Inventory

Question 1

FOB Destination

Answer 1

The Seller bears all costs ot transporting the goods to the buyer.

Title passes to the buyer when the goods are received at their final destination.

Question 2

FOB Shipping Point

Answer 2

Buyer is reponsible for shipping costs .

Title passes to the buyer when the carrier recieves the goods.
If the test is silent on whether FOB ship or destination assume it’s FOB Shipping Point.

Question 3

Purchase Allowance

Answer 3

When you keep the goods even when they’re non-comformant bc the seller gives you a “discount” break on the bill - making the payable smaller.

Question 4

Inventory Turnover

Answer 4

of times your inventory goes down to 0 during the year, the higher the better.

GOGS/Avg. Inventory

Avg. Invenotory = End Inv. from PY+Ending inventory from CY/2

Question 5

Number of days’ supply in average inventory

Answer 5

365/Inventory Turnover

of days inventory is held before sale, shows efficiency of inventory policies.

Question 6

Percentage of Completion Method - Construction Accounting

Answer 6

Income = Cost Incurred to date/Total estimated cost to complete x Profit

Profit = Contract Rev - Total estimated cost to complete.

In the 2 and every year after, you need to subtract the prior year income, bc this is an accumulated amount.

Question 7

COGS Calculation

Answer 7

Beginning inventory 
\+COG Purchased 
=COG Avail for sale 
- Ending Inventory
=COGS

Question 8

Cost of Goods Purchased Calculation

Answer 8

Gross Purchases 
-Purchase Discounts 
-Puchase Returns and Allowances 
=Net Purchases 
\+Freight-in or Transport-in
=COG Purchased

Question 9

Net Mothod of accounting for purchases

Answer 9

Any purchases discounts offered are assumed taken and the puchase account reflects the net price.
Purchase $100 discount 2/10 net 30
Dr. Purchases $98
Cr. AP $98

Dr. AP $98
Cr. Cash $98

Discount not taken
Dr. AP $98
Cr. Cash $100
Cr. Purch disc lost $2 Treated as a period cost

Question 10

Gross method of accounting for purchases

Answer 10

Purchases are recorded at gross then a seperate account “Purchase discount” - contra account to the purchases. Considered to be a product cost.
Don’t take the discount
Dr. AP
Cr. Cash

Take discount
Dr. AP $100
Cr. Cash $98
Cr. Purchase discount $2

Question 11

Weighted-Average Method (Periodic System)

Answer 11

Seller averages the costs of all items on hand and purchased during the period. The units in ending inventory and units sold (COGS) are costed at this average cost.

Question 12

First-in-first-out (FIFO)

Answer 12

The goods from beginning inventory and the earliest purchased are assumed to be the first goods to be sold.
FIFO- describes COGS
Ending inventory - LIST - last in still there
B/S focus - better matching for ending inventory
FIFO under periodic and perpetual are the same

Question 13

Last-In, First-Out (LIFO)

Answer 13

The most recent purchases are assumed to be the first goods sold; thus, ending inventory is assumed is assumed to be composed of the oldest goods.
LIFO- COGS
Ending Inventory - FIST - First in still there
I/S focus - better matching for COGS
Different calc under periodic and perpetual
periodic- doesn’t matter when we made the sale - find COGAS then find ending inventory
perpetual- does matter when you make the sale using the LIFO approach sell the items last in, first.

Question 14

Moving Average (Perpetual System)

Answer 14

The average cost of goods on hand must be recalculated any time additional inventory is purchased at a unit cost different from the previously calculated average cost of goods on hand.

Question 15

Determine Market Price (Lower of Cost or Market)

Answer 15

Market Cost = Replacement Cost
Replacement cost has to fall between the ceiling and the floor.
Ceiling
NRV= Sales Price - Cost to complete and dispose of.
Floor = NRV-Normal Profit Margin (% of Sales Price x Sales Price)
If replacement cost falls below the floor, the market is Floor, and if it’s above the ceiling, market will be the ceiling.
If replacement cost falls between the ceiling and floor this is the market value.
Compare the cost vs. the Market (replacement cost).

Question 16

Lower of Cost of Market (steps to calculate)

Answer 16

1. Determine the Market
   Replacement cost - limited to the ceiling and floor.
2. Determin cost
   Ending inventory: LIFO, FIFO, Weighted Avg, and moving avg.
3. Select either the lower of cost or market for each individual item or inventory as a whole.

