Vol. 3 Inventory Valuation Methods

Question 1

(Under IFRS)
Costs included in inventories

Answer 1

“all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition”

Question 2

(Source)
Costs included in inventories

Answer 2

International Accounting Standard (IAS) 2

Question 3

The costs of purchase (components)

Answer 3

the purchase price, import and tax-related duties, transport, insurance during transport, handling, and other costs directly attributable to the acquisition of finished goods, materials, and services.

Question 4

(items that reduce) the costs of purchase

Answer 4

trade discounts and rebates

Question 5

(IFRS and US GAAP) exclude the following costs from inventory

Answer 5

abnormal costs incurred as a result of waste of materials,
labour or other production conversion inputs,
any storage costs,
and all administrative overhead and selling costs

Question 6

Inventory valuation methods are referred to as ______ under IFRS and _________ under US GAAP

Answer 6

cost formulas (IFRS); cost flow assumptions (US GAAP)

Question 7

If the choice of inventory method results in more cost being allocated to cost of sales and less cost being allocated to inventory, this will cause, in the current year, ______, __________, and ____________ to be lower

Answer 7

reported gross profit, net income, inventory carrying amount

Question 8

A company must use the same inventory valuation method for …..

Answer 8

… all items that have a similar nature and use.

Question 9

When items are sold, the carrying amount of the inventory is recognized as _________ (__________) according to the ___________ (_____________) in use.

Answer 9

an expense (cost of sales); cost formula (cost flow assumption)

Question 10

(inventory method)
_______ is used for inventory items that are not ordinarily interchangeable

Answer 10

Specific identification

Question 11

(inventory method)
[ … ] are typical used when there are large numbers of interchangeable items in inventory.

Answer 11

[FIFO, weighted average cost, and LIFO]

Question 12

[identify inventory method]
matches the actual historical costs of the inventory items to their physical flow

Answer 12

Specific Identification

Question 13

[identify inventory method]
the costs remain in inventory until the actual identifiable inventory is sold

Answer 13

Specific identification

Question 14

[identify inventory method]
Companies must make certain assumptions about which goods are sold and which goods remain in ending inventory

Answer 14

FIFO, LIFO or Weighted Average Cost

Question 15

[identify inventory method]
This method is commonly used for expensive goods that are uniquely identifiable, such as precious gemstones.

Answer 15

Specific Identification

Question 16

[describe]
Specific Identification method

Answer 16

It is used for inventory items that are not ordinarily interchangeable and for goods that have been produced and segregated for specific projects.

Question 17

[idnetify inventory methods]
It assumes that the oldest goods purchased (or manufactured) are sold first and the newest goods purchased (or manufactured) remain in ending inventory.

Answer 17

FIFO

Question 18

[Describe]
FIFO

Answer 18

It assumes that the oldest goods purchased are sold first and the newest goods purchased remained in ending inventory.
The first units in inventory are are assumed to be the first units sold from inventory.

Question 19

[Cost of Inventory]
FIFO

Answer 19

Cost of sales reflects the cost of goods in the beginning inventory + the cost of items purchased earliest in the accounting period.
The value of ending inventory reflects the costs of goods purchased more recently.

Question 20

[Inflationary Environment]
FIFO

Answer 20

In periods of rising prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold.

Question 21

[Deflationary Enviornment]
FIFO

Answer 21

In declining prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold.

Question 22

[Identify Inventory Method]
It assigns the average cost of the goods available for sale (beginning inventory + purchase, conversion, and other costs) during the accounting period to the units that are sold as well as to the units in ending inventory.

Answer 22

Weighted Average Cost

Question 23

Weighted Average Cost per Unit

Answer 23

Calculated as the total cost of the units available for sale divided by the total number of units available for sale in the period.

Question 24

[Identify Inventory Method]
It is permitted only under US GAAP.

Answer 24

LIFO

Question 25

[Describe]
LIFO

Answer 25

This method assumes that the newest goods purchased are sold first and the oldest goods purchased, including beginning inventory, remain in ending inventory.

Question 26

[Cost of Inventory]
LIFO

Answer 26

Cost of sales reflects the cost of goods purchased more recently, and the value of ending inventory reflects the cost of older goods.

Question 27

[Inflationary Environment]
LIFO

Answer 27

In rising prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold.

Question 28

[Deflationary Environment]
LIFO

Answer 28

In declining prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold