Inventory Flashcards
FOB Shipping point
The inventory is still included on seller’s books until the seller hands the goods to the carrier to be delivered to the buyer where it then is included in buyer’s inventory
FOB Destination
The inventory is still included in the seller’s books until the goods are delivered to the buyer; only upon delivery to buyer is the inventory in buyer’s books
Consignment
1) supplier (consignor) has goods @ another facility (consignee) that hasn’t been sold yet
2) Consignor (supplier) should include consigned goods in inventory b/c they continue to hold risk of loss
3) Title passes directly from consignor to 3rd party buyer and revenue is recognized when sold to the 3rd party
Valuation of Inventory
GAAP requires inventory to be stated at cost where cost is the price paid/consideration given to acquire the asset
Valuation of Inventory Methods
1) FIFO
2) LIFO
3) AVERAGE COST
4) RETAILED INVENTORY
Net Realizable Value
= selling price - disposal costs
This is the alternative to valuing inventory at cost and is allowed for only 2 types of inventory 1) precious metals and 2) farm/agricultural products
Lower of Cost or Market/NRV
Either method is used when the utility of inventory becomes less than the cost; required to show the probable loss (matching principle)
Write-down of Inventory under GAAP
Reflected in COGS and reversal of the write-down is PROHIBITED
Lower of Cost or NRV (Allowed for IFRS and GAAP)
1) NRV = selling price - costs to complete/dispose of
2) Used for all inventory not costed @ LIFO or Retail (used for all inventory under IFRS)
3) NRV = market ceiling in lower of cost or market
Lower of Cost or Market (GAAP only)
Used for inventory costed using LIFO or retail
Market Value of Inventory
= the current replacement cost
1) cannot exceed NRV (market ceiling)
2) cannot fall below market floor (NRV - profit margin)
Definition market value
The median value of inventory’s replacement cost, ceiling, and floor
Definition Replacement cost
The cost to purchase the inventory item
Definition market ceiling (NRV)
The net selling price minus costs to complete and dispose
Definition market floor
Ceiling subtract normal profit margin
Steps in Determining Inventory Valuation Using Lower of Cost or Market (LCM) and Net Realizable Value (NRV)
1). Determine the historical cost of inventory (typically based on LIFO, FIFO, average cost, etc.).
2). Obtain the market value, or the replacement cost of the inventory item.
3). Calculate the net realizable value of the inventory item, used as the ceiling for the market price.
4). Calculate the net realizable value less the normal profit margin for inventory, used as the floor for the market price.
5). Determine the market value of the inventory.
If RC > NRV, market value = NRV (ceiling)
If RC < (NRV minus normal profit margin, called market floor), use market floor).
6). Compare the historical cost from Step 1 with the market value in Step 5, and use the lowest amount for the inventory item (LCM).
Inventory Systems Methods
1) Perpetual
2) Periodic
Periodic Inventory System
Does NOT keep a running total of inventory; ending inventory is counted then priced
To find COGS:
Beg Inv + purchases = CGAS - End Inv = COGS
Perpetual Inventory System
1) Inventory is updated with each purchase or sale
2) COGS is recorded with each sale
3) Running total of inventory is kept
Journal Entry to record Inventory Sale under Periodic Inventory System
Dr. Cash
Cr. Sales
Journal Entry to record Inventory Sale under Perpetual Inventory System
Dr. Cash
Cr. Sale
Dr. COGS
Cr. Inventory
Journal Entry to record purchase of inventory under periodic inventory system
Dr. Purchases
Cr. Cash
Journal Entry to record purchase of inventory under perpetual inventory system
Dr. Inventory
Cr. Cash
Inventory Cost Flow Assumptions
1) Specific Indentification
2) FIFO
3) Weighted Average
4) LIFO
5) Retail (Gross Profit) Method
