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FAR - 4 > Inventory > Flashcards

Inventory Flashcards

1
Q

Inventory

A

core of business operating asset

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2
Q

types held for resale

A

retail (finished goods only)- resold in substantially the same form in which it was purchased- like walmart

manufacturer:
raw materials (inventory being held for use in production process)

work in process (inventory that is in production but incomplete)

finished goods (inventory in production that is complete and ready for sale)

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3
Q

Goods and materials to be included in inventory

A

general rule is that the goods and materials in which the company has legal title should be included in inventory; and this legal title generally occurs after the possession of goods

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4
Q

inventory

A

current asset

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5
Q

goods in transit

A

title passes based on conditions agreed upon by the parties

if no conditions explicitly agreed upon ahead of time, title passes to buyer at the time and place where the seller’s performance regarding the delivery of goods is complete

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6
Q

f.o.b

A

free on board; requires seller to deliver goods to location determined as FOB ON THE SELLER’S EXPENSE

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7
Q

Goods in transit**

A

WHO ARE WE? buyer or seller

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8
Q

FOB shipping point

think of amazon

A

buyer pays

once the seller’s ships the good or delivers it to the common carrier, included in buyer’s inventory upon shipment

buyer is in LA and seller is in new york the moment seller puts the goods in the truck in new york buyer owns it;

it is freight in for the buyer, adds to the cost of inventory; buyer’s inventory

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9
Q

FOB destination

A

seller pays

title passes to buyer when buyer receives good from carrier

title transfers in la in the example above

freight out: selling expense; seller’s inventory

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10
Q

shipment of non conforming goods

A

if seller ships wrong goods they belong to the seller once rejected by the buyer

should be included in seller’s inventory

ALWAYS

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11
Q

sale with a right to return

A

1) CAN YOU REASONABLY ESTIMATE RETURNS?

General rule: sold goods, buyer has the right to return, should be included in seller’s inventory IF the amounts of goods likely to be returned cannot be estimated; cannot record sales cogs etc

if the returns can be reasonably estimated, transaction will be recorded as sale with an ALLOWANCE for returns;

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12
Q

revenue from a sale where customer has right to return shall be recognized at time of sale

A

IF ALL THE CONDITIONS ARE MET:

sale price substantially fixed at date of sale, buyer assumes risk of loss; buyer has paid some form of consideration; product sold is subs complete; amount of future returns can be reasonably estimated

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13
Q

if returns can be reasonable estimated

A

transfer of title has happened already

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14
Q

consigned goods

A

consignor : true owners

consignee: selling agent

inventory cost or COGS: includes shipping cost to the consignee SO:

Sales - Gogs = GP -(commission paid to consignee+ advertising to sell the final products) = NI

the seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor’s behalf

original owners still own the title and risk of loss so they include the inventory

revenue only recognized when all the above conditions are met and the goods are sold to third party

title passes directly to third party buyer at point of sale and not to the consignee at any point in time

ALL this unless there is an agreement otherwise

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15
Q

public warehouses

A

inventory held by original owners even though posession with warehouse

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16
Q

sales with mandatory buyback

A

seller should include goods in inventory even though buyer has the title

in this case seller has a requirement to repurchase goods from the buyer

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17
Q

installment sales

A

if goods sold on installment basis but retains legal title as security for the loan:

if % uncollectible debts cannot be estimated: seller includes

can be estimated: sale recorded with an allowance

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18
Q

Valuation

A

US GAAP: general rule stated at cost only if we think the goods are going to be sold at a profit;

as long as you think you’re going to be able to cover your carrying valueand go above it you are going to leave it at cost EVEN if you think replacement or reproduction cost is lower

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19
Q

Valuation

A

US GAAP: general rule stated at cost only if we think the goods are going to be sold at a profit;

as long as you think you’re going to be able to cover your carrying valueand go above it you are going to leave it at cost EVEN if you think replacement or reproduction cost is lower

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20
Q

IFRS

A

does NOT permit LIFO

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21
Q

Exception to the general cost rule

A

SP< Cost; we think we’re going to have a loss so we book that loss immediately

utility of goods no longer as great as cost

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22
Q

purpose of reducing inventory to lower of cost or market (profit) or lower of cost and net realizable value (loss)

A

to show probable loss is sustained (conservatism) in the period in which loss occurs (matching prin)

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23
Q

Pass Key

GAAP

A

If inventory is NOT lifo or retail:
measured at lower of cost and net realizable value. JUST LIKE IFRS

if inventory is LIFO or retail:
lower of cost or market

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24
Q

IFRS

A

all inventory measured at lower of cost or net realizable value

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25
Q

Precious Metals and Farm Products

A

net realizable value
SP-Cost

when stated at a value in excess of cost, should be disclosed on the financial statements

