Inventory

Question 1

Equation for Inventory Errors

Answer 1

BI + P = EI + COGS

i. If one side Over or Under the COGS movement needed to balance will tell you answer
ii. So if P is under, COGS must be Under to balance and if EI is Under, COGS must be Over
iii. Once you know if COGS is + or -, have answers for NI etc

Question 2

Purchase Commitment Losses

Answer 2

Booked when can’t change agreement AND in Loss Position.

Otherwise footnote a CL (Contingent Liability). Potential Loss implies a CL, but not an accrual unless unable to change.

Describe the nature of the contract in a note to the financial statements, recognize a loss in the Income Statement, and recognize a liability for the accrued loss.

(Fixed Contract = Booked)

Question 3

Inventory: US GAAP (v IFRS)

Answer 3

1. LOCOM (Floor and Ceiling)
2. More than one cost Formula can be used for inventories of similar use
3. No Reversal of Write-down
4. LIFO permitted
5. Cost Flow Assumption need not mirror physical Flow

Question 4

Inventory: IFRS (v US GAAP)

Answer 4

1. LOC or NRV
2. Same cost formulas must be used for inventory with a similar nature and use
3. Reversal of write down to NRV allowed
4. NO LIFO
5. Cost Flow Assumption must mirror physical Flow

Question 5

Which of the following statements are correct when a company applying the lower of cost or market method reports its inventory at replacement cost?

Answer 5

II. The net realizable value is greater than replacement cost.

When determining market value, net realizable value is the ceiling or maximum amount. If replacement cost is less than net realizable value, then replacement cost is used as market (as long as replacement cost exceeds net realizable value less a normal profit margin - the floor or minimum value for market).