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CPA FAR > Inventory > Flashcards

Inventory Flashcards

1
Q

What is included in inventory?

A
  • Property for Sale
  • FG + WIP + Raw Materials
  • Property consumed in manufacture (materials, labor, overhead)
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2
Q

What is included in ending inventory?

A
  • Any merchandise owned
  • Capitalize cost to bring to sale (freight, insurance, taxes, packaging)
  • DO Not include Goods on Consignment - not owned
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3
Q

Shipping terms

A

Free on board - FOB - party w/o risk

Inventory in transit is included in which ever entity has the risk of loss

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4
Q

FOB Destination

A

Destination is Free - risk to Seller, seller includes in inventory

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5
Q

FOB Shipping Point

A

Shipping point is Free - risk to buyer, buyer includes in inventory

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6
Q

Is purchase returns included in inventory?

A

Yes - contra account to purchases

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7
Q

Is freight in included in inventory?

A

Yes

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8
Q

Is freight out included in inventory?

A

No, this is a selling expense

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9
Q

Is interest on purchase included in inventory?

A

No, this is a financing expense

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10
Q

Is sales tax on acquisition included in inventory?

A

Yes

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11
Q

Is packaging cost included in inventory?

A

Yes

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12
Q

Is insurance on transit included in inventory?

A

Yes

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13
Q

Is transportation to consignees included in inventory?

A

Yes, cost to bring product to market

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14
Q

Is sales commission included in inventory?

A

No, this is a selling cost

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15
Q

Is advertising included in inventory?

A

No, this is a selling cost

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16
Q

Is trade discounts be included in inventory?

A

Yes

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17
Q

Net Purchases

A

=gross + trans in - returns & allow - discounts

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18
Q

COGS

A

=Beg Inv + Purchases (AKA CGAfS) - End Inv

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19
Q

Cost Flow - Specific Identification

A

used for large products (cars)

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20
Q

Cost Flow - Weighted Avg

A

CGAfS/# of units

21
Q

Cost Flow - FIFO

A

First goods bought are first sold. Oldest cost assigned to COGS, most recent costs assigned to inventory. Lowest COGS, Highest NI, Highest End Inv with rising prices.

22
Q

Cost Flow - LIFO

A

Last purchased are first sold. Newest cost assigned to COGS, oldest costs assigned to inventory. Higher COGS, Lower NI and Lower End Inv with rising prices.

Advantage - Gross margin reflects latest purchase costs and is a better representation of future gross margin.
Disadvantage - Ending inventory cost will be less reliable than under FIFO.

23
Q

Cost Flow - GAAP

A

Does not require that cost flow assumption match the actual flow of goods.

24
Q

Inventory Write Offs

A

Not part of COGS, reduces inventory

25
Q

Perpetual Systems

A

FIFO & Specific the same for perpetual & periodic.
LIFO & Average different. Weighted average becomes moving average. LIFO cost assigned after each sale and will be lower in times of rising prices in perpetual vs periodic.

Timing of the sale is very important for End Inv calculations.

26
Q

Perpetual vs Periodic Journal Entries

A

Perpetual uses inventory and records COGS at time of sale. Periodic uses purchases.

27
Q

FIFO vs LIFO

A

Type End Inv COGS
FIFO = latest earliest
LIFO = earliest latest

FIFO matches better on balance sheet. LIFO matches better on Income Statement.

28
Q

LIFO Liquidation

A

oldest layer of cost reduced - will boost NI

happens due to poor planning and lack of supply

29
Q

LIFO advantage

A

lower taxes from lower NI

30
Q

Dollar Value LIFO

A

Allows FIFO for internal and LIFO for external. Pools of inventory, reduces clerical costs and reduces LIFO liquidation problem.

31
Q

Inventory Pool

A

= End Inv Current YR Dollars/ End Inv Base Yr Dollars

32
Q

Price Index exp 1.10

A

To convert to base year (1/1.1) * dollar amount to convert to current year (1.1/1) * dollar amount.

33
Q

LIFO layer for year

A

End Inv in base year dollars - beg inv in base year dollars

Figure in base year dollars first to factor out prices changes.

34
Q

Dollar Value LIFO Steps

A

1) Convert EOY inv to base year
2) Determine increase in base year prices
3) Convert increase to current year prices

35
Q

Conversion Index Cal

A

End Inv current year dollars/ end inv base year dollars

36
Q

Dollar Value LIFO Calc

A

= Beg DV LIFO + increase at base yr dollars*index

37
Q

Dollar Value Beg Inv LIFO in year of adoption

A

= same beg inv in base year dollars

38
Q

Lower of Cost or Market

A

market with ceiling and floor
ceiling = selling price - cost to complete
floor = selling price - normal profit

39
Q

Gross Margin

A

Not allowed for observable inventory

40
Q

Margin on Cost Formula

A

=(sales-COGS)/COGS

41
Q

Gross Margin % or Margin on Sales

A

=(sales-COGS)/sales

42
Q

Gross Margin Method

A

=Beg. inventory + net purchases = end. inventory + cost of goods sold

=Beg. inventory + net purchases = end. inventory + sales (cost/sales)

43
Q

T or F Margin on Cost > Margin on Sales

A

True

44
Q

Retail Inv Method

A

1) End Inv @ Retail
2) Cost to Retail Ratio
3) 1 * 2 = End Inv @ Cost

45
Q

Average LCM or Conventional Method - cost ratio

A

The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator, but excludes net markdowns from the cost ratio calculation.

46
Q

FIFO - cost ratio

A

The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Thus, C/R measures the cost-to-retail ratio only for the current-period purchases on the assumption that all beginning inventory will be sold (first-in, first-out). If ending inventory consists entirely of current-period purchases, the C/R should not include beginning inventory

47
Q

FIFO, LCM - cost ratio

A

The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Then, in an effort to arrive at a more conservative cost ratio, the calculation also excludes net markdowns from the cost ratio. This causes the denominator of C/R to be larger, because net markdowns are not subtracted, and thus the ratio itself is smaller. When C/R is multiplied by EI(retail), the resulting EI(cost) is smaller, approximating the effect of LCM.

48
Q

Average - cost ratio

A

The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of C/R.

49
Q

Inventory Errors

A 
Beg Inv
\+Purchases
= CGAFS
-End Inv
=COGS

COGS mistake has inverse effect on NI and RE

CPA FAR (20 decks)

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