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Inventory is defined as tangible personal property...3 possibilities

1 held for sale in ordinary course of business

2 In process of production for sale

3 to be used currently in production of items for sale

1

Inventory:

Ownership of goods

Determination of which items are to be included in inventory

2

Inventory:

Ownership of goods takes into account items such as...2

1 Shipping terms

2 Consignments.

3

Inventory:

Cost is the determination of...

Ex.

Which costs are being assigned to inventory

Ex. Freight and overhead, product costs vs. Period costs

4

Inventory:

Cost flow assumptions are the determination of...

Costs assigned to COGS and inventory under various cost
Flow methods

Such as FIFO and LIFO

5

Inventory:

Valuation is the determination of...

How and when inventories should reflect their market values
Using rules such as LCM

6

The primary basis of accounting for inventories is...


2) which includes...

Cost

2) the cash of FMV of consideration given in exchange for it

7

Inventory cost is a function of what 2 variables?

1 number of units included in inventory, and

2 costs attached to those units (COGS)

8

The costs to be included in inventory include...

All costs necessary to prepare goods for sale

9

3 normal costs included in inventory

1 freight in/transportation in

2 handling costs

3 normal spoilage

10

For a manufacturing entity:

The cost of inventory includes...4 costs

1 direct materials
2 direct Labor
3 direct factory overhead
4 indirect factory overhead


11

For a manufacturing entity:
1 direct materials
2 direct Labor
3 direct factory overhead
4 indirect factory overhead
Are then allocated to...


Work in progress and finished goods inventory account

12

For a manufacturing entity:

Variable production overhead, is allocated to...

Each unit of production based on actual use of production
Facilities

13

For a manufacturing entity:

Fixed overhead is allocated based on...

The normal capacity of production of the production facilities

14

For a manufacturing entity:

The normal capacity of the production facility is...

The production expected to be achieved over a number of periods
Or seasons under normal circumstances

15

For a manufacturing entity:

Normal capacity of production takes into account...

The loss of capacity resulting from planned maintenance

16

For a manufacturing entity:

The range of normal capacity will vary based on...

Business and industry specific factors

17

For a manufacturing entity:

The actual level of production may be used if it...

Approximates normal capacity

18

For a manufacturing entity:

unallocated fixed overhead costs are recognized...

As an expense in period in which they are incurred

19

Any abnormal costs for freight in, handling costs and spoilage are treated as...

Current period expenses and aren't allocated to inventory

20

Interest on inventories routinely produced or repetitively produced in large quantities is...

Not capitalized as part of inventory cost

21

For a merchandising concern: recording of purchases

The amount used as a purchase price for goods will vary depending on whether...

The gross profit or net method is used for recording purchases

22

Gross method is used to...

2) the purchase discount is netted against...

Record the purchases, then any subsequent discount taken
Is shown as purchase discount

2) the purchases account in determining COGS

23

If the net method is used to record purchases, then any purchase discounts offered are assumed...

Taken and purchase account reflects the net price

24

Net method:

If subsequent to the recording of the purchases the discount is not taken (payment is tendered after the discount period has elapsed) a...

Purchase discounts lost account is debited

25

Net method:

The balance in purchase discounts lost account does not enter into the...

2) the balance in purchase discounts lost account is treated as...

Determination of cost of goods sold

2) a period expense

26

Regardless of whether the gross method or net method is used, purchases are always recorded...

Net of allowable trade discounts

27

Trade discounts, are discounts that are...

Allowed to the entity because it's a wholesaler, good customer
Or merely the item is on sale at reduced price

28

Is Interest paid to vendors, included in the cost of inventory?

No

29

The determination of cost of goods sold and inventory under each of the cost flow assumptions depends upon...

The system used to record inventory: periodic or perpetual

30

Periodic system

Inventory is counted periodically and then priced

31

In the periodic system, the ending inventory is usually recorded in...

The COGS entry

32

Standard journal entry under the periodic system

Ending inventory. Xxx
COGS. (Plug)
Beginning Inventory. Xxx
Purchases Xxx

33

Periodic calculation for COGS

purchases
- change in inventory
______
COGS

34

Perpetual system

Running total is kept of the units on hand and possibly their value

By recording increases and decreases as they occur

35

Perpetual system:

When inventory is purchased, the...

Inventory account, rather than purchases is debited

36

Under the perpetual system, when inventory is sold, what is the following journal entry made?

COGS. (Cost)
Inventory. (Cost)

37

The weighted avg. method is used under the...

Periodic system

38

The moving avg method is used under the...

Perpetual system

39

What kind of asset is inventory?

