Inventory Flashcards
Inventory is defined as tangible personal property?
- Held for sale in the ordinary course of business (Finished Goods)
- In the process of production for such sale (Work in Process)
- To be used currently in the production of items for sale (Raw Materials)
Regarding inventory, everything not sold appears in inventory on?
The balance Sheet
Regarding inventory, everything sold appears in COGS on?
The income statement
Periodic System?
FIFO, LIFO, & Weighted Average Methods
Inventory is counted periodically and then priced with an offset to COGS
Perpetual System?
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.
What is the primary basis of accounting for inventories?
Cost
Generally, what are the costs to be included in inventory?
Costs which are necessary to prepare the goods for sale.
For a manufacturing entity, normal inventory costs include?
Direct Materials
Direct Labor
Direct & Indirect Factory Overhead
Normal costs to include in inventory?
Freight-in
Handling Costs
Spoilage
Costs normally associated with inventory that are for some reason abnormal, are treated how?
As periodic costs
Interest on inventories routinely produced are treated how?
Period cost
When does the Gross Method record purchase discounts?
When purchase discount is recognized.
Only if recognized will the purchase discount net against COGS
When does the Net Method record purchase discounts?
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.
Inventory Valuation Methods:
- Specific Identification
- Weighted Average
- Moving Average
- LIFO
- FIFO
What types of items is the Specific Identification Method use for?
Automobiles, appliances, jewelry, etc…
High dollar items that are uniquely traceable because of a unique identification number
What account do you debit when purchasing materials under the Periodic System?
Purchases
What account do you debit when purchasing materials under the Perpetual System?
Inventory
COG Purchases is calculated how?
Gross Purchases - Purchase Discounts - Purchase Returns & Allowances = Net Purchases \+ Freight & Transportation = Cost of Goods Purchased
COGS is calculated how?
Beginning Inventory (COGS Account) \+COG Purchased = COG Available for Sale - Ending Inventory (Equity Account) = COGS
How do you calculate the Weighted Average - Periodic?
- Total Cost of Inventory (at end of period)/Total Units of Inventory for Period
Do not include Sales of inventory - Multiply Sales Units by the above average cost
How do you calculate Moving Average - Perpetual?
Same as above except every time a sale is made, you have to re-calculate moving average cost
What is FIFO?
First In First Out
What is LIFO?
Last In First Out
What method yields the same results for both the periodic and perpetual systems?
FIFO
In a period of rising prices, switching from FIFO to LIFO will yield?
- Higher COGS
- Lower NI
- Lower Ending Inventory
In a period of rising prices, switching from LIFO to FIFO will yield?
- Lower COGS
- Higher NI
- Higher Ending Inventory
In a period of falling prices, switching from FIFO to LIFO will yield?
- Lower COGS
- Higher NI
- Higher Ending Inventory
In a period of falling prices, switching from LIFO to FIFO will yield?
- Higher COGS
- Lower NI
- Lower Ending Inventory
What method does a better job of matching on the Income Statement?
LIFO
What method does a better job of inventory valuation on the Balance Sheet?
FIFO
When is a departure from the cost basis of pricing inventory necessary?
When the utility of inventory no longer matches its cost
Market or Replacement Cost is limited to what?
Ceiling = Net Realizable Value (Selling Price - Selling Cost) Floor = Net Realizable Value - normal profit
Can inventory valuation be written back up after it is written down?
NO
There can be no recovery until the units are sold
What type of inventory can be written up or down before the inventory is received?
Purchase Commitments
Why is LIFO so widely adopted?
Because of the reduction of tax liability in periods of rising prices
What is the result of a LIFO Liquidation?
Large profits due to lower valued layers being included in COGS
What is the LIFO Conformity Rule?
If LIFO is used for tax purposes, it must be used for financial reporting as well
What is a LIFO Reserve Account used for?
To reduce inventory from an internal valuation method used that is different from LIFO when the same entity uses LIFO for external financial reporting
How does Dollar Value LIFO differ from LIFO?
Dollar Value LIFO applies LIFO to pools of inventory rather to individual items
Does the LIFO Conformity Rule apply to Dollar Value LIFO?
Yes
What is the advantage of using Dollar Value LIFO?
Inventory liquidation of LIFO Layers is less likely to occur because of the increased number of items in the pool
What are the steps to applying Dollar Value LIFO?
- Convert Nominal Ending Inventory to Base Year Ending Inventory by using a CPI
- Find changes in each period by taking the difference between each base year
- Convert Base Year differences to Nominal
- Add
Consignment goods remain in the inventory of who?
The Consignor
Who bears the cost of shipping the goods to the Consignee?
Shared by the Consignor & Consignee
When does the Consignor recognize revenue?
When the Consignee sells the goods
How is the Inventory Turnover Ratio measured?
COGS/Average Inventory
How is the Number of Days Supply in Average Inventory Ratio measured?
365/Inventory Turnover
When is the Percentage of Completion method used?
When an entity can make dependable estimates regarding contract revenues, costs, and the extent of progress towards completion
What is the formula for recognizing revenue under the percentage of completion method?
Gross Profit (Contract Cost - Total Est. Cost to Completion) x (Cost Incurred to Date)/(Total Est. Cost to Complete)
Where is transportation cost to the Consignee located?
COGS
IFRS allows you to re-value your inventory based on?
Lower of Cost or Net Realizable Value
The Double Extension and Link Chain methods are two variation of which inventory cost flow method?
FIFO
Regarding the Percentage of Completion Method, if at the end of the year, progress billings are greater than construction in process account then…
A liability is recorded
Under IFRS, Specific Identification is required for inventory that is…
Not interchangeable