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26
Q

Inventory write downs or loss

A

US GAAP:
write down reflected in cogs if immaterial; **higher cogs lower profits

if write down amount is material loss is identified separately on i/s

IFRS: no specifications

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27
Q

Reversal of Inventory Write Downs

A

GAAP: not allowed

IFRS: reversal limited to the amount of original write down; reduction of COGS

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28
Q

Lower of cost of market- old rule

A

US GAAP only:
LIFO or retail

can be applied to a single item, category, total inventory- method that most clearly reflects periodic income

*when you separately apply LCM to each item-> most conservative EI

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29
Q

market value

A

middle value of an inventory’s replacement cost, market ceiling, or market floor

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30
Q

replacement cost - 53

A

cost to purchase the item of invenotry as of valuation date

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31
Q

market ceiling - 70-4 = 66

A

item’s selling price - costs to complete and dispose or sell called the net realizable value

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32
Q

market floor - 66-7 if profit margin is 10% of sp of 70 = 59

A

market ceiling - normal profit margin

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33
Q

Lower of cost and net realizable value

A

IFRS and GAAP (not LIFO or retail inventory)

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34
Q

net realizable value

A

SP- Cost to complete -> same as market ceiling

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35
Q

Example on 24**

A

max-> prevents loss in future periods

min-> prevents excess profit realization in future periods

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36
Q

write down under lcm

A

dr. inventory loss due to decline in market value

cr. inventory

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37
Q

losses or write downs-> LCM

A

substantial and unusual or infrequent from LCM -> loss disclosed in income from continuing operations

small losses -> cogs

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38
Q

types of inventory systems

A

periodic vs. perpetual

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39
Q

periodic = purchases = COGS = plug

A

inventory determined by physical count

usually atleast annually

does not keep running totals; *****ending inventory is physically counted and priced

40
Q

purchases

A

bi+purchases = cogas - ei = cogs

PURCHASES: net of returns and discounts

41
Q

purchases disadvantage

A

shortages are lumped in with COGS

42
Q

Perpetual

A

no purchases; everytime we buy inventory we debit it

dont wait till the end of the period

updated immediately

43
Q

Journal entries

A

periodic:
no cogs till end of period:
dr. cash
cr. rev

purchases:

dr. purchases
cr. cash

perpetual:
sale:
dr. cash
cr. sales
dr. cogs
cr. inventory

purchases:

dr. inventory
cr. cash

THINK OF PERPETUAL AS NORMAL INVENTORY JOURNAL ENTIRES

44
Q

primary cost flow assumptions

A

US GAAP: cost flow assumption used bu the company is not required to match physical inventory flows

needs to most clearly reflect income from the period

IFRS:

1) No lifo
2) method should be based on the order in which the products are sold relative to when they were put in the inventory (should match physical flows)
3) specific identification should be used wherever possible
4) same cost flow assumption should be used for all inventories similar in nature

45
Q

specific identification

A

no estimating; cost of each item in inventory is unique and identified to that system -> BIG ITEM/HIGH VALUE

car and win’s number; follows the physical flow of that product

46
Q

estimating

A

FIFO, LIFO, Weighted average

47
Q

FIFO

A

irrelevant periodic or perpetual

first in first out for COGS

ei -> most recent items therefore most closely estimates replacement costs

Rising prices: cogs are going to be lower; NI is going to be higher

48
Q

FIFO Periodic and Perpectual

A

every number is same***

49
Q

weighted average-> generally periodic

A

total inventory costs including BI/ Total inventory including beg inventory = unit cost

unit cost * number of units sold = COGS

suitable for homogeneous products and a periodic inventory system

50
Q

Moving average method -> NEED perpetual

A

computes the weighted average cost after each purchase:

total cost of inventory after each purchase including BI/ total units available after each purchase

then use that to calculate COGS

more current than weighted average

page 28**

51
Q

LIFO

A

not permitted under IFRS, allowed under US Gaap

if LIFO is used for tax purposes it must also be used to report financial statements

ending inventory usually does not reflect replacement costs

52
Q

LIFO financial statement effect

A

better matches expenses against revenues because matches current costs with current liab

eliminates holding gains

if selling for a period exceeds production there will be a distortion of net income because you’ll start matching revenues to older LIFO layers

53
Q

LIFO conformity rule

A

if you use for tax purposes have to use it for financial statements

54
Q

LIFO Layers

A

UNLIKE FIFO

LIFO PERIODIC IS NOT EQUAL TO LIFO PERPETUAL

55
Q

LIFO layer

A

created each year in which ending inventory > beginning inventory

(more unsold stuff)

additional layer is priced at the earliest cost of the year in which it was created

56
Q

Problem on F4-30*

A

periodic: normal
perpetual:

first 3000 sold from the first batch because we dont have choice

now for the rem 1000 sold could come from the first batch or the second batch -> since its LIFO it comes from the second batch

57
Q

COGAS

A

ALWAYS SAME perpetual periodic or moving average LIFO FIFO

58
Q

EI

A

cogas - cogs

different is in cogs

59
Q

Table pass key!!