Nonmonetary asset

40

How do you record a $100 purchase with terms of 2/10 net 30:

Under the gross method, when a discount is taken

Purchases. 100
A/P. 100

A/P. 100
Purch. Disc. 2
Cash. 98

41

How do you record a $100 purchase with terms of 2/10 net 30:

Under the gross method when no discount is taken

Purchases 100
A/P. 100

A/P. 100
Cash. 100

42

How do you record a $100 purchase with terms of 2/10 net 30:

Under the net method when a discount is taken

Purchases. 98
A/P. 98

A/P. 98
Cash. 98

43

How do you record a $100 purchase with terms of 2/10 net 30:

Under the net method when no discount is taken

Purchases. 98
A/P. 98

A/P. 98
Purchase Disc. 2
Cash. 100

44

Under the periodic system, What is the equation for COGS?

Beg Inv.
+ COGPurchased
____________
= COGAS
- EI
___________
COGS

45

Under the periodic system, What is the equation for COGPurchased?

Gross Purchases
- Purch. Disc.
- Purch. R+A
____________
= net Purch
+ freight in/transport in
________________
COGPurchased

46

Shrinkage

When inventory gets lower (due to theft or damage)

47

Specific identification

Individual inventory lots purchased or manufactured are separately
Identified

48

Under specific identification, when items are sold or otherwise disposed of, the actual cost of the specific item is...

Assigned to the transaction

and ending inventory consists of actual costs of specific items on
Hand

49

When is specific identification usually used?

High cost and individually identifiable items

Cars, appliance jewelry

50

The average cost flow assumption assumes that all costs and units are...

Merged so no specific item or cost can be separately identified

51

Under average cost both cost of goods sold and ending inventory are...

Valued at average unit cost

52

The average cost method may be used with either...

The periodic or perpetual inventory system

53

Weighted avg. - periodic:

The cost of units is calculated at...

The end of the period based on avg. price paid (including
freight, etc.), weighted by # of units purchased at each price

54

Calculation for the weighted number of units purchased at each price

weighted number of units purchased at each price =
(Cost of goods available for sale)/(# units available for sale)

55

Moving avg.- perpetual: how is the cost of units calculated?

In same manner as weighted avg.

Except new weighted avg. cost calculated after each purchase

56

Moving avg. perpetual: the averGe cost is used to determine...

The cost of each unit sold prior to the next purchase

57

Weighted avg. unit cost equation

2) ending inventory equation for 600 units

Weighted average unit cost = Total units/total cost

2) Ending inventory = (600 units) x (weighted avg. unit cost)

58

FIFO First in First out

Assumption that goods are sold in chronological order purchased

59

Under FIFO, What will ending inventory consist of?

The last purchases made during the accounting period

60

LIFO (last in first out)

Assumption that goods are sold in chronological order purchased

61

Under LIFO, ending inventory will consist of...

The last purchases made during accounting period

62

Under FIFO periodic and FIFO perpetual, ending inventory is...

The same

63

Under LIFO Periodic and LIFO perpetual ending inventory is...

Different

64

Under FIFO, first in goes to...

2) remaining goes to...

COGS

2) ending inventory

65

LIFO has better matching on...

The income statement

66

Do freight in and interest expense go into COGS?

Freight in goes into COGS

interest has no effect

67

Under FIFO, with rising prices, ending inventory is...

Higher

68

LIFO liquidation

Break everything in inventory down to $0

69

Under LIFO, it's best to make calculations with...

Periodic system

70

If you use periodic or perpetual systems under LIFO, what happens with your calculations for EI and COGS?

They are never the same for EI and COGS

71

Under perpetual, after every time you make sale you must...

Recomputed avg.

72

During a period with rising prices what happens to 1) ending inventory, 2) COGS, 3) Net Income 4) Taxes under FIFO?

1) EI is higher
2) COGS lower
3) NI higher
4) Taxes higher

73

During a period with rising prices what happens to 1) ending inventory, 2) COGS, 3) Net Income 4) Taxes under LIFO

1) EI Lower
2) COGS higher
3) NI lower
4) Taxes lower

74

Lower of Cost or Market:

A departure from the cost basis of pricing the inventory is required when the...

Utility of goods is no longer as great as its cost

75

Applying lower of cost or market rule:

Determine market

Market is replacement cost limited to ceiling and floor

76

Ceiling

Net realizable value (selling price less selling costs and costs
To complete)

77

Floor

Net realizable value less normal profit

78

If replace,net cost is greater than net realizable value, market equals...

Net realizable value

79

When does market = net realizable value - normal profit?

If replacement cost is: less than net realizable value minus normal
Profit

80

3 steps in applying the lower cost or market rule?

1 determine market
2 determine cost

3 select lower of cost or market

81

Floor and ceiling have bother to do with...

Cost (of step 2)

82

The floor limitation on market prevents recognition of...

More than normal profit in future periods (if market is less than cost)

83

The ceiling limitation on market prevents recognition of...

A loss in future periods (if market is less an cost)

84

Cost or market applied to individual items will always be as low as, and usually lower than...

