Inventory Flashcards
WHAT is a disadvantage of the periodic inventory system?
THE Cost of goods Sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages
SHOULD the consignee record goods held on consignment?
NO.
WHY? - Because the consignee, who has custody of the goods, does NOT have ownership
As a result, the goods do NOT appear on the consignee’s inventory and are NOT reported as cost of sales by the consignee when the goods are sold
HOW is “market” defined under the lower of cost or market rule?
AS replacement cost subject to maximum – ceiling, and minimum – floor limitations
HOW would you appropriately handle goods held on consignment?
BY including them in Ending Inventory of the consignor, even after transfer to a consignee–until they are sold
WHAT inventory costing method would a company use that wished to minimize its Net Income in a period of rising prices?
Dollar-Value LIFO (i.e. Last-In, First-Out)
i.e. IN periods of rising prices, LIFO would result in the lowest ending inventory and highest cost of sales
Leading to minimized net income
HOW would you calculate your “Price Index” for current year dollar value LIFO inventory layer?
BY dividing Ending Inventory at “Current Year” cost by Ending Inventory at “Base Year” cost
WHAT is “Market value” under an Inventory Method such as LIFO and the Retail Method?
Replacement cost; subject to a ceiling Net Realizable Value (NRV) and a floor (NRV minus the normal profit margin)
WHAT happens when the replacement cost is above the ceiling (NRV)?
THE ceiling (NRV) is considered the market value
NOTE: The market value cannot be higher than the ceiling
Under IFRS, what Inventory Method will result in the highest value of inventory during periods of rising prices?
The Weighted Average Inventory Method
WHAT is the “ceiling” and how do you calculate it?
THE Net Realizable Value
**Calculation: Take your Sales and subtract that from your Cost of Disposal and/ or Costs to complete the inventory
WHAT is the “floor” and how do you calculate it?
IT is your “Net Realizable Value” but the calculation is different
**Calculation: Take your NRV (i.e. your Sales and subtract that from your Cost of Disposal or Costs to complete the inventory) and subtract it from your “Normal Profit” Margin
WHAT Inventory-Costing methods would produce a higher inventory turnover ratio in an inflationary economy?
Last-in, First-Out
WHY? - Because in an inflationary economy, inventory valued under LIFO will be lower and cost of goods sold higher than inventory valued under FIFO
Under which inventory cost flow method would “Periodic” and “Perpetual” Inventory produce the same dollar amount? Especially in a period with rising prices?
THE First-in, First-out Inventory (FIFO) Method
WHAT Inventory Method is NOT allowed under IFRS?
THE Last-In First-out (LIFO) Method
WHAT inventory-costing methods will produce a lower inventory turnover ratio in an inflationary period and WHY?
The First-in, First-out Inventory Method
WHY? - Because inventory valued under FIFO in an inflationary economy will be higher and Cost of Goods Sold (COGS) lower than inventory valued under LIFO
i.e. A Lower cost of goods sold results in a lower numerator in the Cost of Goods Sold / Average Inventory ratio
