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FAR > Inventory > Flashcards

Inventory Flashcards

1
Q

Inventory is defined as tangible personal property?

A
  1. Held for sale in the ordinary course of business (Finished Goods)
  2. In the process of production for such sale (Work in Process)
  3. To be used currently in the production of items for sale (Raw Materials)
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2
Q

Regarding inventory, everything not sold appears in inventory on?

A

The balance Sheet

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3
Q

Regarding inventory, everything sold appears in COGS on?

A

The income statement

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4
Q

Periodic System?

A

FIFO, LIFO, & Weighted Average Methods

Inventory is counted periodically and then priced with an offset to COGS

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5
Q

Perpetual System?

A

FIFO, LIFO, & Moving Average Methods

A running total is kept of the units on hand. An offset to COGS is recorded each time inventory is sold.

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6
Q

What is the primary basis of accounting for inventories?

A

Cost

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7
Q

Generally, what are the costs to be included in inventory?

A

Costs which are necessary to prepare the goods for sale.

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8
Q

For a manufacturing entity, normal inventory costs include?

A

Direct Materials
Direct Labor
Direct & Indirect Factory Overhead

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9
Q

Normal costs to include in inventory?

A

Freight-in
Handling Costs
Spoilage

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10
Q

Costs normally associated with inventory that are for some reason abnormal, are treated how?

A

As periodic costs

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11
Q

Interest on inventories routinely produced are treated how?

A

Period cost

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12
Q

When does the Gross Method record purchase discounts?

A

When purchase discount is recognized.

Only if recognized will the purchase discount net against COGS

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13
Q

When does the Net Method record purchase discounts?

A

Purchase discounts are assumed taken and will always net against COGS even if the discount is not taken.
An expense account - Purchase Discounts Lost would be debited to offset the discount not realized and would be treated as a period expense.

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14
Q

Inventory Valuation Methods:

A
  1. Specific Identification
  2. Weighted Average
  3. Moving Average
  4. LIFO
  5. FIFO
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15
Q

What types of items is the Specific Identification Method use for?

A

Automobiles, appliances, jewelry, etc…

High dollar items that are uniquely traceable because of a unique identification number

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16
Q

What account do you debit when purchasing materials under the Periodic System?

A

Purchases

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17
Q

What account do you debit when purchasing materials under the Perpetual System?

A

Inventory

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18
Q

COG Purchases is calculated how?

A 
Gross Purchases
- Purchase Discounts
- Purchase Returns & Allowances
= Net Purchases
\+ Freight & Transportation
= Cost of Goods Purchased
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19
Q

COGS is calculated how?

A 
Beginning Inventory (COGS Account)
\+COG Purchased
= COG Available for Sale
- Ending Inventory (Equity Account)
= COGS
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20
Q

How do you calculate the Weighted Average - Periodic?

A
  1. Total Cost of Inventory (at end of period)/Total Units of Inventory for Period
    Do not include Sales of inventory
  2. Multiply Sales Units by the above average cost
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21
Q

How do you calculate Moving Average - Perpetual?

A

Same as above except every time a sale is made, you have to re-calculate moving average cost

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22
Q

What is FIFO?

A

First In First Out

23
Q

What is LIFO?

A

Last In First Out

24
Q

What method yields the same results for both the periodic and perpetual systems?

A

FIFO

25
Q

In a period of rising prices, switching from FIFO to LIFO will yield?

A
  1. Higher COGS
  2. Lower NI
  3. Lower Ending Inventory
26
Q

In a period of rising prices, switching from LIFO to FIFO will yield?

A
  1. Lower COGS
  2. Higher NI
  3. Higher Ending Inventory
27
Q

In a period of falling prices, switching from FIFO to LIFO will yield?

A
  1. Lower COGS
  2. Higher NI
  3. Higher Ending Inventory
28
Q

In a period of falling prices, switching from LIFO to FIFO will yield?

A
  1. Higher COGS
  2. Lower NI
  3. Lower Ending Inventory
29
Q

What method does a better job of matching on the Income Statement?

A

LIFO

30
Q

What method does a better job of inventory valuation on the Balance Sheet?

A

FIFO

31
Q

When is a departure from the cost basis of pricing inventory necessary?

A

When the utility of inventory no longer matches its cost

32
Q

Market or Replacement Cost is limited to what?

A 
Ceiling = Net Realizable Value (Selling Price - Selling Cost)
Floor = Net Realizable Value - normal profit
33
Q

Can inventory valuation be written back up after it is written down?

A

NO

There can be no recovery until the units are sold

34
Q

What type of inventory can be written up or down before the inventory is received?

A

Purchase Commitments

35
Q

Why is LIFO so widely adopted?

A

Because of the reduction of tax liability in periods of rising prices

36
Q

What is the result of a LIFO Liquidation?

A

Large profits due to lower valued layers being included in COGS

37
Q

What is the LIFO Conformity Rule?

A

If LIFO is used for tax purposes, it must be used for financial reporting as well

38
Q

What is a LIFO Reserve Account used for?

A

To reduce inventory from an internal valuation method used that is different from LIFO when the same entity uses LIFO for external financial reporting

39
Q

How does Dollar Value LIFO differ from LIFO?

A

Dollar Value LIFO applies LIFO to pools of inventory rather to individual items

40
Q

Does the LIFO Conformity Rule apply to Dollar Value LIFO?

A

Yes

41
Q

What is the advantage of using Dollar Value LIFO?

A

Inventory liquidation of LIFO Layers is less likely to occur because of the increased number of items in the pool

42
Q

What are the steps to applying Dollar Value LIFO?

A
  1. Convert Nominal Ending Inventory to Base Year Ending Inventory by using a CPI
  2. Find changes in each period by taking the difference between each base year
  3. Convert Base Year differences to Nominal
  4. Add
43
Q

Consignment goods remain in the inventory of who?

A

The Consignor

44
Q

Who bears the cost of shipping the goods to the Consignee?

A

Shared by the Consignor & Consignee

45
Q

When does the Consignor recognize revenue?

A

When the Consignee sells the goods

46
Q

How is the Inventory Turnover Ratio measured?

A

COGS/Average Inventory

47
Q

How is the Number of Days Supply in Average Inventory Ratio measured?

A

365/Inventory Turnover

48
Q

When is the Percentage of Completion method used?

A

When an entity can make dependable estimates regarding contract revenues, costs, and the extent of progress towards completion

49
Q

What is the formula for recognizing revenue under the percentage of completion method?

A 
Gross Profit (Contract Cost - Total Est. Cost to Completion)
x  (Cost Incurred to Date)/(Total Est. Cost to Complete)
50
Q

Where is transportation cost to the Consignee located?

A

COGS

51
Q

IFRS allows you to re-value your inventory based on?

A

Lower of Cost or Net Realizable Value

52
Q

The Double Extension and Link Chain methods are two variation of which inventory cost flow method?

A

FIFO

53
Q

Regarding the Percentage of Completion Method, if at the end of the year, progress billings are greater than construction in process account then…

A

A liability is recorded

54
Q

Under IFRS, Specific Identification is required for inventory that is…

A

Not interchangeable

FAR (28 decks)

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