INVENTORY (F3M3)

Question 1

LOWER OF COST OR NET REALIZABLE VALUE

Answer 1

Permitted under: IFRS and GAAP (FIFO/Weighted Average)

NRV = selling price - costs to dispose

Question 2

LOWER OF COST OR MARKET

Answer 2

Permitted under: GAAP (LIFO/retail)

Market = middle value of:

• replacement cost
• market ceiling = NRV = selling price - cost to dispose
• market floor = NRV - normal profit margin

Question 3

Weighted average method

Answer 3

Used under periodic inventory system

WA = total cost of goods available for sale / total units available for sale

Question 4

Moving average method

Answer 4

Used under perpetual inventory system

MA = (original inventory bal cost + purch) / total units available for sale

Question 5

Comparison of inventory methods assuming prices are RISING

Answer 5

FIFO: highest EI, lowest COGS (same under periodic and perpetual)
LIFO: lowest EI, highest COGS

Question 6

Dollar Value LIFO

Answer 6

Step 1: Price Index = EI at current year / EI at base year
Step 2: LIFO layer added at base year (EI-BI) * Price index

Dollar value LIFO EI = BI + LIFO layer

Question 7

FOB Shipping Point

Answer 7

• Title passes to buyer/included in buyer inventory when seller delivers to common carrier.
• Freight in costs should be included in inventory

Question 8

FOB Destination

Answer 8

• Seller’s inventory until delivered to buyer

- Freight out is considered a selling expense

Question 9

Sales with a right of return

Answer 9

• If amount to be returned CANNOT be estimated, include in seller’s inventory
• If amount to be returned CAN be estimated, record as a sale with an allowance for estimated returns