Inventory

Question 1

FOB Shipping point

Answer 1

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

Question 2

FOB Destination

Answer 2

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

Question 3

Consignment

Answer 3

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

Question 4

Valuation of Inventory

Answer 4

GAAP requires inventory to be stated at cost where cost is the price paid/consideration given to acquire the asset

Question 5

Valuation of Inventory Methods

Answer 5

1) FIFO
2) LIFO
3) AVERAGE COST
4) RETAILED INVENTORY

Question 6

Net Realizable Value

Answer 6

= 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

Question 7

Lower of Cost or Market/NRV

Answer 7

Either method is used when the utility of inventory becomes less than the cost; required to show the probable loss (matching principle)

Question 8

Write-down of Inventory under GAAP

Answer 8

Reflected in COGS and reversal of the write-down is PROHIBITED

Question 9

Lower of Cost or NRV (Allowed for IFRS and GAAP)

Answer 9

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

Question 10

Lower of Cost or Market (GAAP only)

Answer 10

Used for inventory costed using LIFO or retail

Question 11

Market Value of Inventory

Answer 11

= the current replacement cost

1) cannot exceed NRV (market ceiling)
2) cannot fall below market floor (NRV - profit margin)

Question 12

Definition market value

Answer 12

The median value of inventory’s replacement cost, ceiling, and floor

Question 13

Definition Replacement cost

Answer 13

The cost to purchase the inventory item

Question 14

Definition market ceiling (NRV)

Answer 14

The net selling price minus costs to complete and dispose

Question 15

Definition market floor

Answer 15

Ceiling subtract normal profit margin

Question 16

Steps in Determining Inventory Valuation Using Lower of Cost or Market (LCM) and Net Realizable Value (NRV)

Answer 16

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).

Question 17

Inventory Systems Methods

Answer 17

1) Perpetual

2) Periodic

Question 18

Periodic Inventory System

Answer 18

Does NOT keep a running total of inventory; ending inventory is counted then priced

To find COGS:
Beg Inv + purchases = CGAS - End Inv = COGS

Question 19

Perpetual Inventory System

Answer 19

1) Inventory is updated with each purchase or sale
2) COGS is recorded with each sale
3) Running total of inventory is kept

Question 20

Journal Entry to record Inventory Sale under Periodic Inventory System

Answer 20

Dr. Cash

Cr. Sales

Question 21

Journal Entry to record Inventory Sale under Perpetual Inventory System

Answer 21

Dr. Cash
Cr. Sale
Dr. COGS
Cr. Inventory

Question 22

Journal Entry to record purchase of inventory under periodic inventory system

Answer 22

Dr. Purchases

Cr. Cash

Question 23

Journal Entry to record purchase of inventory under perpetual inventory system

Answer 23

Dr. Inventory

Cr. Cash

Question 24

Inventory Cost Flow Assumptions

Answer 24

1) Specific Indentification
2) FIFO
3) Weighted Average
4) LIFO
5) Retail (Gross Profit) Method

Question 25

Inventory Cost Flow Assumption IFRS

Answer 25

LIFO is prohibited under IFRS - all inventory is required to use the same cost flow assumption

Question 26

Specific Indentification

Answer 26

Cost Flow assumption where

1) cost of each item is uniquely identified
2) usually for physically large / high-value items

Question 27

FIFO (first in, first out)

Answer 27

1) The first costs inventoried are first costs transferred to COGS
2) Ending inventory includes most recent incurred costs
3) Ending inventory approximates replacement costs
4) End Inv./COGS same value in perpetual or periodic

Question 28

FIFO in times of rising prices

Answer 28

1) Highest ending inventory
2) Lowest COGS
3) Highest Net Income

Question 29

Weighted Average

Answer 29

= (total cost of inventory available)/(total inventory units available) x units

• suitable for homogeneous products and periodic system

Question 30

Moving Average

Answer 30

Computes a new average after each purchase of inventory; necessary to use perpetual system

Question 31

LIFO (last in, first out)

Answer 31

1) Last inventoried costs are first in COGS
2) Ending inventory has oldest costs
3) Prohibited under IFRS

Question 32

LIFO in times of rising prices

Answer 32

1) Lowest ending inventory
2) Highest COGS
3) Lowest Net Income

Question 33

Retail (Gross Profit) Method of Inventory

Answer 33

1) Used for interim financial statements

2) Inventory is valued at retail where average gross profit % determines the cost