Unit 7 questions Flashcards
According to the net method, are purchase discounts not taken included in the cost of inventory?
No, purchase discounts not taken are not included in inventory under the net method.
Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data: Purchases during the year $12.0 million Shipping costs from overseas 1.5 million Shipping costs to export customers 1.0 million Inventory at year end 3.0 million What amount of shipping costs should be included in Seafood Trading’s year-end inventory valuation? A. $250,000 B. $0 C. $1,125,000 D. $375,000
Answer (D) is correct. Freight costs of acquiring inventory are included in inventory. Freight costs incurred in shipping inventory to customers are not. The freight-in costs must be prorated to ending inventory and cost of goods sold. Because the entity began operations during the year, it has no beginning inventory. Accordingly, the freight-in costs assigned to ending inventory equal $375,000 [$1.5 million freight-in × ($3 million inventory ÷ $12 million purchases)].
Is Freight Out included in the cost of sales?
No, freight out is a selling cost.
In a periodic inventory system that uses the weighted-average cost flow method, the beginning inventory is the
Total goods available for sale minus the net purchases. In a periodic inventory system, the beginning inventory is equal to the total goods available for sale minus the net purchases, regardless of the cost flow method used.
Total goods available for sale minus the cost of goods sold gives what number?
ending inventory
Should Interest on inventory loan affect a retailer’s inventory?
Interest cost is capitalized only for assets produced for an enterprise’s own use or for sale or lease as discrete projects.
Which system is more difficult to maintain: perpetual or periodic?
Perpetual, because each transaction must be accounted for.
A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and:
inventory shortages. The periodic inventory system calculates the cost of goods sold using the following formula: cost of goods sold = beginning inventory + purchases – ending inventory. Because inventory is not accounted for directly when goods are sold, inventory shortages will be hidden in the cost of goods sold account.
For IFRS inventory is measured at the lower of?
lower of cost and NRV
In accounting for inventories, generally accepted accounting principles require departure from the historical cost principle when the utility of inventory has fallen below cost. This rule is known as the “lower-of-cost-or-market” rule. The term “market” as defined here means
Replacement cost of the inventory. Market is the replacement cost of the inventory as determined in the market in which the entity buys its inventory, not the market in which it sells to customers. Market is limited to a ceiling amount equal to net realizable value and a floor amount equal to net realizable value minus a normal profit margin.
What is Net Realizable Value NRV?
NRV is the estimated selling price in the ordinary course of business minus estimated costs of completion and sale. Under IFRS, this amount is compared with cost to measure the inventory at the lower of the two amounts.
he lower-of-cost-or-market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?
Separately to each item. Applying the LCM rule to each item of inventory produces the lowest amount for each item and therefore the lowest and most conservative measurement for the total inventory. The reason is that aggregating items results in the inclusion of some items at amounts greater than LCM. For example, if item A (cost $2, market $1) and item B (cost $3, market $4) are aggregated for LCM purposes, the inventory measurement is $5. If the rule is applied separately to A and B, the LCM measurement is $4.
Which of the following is true regarding inventory adjustments under IFRS? A. A reversal of a previous write-down may be higher than the previous write-down. B. Reversals of adjustments are allowed in a subsequent period. C. IFRS do not require inventory adjustments. D. Adjustments may not be reversed in a subsequent period.
Answer (B) is correct. Both IFRS and U.S. GAAP require the cost of inventory to be written down if the utility of the goods is impaired. Under IFRS, inventories are measured subsequent to initial recognition at the lower of cost and net realizable value (NRV), with NRV assessed each period. Moreover, unlike U.S. GAAP, IFRS permit inventory to be written up to the lower of cost and NRV if previously written down. The reversal is permissible only to the extent of the prior write-down.
At the end of Year 1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of Year 2, the inventory was still on hand and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for Year 2 to properly report the inventory value? A. Debit inventory for $70, credit retained earnings for $50, and credit expense for $20. B. Debit inventory for $20 and credit expense for $20. C. Debit inventory for $70 and credit expense for $70. D. Debit inventory for $20, debit expense for $30, and credit retained earnings for $50.
Answer (B) is correct. Under IFRS, inventories are measured at the lower of cost or net realizable value (NRV). NRV is the estimated selling price less the estimated costs of completion and disposal. At the end of Year 1, a loss on write-down of $20 ($100 cost – $80 NRV) was recognized. NRV is assessed each period. Accordingly, a write-down may be reversed but not above original cost. The write-down and reversal are recognized in profit or loss. Therefore, only the original $20 write-down can be reversed by debiting inventory for $20 and crediting the expense account for $20.
Under IFRS, a write-down may be reversed but not above:
original cost. The write-down and reversal are recognized in profit or loss.
