Vol. 3 LM5 Cost of Inventories

Question 1

Under IFRS

the costs to include in inventories

p. 257

Answer 1

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

Question 2

included in

costs of purchase in inventories

p. 257

Answer 2

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

IAS 2 [Inventories]; ASC 330 [Inventories]

Question 3

Treatment of Inventory-Related Costs

Acme Enterprises, a hypothetical company that prepares its financial statements in accordance with IFRS, manufactures tables.
In 2018, the factory produced 900,000 finished tables and scrapped 1,000 tables. For the finished tables, raw material costs were €9 million, direct labour conversion costs were €18 million, and production overhead costs were €1.8 million.
The 1,000 scrapped tables (attributable to abnormal waste) had a total production cost of €30,000 (€10,000 raw material costs and €20,000 conversion costs; these costs are not included in the €9 million raw material and €19.8 million total conversion costs of the finished
tables).
During the year, Acme spent €1 million for freight delivery charges on raw materials and €500,000 for storing finished goods inventory. Acme does not have any work-in-progress inventory at the end of the year.

What costs should be included in inventory in 2018?

p. 238

Answer 3

raw materials………………+€9.0 million
direct labour……………….+€18 million
production overhead…+€1.8 million
raw materials transpo..+€1.0 million
* storage costs and abnormal waste are not included

Question 4

Treatment of Inventory-Related Costs

Acme Enterprises, a hypothetical company that prepares its financial statements in accordance with IFRS, manufactures tables.
In 2018, the factory produced 900,000 finished tables and scrapped 1,000 tables. For the finished tables, raw material costs were €9 million, direct labour conversion costs were €18 million, and production overhead costs were €1.8 million.
The 1,000 scrapped tables (attributable to abnormal waste) had a total production cost of €30,000 (€10,000 raw material costs and €20,000 conversion costs; these costs are not included in the €9 million raw material and €19.8 million total conversion costs of the finished
tables).
During the year, Acme spent €1 million for freight delivery charges on raw materials and €500,000 for storing finished goods inventory. Acme does not have any work-in-progress inventory at the end of the year.

What costs should be expenses in 2018?

p. 238

Answer 4

abnormal waste…………………+€30,000
storage of finished goods…+€500,000

Question 5

Multiple choice

allows companies to use the following inventory valuation method: LIFO

A. IFRS
B. US GAAP
C. IFRS and US GAAP

p. 259

Answer 5

B. US GAAP

Question 6

List

inventory valuation methods allowed under US GAAP and IFRS

p. 258

Answer 6

• specific identification
• FIFO
• weighted average cost

Question 7

When items are sold, the carrying amount of the inventory is recognized as ____ according to the cost flow assumption in use

p. 259

Answer 7

an expense (cost of sales)

Question 8

Concept

is used for inventory items that are not ordinarily interchangeable

p. 259

Answer 8

specific identification

Question 9

Concept inventory method

____ based upon actual physical flow of costs whereas ____ based upon cost flow assumptions

p. 259

Answer 9

specific identification
VS
weighted average cost
LIFO
FIFO

Question 10

Concept

method used for inventory items that are not interchangeable

Answer 10

Specific identification

Question 11

Concept

assumes that the oldest goods purchased are sold first and the newest goods purchased remain in ending inventory

Answer 11

FIFO

Question 12

Concept

The first units included in inventory are assumed to be the first units sold from inventory

Answer 12

FIFO

Question 13

Under FIFO

cost of sales reflects

Answer 13

• COGS (beginning inventory)
• • cost of items purchased (manufactured) earliest in the accounting period

Question 14

(cost of units sold) Under FIFO

1. In periods of rising prices, the costs assigned to the units in ending inventory are…
2. Conversely, in periods of declining prices, the costs assigned to the units ending inventory are …

p. 259

Answer 14

1. are higher than the costs assigned to the units sold
2. are lower than the costs assigned to the units sold

Question 15

Describe

weighted average cost method

p. 260

Answer 15

assigns the average cost of the goods available for sale (beginning inventory plus purchase, conversion, and other costs) during the accounting period to the units that are sold as well as to the units in ending inventory

Question 16

Calculate

the weighted average cost per unit

p. 260

Answer 16

numerator total cost of goods available for sale
denominator total units available for sale

Question 17

Describe

LIFO

p. 260

Answer 17

• LIFO is permitted only under US GAAP
• assumes that the newest good purchased are sold first and the oldest goods purchased, including beginning inventory, remain in ending inventory.

Question 18

Under LIFO

cost of sales reflects

p. 260

Answer 18

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

Question 19

costs of inventory (under LIFO)

1. under rising prices
2. under lower prices

p. 260

Answer 19

1. costs assigned to the units in ending inventory are lower than costs assigned to units sold
2. costs assigned to the units in ending inventory are higher than the costs assigned to units sold

Question 20

Global Sales, Inc. (GSI) is a hypothetical Dubai-based distributor of consumer products, including bars of luxury soap. The soap is sold by the kilogram. GSI began operations in 2018, during which it purchased and received initially 100,000 kg of soap at 110 dirham (AED)/kg, then 200,000 kg of soap at 100 AED/kg,
and finally 300,000 kg of soap at 90 AED/kg. GSI sold 520,000 kg of soap at 240 AED/kg. GSI stores its soap in its warehouse so that soap from each shipment received is readily identifiable. During 2018, the entire 100,000 kg from the first shipment received, 180,000 kg of the second shipment received, and 240,000 kg of the final shipment received was sent to customers. Answers to the following questions should be rounded to the nearest 1,000 AED.

