LM 5: Analysis of Inventories Flashcards
What is inventory?
costs that a company incurs to acquire inputs and prepare them for final sale
When are inventory costs recognized on the income statement?
recorded once sold due to the matching principal
What is the specific identification inventory method?
keeping track of each specific item in inventory and assigning costs individually instead of grouping items together
What is the first in, first out inventory method?
the FIFO inventory valuation method assumes the oldest goods are sold first
What is the last in, last out inventory method?
the most recently acquired items are sold first and the oldest items remain in inventory.
Where is inventory initially recorded if the item hasn’t been sold?
initially recorded on balance sheet at the cost paid to acquire them
If inventory can no longer be recovered due to various factors, what are 2 ways inventories must be carried at lower of under IFRS?
- Cost
- Net realizable value
What is the formula for net realizable value?
Estimated seeking price - estimated costs necessary to make sale - estimated costs to get inventory ready for sale
If inventory can no longer be recovered due to various factors, what are 2 ways inventories must be carried at lower of under UG GAAP?
- Cost
- Market Value
Under IFRS and US GAAP, what value do commodity producers or traders report?
report at net realizable value
Which accounting standard allows inventory write-downs?
both IFRS and US GAAP
Which accounting standard allows reversals of write-downs if inventory rises back above the carry amount?
IFRS allows reversals
US GAAP doesn’t not allow reversals of write-downs.
What is inventory write-down?
when inventory value declines below its carrying value
When must inventory write-downs be recorded?
recorded on the income statement for the period when the assessment is made
Which 4 inventory methods are allowed under US GAAP?
- Specific identification
- First in, first out (FIFO)
- Last in, first out (LIFO)
- Weighted average cost
Which 3 inventory methods are allowed under IFRS?
- Specific identification
- First in, first out (FIFO)
- Weighted average cost
What is the weighted average cost inventory method?
calculates the average cost of your inventory, per unit.
Whats the difference between periodic and perpetual inventory systems?
- period system, values COGS and ending inventory at end of account period (periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold.)
- perpetual system, purchase and sales recorded directly in inventory as they occur. (perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold)
If you use LIFO what happens to COGS and ending inventory?
using LIFO will increase COGS and lower ending inventory
In a rising environment, how does using LIFO vs FIFO or Weighted average affect COGS, PROFIT, & income tax expense on the income statement?
using LIFO will result in higher COGS, lower profit, and lower income tax expense on the income statement
In a rising environment, how does using LIFO vs FIFO or Weighted average affect inventory, assets, & equity on the balance sheet?
using LIFO will result in lower inventory, lower assets, and lower equity on the balance sheet
In a rising environment, how does using LIFO vs FIFO or Weighted average affect taxes and operating cash flow on the cash flow statement?
using LIFO will result in lower taxes and higher operating cash flow on the cash flow statement
What is LIFO reserve?
an accounting term that measures the difference between the first in, first out (FIFO) and last in, first out (LIFO) cost of inventory for bookkeeping purposes
inventory that would be reported if FIFO method was used
How do you calculate LIFO reserve?
LIFO reserve = FIFO inventory value - LIFO inventory value
When can companies change inventory methods?
If change makes financial statements more reliable and relevant
What is LIFO liquidation?
sells more inventory than it purchases or produces in a given period. This results in the company ‘digging into’ its older LIFO layers of inventory
Under IFRS what changes in valuation method require a retrospective restatement?
All, FIFO weighted average, specific identification
Under US GAAP what changes in valuation method require a retrospective restatement and which ones don’t?
LIFO to other valuation methods Requires retrospective restatement
Other to LIFO doesn’t require retrospective restatement
What is the inventory turnover formula for inventory?
COGS / average inventory
What is the gross profit margin formula given sales?
gross profit margin = (Sales - COGS) /sales
How much are inventory reversals from prior periods limited to?
limited to the amount of the original write-down
