are the 3 different methods for calculating the price index in dollar value LIFO?

A
  • simplified
  • double extension
  • link-chain
32
Q

what is the simplified method for calculating the price index

A

refers tot he use of a generally available index of prices, typically a government index such as the consumer price index for urban consumers (CPI)

33
Q

what is the double extension method for calculating the price index

A

requires the client to count the inventory and then extend inventory prices twice (which is the reason the term “double” is used). then the two results are compared to determine a price index:
(1) Current Quantity x Current Unit Cost = Current Cost

(2) Current Quantity x Base Date Unit cost = base cost
(3) Current Cost/Base Cost = price index

34
Q

what is the link-chain method for calculating the price index

A

similar to the double extension method except that year to year price changes rather than cumulative changes are computed, then the annual changes are linked (multiplied) together to determine the price index.
(1) current quantity x end of year unit cost = current cost

(2) current quantity x start of year unit cost = prior year cost
(3) current cost/prior year cost = annual cost index

35
Q

what GAAP principles does lower of cost or market rule comply with?

A

conservatism & matching principle

36
Q

which financial statement are inventory losses reported in?

A

in the income statement

37
Q

what is the journal entry to record the loss on inventory valuation?

A

Debit: loss on inventory due to decline in market

Credit: Inventory

38
Q

what is the formula for calculating the net realizable value?

A

Sales price - cost of disposal=net realizable value which is also know as the ceiling

39
Q

what is another term for replacement cost?

A

Market cost

40
Q

what is the formula for calculating the floor in the lower of cost or market approach?

A

Net realizable value - normal profit = the floor

41
Q

What are the inventory estimation methods?

A
  • gross profit (margin) method
  • retail inventory method
  • LIFO Retail Inventory method
42
Q

when would an entity use the gross profit margin method?

A

gross profit can be used to prepare interim financial statements or as an estimate if ending inventory is missing or destroyed.

43
Q

what is the formula for calculating the gross profit (margin) method

A 
Beginning Inventory 
\+purchases
=goods available for sale
-ending inventory
=cost of goods sold

1-gross profit %= the % of cost of goods sold. Take the cost of goods sold % and multiply it by the sales and you will get the cost of goods sold and then the ending inventory is a plug for the difference needed to balance the entry.

44
Q

what is the formula for dollar value LIFO

A

Step 1-see section 7 in the book

45
Q

how in the inventory turnover ration calculated?

A

divide cost of goods sold by average inventory.

46
Q

in inflationary times what are the affects of FIFO inventory

A

FIFO inventory will be higher & cost of goods sold will be lower then inventory valued under LIFO. These attributes result in a lower numerator (cost of goods sold) and a higher denominator (avg inventory) in the inventory turnover ratio, resulting in a lower calculated turnover rate for inventory valued under FIFO. Any average method used will be lower than FIFO or LIFO

47
Q

what are the steps for the retail inventory method

A

see page 7-16

48
Q

what are the steps for the retail inventory method

A

see page for formula 7-16

Financial Accounting and Reporting (12 decks)

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