What are the reported cost of sales, gross profit, and ending inventory balances for 2018 under the specific identification method?

p. 260

Answer 20

GSI sold 520,000 kg of soap at 240 AED/kg.
* Sales = 520,000 x 240 = 124,800,000 AED

purchased and received initially 100,000 kg of soap at 110 dirham (AED)/kg, then 200,000 kg of soap at 100 AED/kg, and finally 300,000 kg of soap at 90 AED/kg. 100,000 in first shipment, 180,000 in second shipment, and 240,000 in final shipment.
* Cost of sales = (100,000 x 110) + (180,000 x 100) = (240,000 x 90) = 50,600,000 AED

• Gross profit = 124,800,000 - 50,600,000 = 74,200,000 AED

(200,000 - 180,000) = 20,000
(300,000 - 240,000) = 60,000
* Ending inventory = (20,000 x 100) + (60,000 x 90) = 7,400,000 AED

Question 21

Global Sales, Inc. (GSI) is a hypothetical Dubai-based distributor of consumer products, including bars of luxury soap. The soap is sold by the kilogram. GSI began operations in 2018, during which it purchased and received initially 100,000 kg of soap at 110 dirham (AED)/kg, then 200,000 kg of soap at 100 AED/kg,
and finally 300,000 kg of soap at 90 AED/kg. GSI sold 520,000 kg of soap at 240 AED/kg. GSI stores its soap in its warehouse so that soap from each shipment received is readily identifiable. During 2018, the entire 100,000 kg from the first shipment received, 180,000 kg of the second shipment received, and 240,000 kg of the final shipment received was sent to customers. Answers to the following questions should be rounded to the nearest 1,000 AED.

What are the reported cost of sales, gross profit, and ending inventory balances for 2018 under the weighted average cost method

p. 261

Answer 21

Weighted average cost = [(100,000 x 110) + (200,000 x 100) + (300,000 x 90)] / 600,000 = 96.667 AED/kg

Sales = 520,000 x 240 = 124,800,000 AED

• Cost of sales = (520,000 x 96.667) = 50,267,000 AED
• Gross profit = 124,800,000 - 50,267,000 = 74,533,000 AED

(200,000 - 180,000) = 20,000
(300,000 - 240,000) = 60,000
* Ending inventory = 80,000 x 96.667 = 7,733,360 AED

Question 22

Global Sales, Inc. (GSI) is a hypothetical Dubai-based distributor of consumer products, including bars of luxury soap. The soap is sold by the kilogram. GSI began operations in 2018, during which it purchased and received initially 100,000 kg of soap at 110 dirham (AED)/kg, then 200,000 kg of soap at 100 AED/kg,
and finally 300,000 kg of soap at 90 AED/kg. GSI sold 520,000 kg of soap at 240 AED/kg. GSI stores its soap in its warehouse so that soap from each shipment received is readily identifiable. During 2018, the entire 100,000 kg from the first shipment received, 180,000 kg of the second shipment received, and 240,000 kg of the final shipment received was sent to customers. Answers to the following questions should be rounded to the nearest 1,000 AED.

What are the reported cost of sales, gross profit, and ending inventory balances for 2018 under the FIFO method

p. 261

Answer 22

Sales = 520,000 x 240 = 124,800,000 AED

Decompose the 520,000
* Cost of sales = (100,000 x 110) + (200,000 x 100) + (220,000 x 90) = 50,800,000 AED

• Gross profit = 124,800,000 - 50,800,000 = 75,600,000 AED

(200,000 - 180,000) = 20,000
(300,000 - 240,000) = 60,000
* Ending inventory = 80,000 x 90 (most recent cost) = 8,800,000 AED

Question 23

Global Sales, Inc. (GSI) is a hypothetical Dubai-based distributor of consumer products, including bars of luxury soap. The soap is sold by the kilogram. GSI began operations in 2018, during which it purchased and received initially 100,000 kg of soap at 110 dirham (AED)/kg, then 200,000 kg of soap at 100 AED/kg,
and finally 300,000 kg of soap at 90 AED/kg. GSI sold 520,000 kg of soap at 240 AED/kg. GSI stores its soap in its warehouse so that soap from each shipment received is readily identifiable. During 2018, the entire 100,000 kg from the first shipment received, 180,000 kg of the second shipment received, and 240,000 kg of the final shipment received was sent to customers. Answers to the following questions should be rounded to the nearest 1,000 AED.

What are the reported cost of sales, gross profit, and ending inventory balances for 2018 under the LIFO method

p. 261

Answer 23

Sales = 520,000 x 240 = 124,800,000 AED

Decompose the 520,000
* Cost of sales = (20,000 x 110) + (200,000 x 100) + (300,000 x 90) = 49,200,000 AED

• Gross profit = 124,800,000 - 49,200,000 = 75,600,000 AED

(200,000 - 180,000) = 20,000
(300,000 - 240,000) = 60,000
* Ending inventory = 80,000 x 110 (earliest cost) = 8,800,000 AED