Inventory

Question 1

IFRS - LOCM

Answer 1

Lower of cost or Net Realizable Value
Cost, not replacement cost
- Permits the reversal of inventory write downs
Recovery of write down occurs, inventory is written back up to cost

Question 2

FIFO

Answer 2

• Perpetual and periodic inventory method will produce the same ending inventory under FIFO
  
  • This is because the “first in” units are removed first under both methods
    Approximates most current costs for ending inventory

Question 3

LIFO

Answer 3

Approximates most current costs for cost of goods sold, since it counts the most recent purchases as sold items
- Compute ending inventory using base year prices
- Multiply layer at base year cost by the years price index
- Add new layer to base year layer
- To determine the price index, divide the Current year cost layer into the base layer
- Valuation account - maintaining the total difference so far between internally computed cost of the inventory and externally reported costs of the ending inventory on the BS
- Accumulated difference = amount in LIFO reserve account - add or subtract to get the total difference which needs to be updated every period to inventory
- EX: LIFO balance needed = (Current Inv amount - Current LIFO amount ) - existing LIFO reserve balance = additional reserve needed
- Increasing Journal Entry:
○ D COGS
C LIFO reserve

Question 4

Dollar Value LIFO

Answer 4

• Ending inventory is priced at current costs

Ending Inventory is restated to base year costs by use of the year end price index

Question 5

Periodic Inventory System

Answer 5

• Calculates cost of goods sold as difference between cost of goods available for sale and ending inventory
  Does not maintain records indicating what amount of ending inventory should be

Question 6

Retail

Answer 6

• IFRS allows the retail method
  
  • Cost to retail ratio - divide cost into retail
  • Retail - sales returns and mark ups in this column, but not cost
  • Cost - Only freight in goes into this column, not retail. Cost does not include sales returns and mark ups
  • Purchase returns - reflected in both cost and retail columns
  • Restate ending year retail to base level prices
  • Divide the Current Year Price / Price Index = Base year price
  • Multiply layer’s cost to retail percentage and price level to get the ending inventory value
  • In the retail column, only add the beginning inventory, purchases and net mark ups
  • Compare this amount to the Cost to Retail to get the ratio
    Then subtract the sales, normal losses, and mark downs to get the ending inventory at retail, in order to find ending inventory at cost