Inventory Flashcards
Master FAR Material
What costs are inventoriable?
Purchases - Net of Discounts, Freight, Warehouse expenditures
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller’s inventory until it reaches the buyer
Which costs cannot be included in inventory?
Sales Commissions, interest on vendor liabilities, shipping to customers
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not. Unused discounts are allocated to financing expense.
How is gross margin calculated?
Gross Margin : Sales - COGS (BI + P - EI)
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period. Weighted-average cost flow method is used.
Describe the perpetual inventory system.
Inventory count continually updated; a moving-average cost flow method.
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under FIFO, periodic and perpetual inventory methods will produce the same ending balances.
How is inventory turnover calculated?
COGS / Average Inventory
How is Average Day’s Sales in inventory calculated?
365 / Inventory Turnover
Under a consignment system, who holds the consigned goods in inventory?
The CONSIGNOR (owner) holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
What effect does misstatement of inventory have on ending retained earnings?
Misstatement of ending inventory does have an effect on retained earnings because of the misstatement of COGS and NI for the period. If ending inventory is overstated, NI is overstated - the relationship is direct.
If beginning inventory is misstated, the effect on COGS is directly related (BI understated, COGS understated->NI overstated).
How does misstatement of ending inventory effect Ending Retained Earnings?
If EI is overstated : COGS understated -> ERE (NI) over
EI understated: COGS over -> ERE (NI) under
Which costs are included in COGS first under the FIFO (first in first out) system?
The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost $1 when purchased, COGS is $1.
Which costs are included in COGS under the LIFO (last in first out) system?
The last (newest) inventory you have in stock is the first inventory recorded for COGS purposes. If the newest inventory on the shelf costed $1.50 when purchased, COGS is $1.50
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units : Weighted Average Cost Per Unit
How does FIFO’s COGS relate to LIFO’s in a time of changing prices?
FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.
How do FIFO and LIFO change in a period of rising prices?
When prices are rising, FIFO produces lowest COGS. If COGS is low, EI is high.
How do FIFO and LIFO change in a period of falling prices?
When prices are falling, FIFO produces the highest COGS. If COGS is high, EI is low.
Under Lower of Cost or Market, how are the benchmarks calculated?
Market Ceiling: Net Realizable Value (Selling Price - Selling Costs)
Market: Replacement Cost
Market Floor: Net Realizable Value - Normal Profit
*median price is compared against current BV