Question 17

Methods of recording inventory write-downs

Answer 17

1. Dr. COGS
   Cr. Inventory
   The write down gets lost in COGS, losses aren’t seperately disclosed.
2. Dr. Loss due to Market Decline
   Cr. Inventory
   Seperate recognition, treated as a period cost.

Question 18

Losses on purchase commitments

Answer 18

Result from legally enforceable contracts to purchase specific quantities of goods at fixed prices in the future.
Decline in market below the contract price at B/S date and contracts are noncancellable. Unrealized loss occurs and if material should be recorded on the period of decline.

Dr. Estimated loss on PC
Cr. Accrued loss on PC

Question 19

Dollar-value LIFO

Answer 19

LIFO applied to pools of inventory items rather than to individual items.
Steps:
1. Nominal EI convert to the Base Year EI
2. Chang in the layer at Base Year prices
3. Convert Base Year layers to Nominal
4. Add up the layers

Find Price index= nominal year/base year

Question 20

Gross Profit

Answer 20

EI is estimated by using the GP percentage to convert sales to COG Presumed sold.
Not acceptable for tax or annual FS
Used to estimate ending inventory for internal use, interim FS, establishing loss due to destruction of inventory

Net Sales - COGS = GP
Mark up on sales: set sales at 100%(of sales $) and GP at the mark up % (ex. 25%)
Net Sales 100%
COGS- plug 75%
GP 25%
If markup on cost: set COGS at 100% and GP at 25% the plug is net sales at 125%

Question 21

Consignments

Answer 21

Consignor ships goods to Consignee wo sells them, goods belong to Consignor until sold.
Revenue is recognized by the consignor when goods are sold. Commission paid to the consignee is a selling expense, can not be netted against sales revenue.

Question 22

Completed-contract method

Answer 22

Recognition of contract revenue and profit at contract completion.
Advantages- based on results not estimates
Disadvantages - current performance is not reflected and income recognition may be irregular.

Question 23

Percentage-of-completion

Answer 23

Recognition of contract revenue and profit during construction based on expected total profit and estimated progress towards completion in the current period.
Advantage - periodic recognition of income
Disadvantage - dependence on estimates

Question 24

Loss under Completed contract method or Percentage of Completion

Answer 24

If a loss is noticed during Year 2 of a 3 year contract, loss is recognized in the year that it becomes apparent. (Conservatism)

Question 25

Percentage of Completion- Estimated Income calculation

Answer 25

Cost incurred to date/total estimated costs to complete x profit

Total estimated costs to complete - includes the cost incurred so far and the estimated costs to complete.
Profit = contract revenue - total estimated cost to complete.

Question 26

Construction in Progress Inventory - % of completion

Answer 26

2 Components

• the cost of construction
• the income recognized each year.

Question 27

Billings on Contracts

Answer 27

Contra account to Construction in Progress

Any time you bill in excess of your cost and your profit (CIP), this is considered a CL.

Question 28

Inventory ASC 330

Answer 28

Tangible personal property

1. held for sale in the ordinary course of business (Finished goods)
2. in the process of production for such sale (WIP)
3. to be used currently in the production of items for sale (raw materials)

Question 29

Anticipated loss on a long-term contract

Answer 29

Should be recognized immediately for both the percentage -of-completion and the completed-contract method.

Question 30

Classification of Progress Billings on Contracts account

Answer 30

Under the percentage-of-completion method
Progress billings is a contra-account to the CIP account, CIP is netted with the progress billings account. If CIP exceeds billings, the excess is reported as a current asset. If billings exceed CIP, the excess is reported as a current liability.

Question 31

Which method of accounting for inventory is not allowed under IFRS?

Answer 31

LIFO

Question 32

Under IFRS, the Specific Identification method of accounting for inventory is required for?

Answer 32

Inventory items that are not interchangeable and goods that are produced and segregated for specific projects.

Question 33

Gross Profit method of accounting for inventory- IFRS

Answer 33

Can be used to estimate ending inventory when a physical count is not possible.

Question 34

Valuation of Inventory- IFRS

Answer 34

Inventories are carried at the lower of cost or Net realizeable value
Exception: Agricultural inventories (biological assets) which are carried at Fair Value less costs to sell at the point of harvest.

Question 35

Net realizeable Value (calculation)

Answer 35

NRV= Estimated selling price - estimated costs of completion and sale.

Question 36

Capitalization of interest on Inventory - IFRS

Answer 36

Allows interest to be capitalized if there is lengthy production period to prepare the goods for sale.