A

Periodic:
FIFO->Weighted Avg-> LIFO

EI: goes down
COGS: goes up

Perpetual:
FIFO->Moving Avg->LIFO
EI: goes down
COGS: goes up

SAME direction

60
Q

Moving average

A

higher EI and lower COGS than weighted average method

61
Q

Dollar Value LIFO

A

inventory is measured in dollars and is adjusted for changing price levels

calculate using inventory numbers like normal LIFO and then adjust using price index

62
Q

price index

A

internally computed or given to you

= TOTAL ending inventory at year end cost/ ending inventory at base year cost

63
Q

LIFO added in the current year at dollar value LIFO

A

LIFO layer at base year cost * price index

64
Q

dollar value

A

estimate of change in price levels required relative to base year

65
Q

NOT IN UNITS AT ALL

A

At base | Current year cost

example on page 31

66
Q

price index

A

different each year; ALWAYS calculated using ending balance

67
Q

at base year or year 1

A

base year dollar inventory same as current year inventory

68
Q

price index

A

only applies to LAYERS and not to ending balance

69
Q

Firm purchase commitments

A

legal agreement to purchase a specific amount of goods at some time in the future

must be disclosed

if you think the contract price > market price and there is going to be some loss-> you recognize the loss AT THE TIME OF THE DECLINE IN PRICE (end of that year) under Other expenses/losses under IDA

JE:
Dr. estimated loss on purchase commitment
cr. estimated liability on purchase commitment

70
Q

understting overstating

A

handle each assumption separately then net

71
Q

inventory

A

cost of inventory same when you are calculating

72
Q

FOB shipping point

A

when IN THE TRUCK

73
Q

GP%

A

% of sales

74
Q

year 2 price index

A

use year 2 EI levels

75
Q

year 2 price index

A

use year 2 EI levels

76
Q

LIFO perpetual cogs

A

okay to start liquidating prior layers

77
Q

consignment

A

ei of consignee + warehousing costs of consignor before they are transferred to consignee + shipping costs to consignee

only include inventory at cost not mark up

get rid of mark up

payable not recorded till goods sold and if 10% commission 90% of sp is payable

78
Q

LCM

A

can be applied to total inventory, groups of inventory or each item separately

LOWEST INVENTORY AMOUNT: when applied to each item separately

79
Q

lifo reserve

credit balance

DBT: Check!

A

diff between inventory on lifo method vs any other cost method

find required diff between the two methods

add or sub to LIFO reserve

book additional to cogs should have been more of an increase

80
Q

dollar value

A

single inv pool only?!! DBT

81
Q

moving average IMP

A

Subtotals

82
Q

commission

A

only a portion of sp

83
Q

obsolete inventory

A

not a part of cogs

written off from inventory

operating loss not COGS-> unusual gains or losses on i/s

84
Q

disadvantage of periodic

A

includes COGS and shortages

shortages cannot be easily distinguished

85
Q

noncancellable agreement

A

parts rem for the next two years

so if parts become obsolete in year 1 and three year contract at the end of year 1 there are 2 years remaining

so 2 years * min contract units * (actual purchase price - scrap value because you will get that value back)

86
Q

advertising on consignment

A

all of it is expensed even if the entire inventory is not sold!

commission however is based on sales and its amount

87
Q

ending inventory consignment

A

cogs + charges needed to get inventory to place of consignment sale

advertising and commission not included in cogs

88
Q

ending inventory consignment

A

cogs + charges needed to get inventory to place of consignment sale

advertising and commission not included in cogs

89
Q

weighted avg normal

A

ignore actual sp!!

90
Q

cost of inventory

A

insurance cost included

91
Q

prepayment A/P

A

should be recorded as an asset and not a reduction in a/p

92
Q

prices increased by 10%

A

include that as 10% of base prices

93
Q

CPA 05113

A

DOUBT

94
Q

congignee

A

freight cost, cost of merchandise shipped part of cogs so only on part sold

95
Q

returns

A

record once you pass that return date when you cannot reasonably estimate returns

96
Q

reversal of writedown

A

allowed under ifrs

limited to previous write downs

affects EI and COGS on I/S

FAR - 4 (4 decks)

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