Vol. 3 LM5 Cost of Inventories Flashcards
Under IFRS
the costs to include in inventories
p. 257
- all costs of purchase
- costs of conversion
- other costs incurred in bringing the inventories to their present location and condition
included in
costs of purchase in inventories
p. 257
- 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]
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
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
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
abnormal waste…………………+€30,000
storage of finished goods…+€500,000
Multiple choice
allows companies to use the following inventory valuation method: LIFO
A. IFRS
B. US GAAP
C. IFRS and US GAAP
p. 259
B. US GAAP
List
inventory valuation methods allowed under US GAAP and IFRS
p. 258
- specific identification
- FIFO
- weighted average cost
When items are sold, the carrying amount of the inventory is recognized as ____ according to the cost flow assumption in use
p. 259
an expense (cost of sales)
Concept
is used for inventory items that are not ordinarily interchangeable
p. 259
specific identification
Concept inventory method
____ based upon actual physical flow of costs whereas ____ based upon cost flow assumptions
p. 259
specific identification
VS
weighted average cost
LIFO
FIFO
Concept
method used for inventory items that are not interchangeable
Specific identification
Concept
assumes that the oldest goods purchased are sold first and the newest goods purchased remain in ending inventory
FIFO
Concept
The first units included in inventory are assumed to be the first units sold from inventory
FIFO
Under FIFO
cost of sales reflects
- COGS (beginning inventory)
- cost of items purchased (manufactured) earliest in the accounting period
(cost of units sold) Under FIFO
- In periods of rising prices, the costs assigned to the units in ending inventory are…
- Conversely, in periods of declining prices, the costs assigned to the units ending inventory are …
p. 259
- are higher than the costs assigned to the units sold
- are lower than the costs assigned to the units sold
Describe
weighted average cost method
p. 260
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
Calculate
the weighted average cost per unit
p. 260
numerator total cost of goods available for sale
denominator total units available for sale
Describe
LIFO
p. 260
- 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.
Under LIFO
cost of sales reflects
p. 260
the cost of goods purchased more recently, and the value of ending inventory reflects the cost of older goods
costs of inventory (under LIFO)
- under rising prices
- under lower prices
p. 260
- costs assigned to the units in ending inventory are lower than costs assigned to units sold
- costs assigned to the units in ending inventory are higher than the costs assigned to units sold
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
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
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
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
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
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
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
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