Cost or market applied to inventory as a whole

85

Cost or market applied to individual items will be the same as inventory as a whole, when...

All items at market or all items at cost are lower

86

Once inventory has been written down, there can be no recovery from the write down until...

The units are sold

87

Recoveries of prior writedowns for marketable securities are required to be taken into...

The income stream

88

Methods of recording a write down in inventory, when market is less than cost at end of period

1 ending inventory established using market figure

2 or debts the inventory account for actual cost of goods on
Hand and make separate entry for market decline

89

Recording write down: establish ending inventory using market figure

The difficulty with this procedure is that it...

Forces the loss to be included in COGS, thus overstating COGS
by amount of the loss

90

Recording a writedown:

Under the method of Establishing the ending inventory using a market figure, the loss is not...

Separately disclosed

91

Methods of recording a writedown:

An alternative treatment is to debit the inventory account for the actual cost (not market) of goods on hand and then make the following entry giving separate recognition to the market decline

Loss due to market decline. Xxx
Inventory. Xxx

92

Purchase commitments (PC)

Result from legally enforceable contracts to purchase specific
Quantities of goods at fixed prices in the future

93

Purchase commitments:

When there is a decline in market value below the contract price at the balance sheet date and the contracts are noncallable...

An unrealized loss has occurred and if material should be recorded
In period of decline

94

Loss on purchase commitments journal entry

Estimated loss on PC. (excess of PC over mkt.)
Accrued loss on PC. (excess of PC over mkt.)

95

Losses on Purchase Commitments:

If further declines in market value are estimated to occur before delivery is made, the amount of the loss to be accrued should...

2) the loss is take to...

Be increased to include this additional decline in market value

2) the income statement

96

Losses on Purchase Commitments:

The accrued loss on PC is a is a...

Liability account and shown on the balance sheet

97

Losses on Purchase Commitments:

What is the entry when goods are subsequently received?

Purchases. Xxx
Accrued loss on PC. XXX
Cash. Xxx

98

Losses on Purchase Commitments:

If a partial or full recovery occurs before the inventory is received, the accrued loss account would be...

2) likewise, an income statement account...

Reduced by the amount of the recovery

2) recovery on loss of PC would be credited

99

FIFO:

the goods from beginning inventory and the earliest purchases are assumed to be...

The goods sold first

100

FIFO:

In a period of rising prices, COGS is made up of the earlier, lower priced goods resulting in...

2) the ending inventory is made up of more recent purchases and thus represents a...

A larger profit relative to LIFO

2) more current value relative to LIFO on the balance sheet

101

The FIFO cost flow assumption may be used even when...

It does not match the physical flow of goods

102

Whenever the FIFO method is used, the results of inventory and COGS are...

The same at the end of the period under either a perpetual or
Periodic system

103

LIFO (last in first out)

Under this cost flow method, the most recent purchases are
assumed to be the first goods sold

Ending inventory is assumed to be composed of the oldest
Goods

104

Under LIFO, the COGS contains...

Relatively current costs (resulting in matching current costs
With sales)

105

The LIFO cost flow assumption usually does not parallel...

The physical flow of goods

106

LIFO is widely adopted because it is acceptable for...

Tax purposes and during periods of rising prices it reduces tax
Liability due to lower reported income + higher COGS

107

LIFO smooths out fluctuations in the income stream relative to FIFO because it...

Matches current costs with current revenues

108

The primary disadvantage of LIFO is that it results in...

2) what is this generally know as?

Large profits if inventory decreases, because earlier lower valued
layers are included in COGS

2) LIFO liquidation

109

Another disadvantage of LIFO is the cost involved in...

Maintaining separate LIFO records for each item in inventory

110

If LIFO is used for tax purposes it must be used for...

2) what is this rule known as?

Financial reporting purposes

2) LIFO conformity rule

111

LIFO:

Under current tax law inventory layers may be added using the...3

1 earliest acquisition costs
Or
2 weighted avg, cost for period
Or
3 latest acquisition costs

112

On the CPA exam for LIFO, use the earliest acquisition costs unless you are instructed to use one of the other...

Alternatives

113

LIFO:

When a company uses LIFO for external reporting purposes and another inventory method for internal purposes...

A LIFO Reserve account is used to reduce Inventory from
Internal valuation to LIFO valuation

114

LIFO Reserve 2

1 contra account To inventory

2 adjusted up or down at year end with a corresponding increase
Or decrease in COGS

115

Dollar-value LIFO is LIFO applied to...

Pools of inventory items rather than to individual items

116

Costs of keeping inventory records is less under which form of LIFO?

Less under dollar value LIFO, than compared to unit LIFO

117

LIFO conformity rule also applies to...

Dollar value LIFO

118

LIFO conformity rule:

Companies using dollar value LIFO define their LIFO pools so as to...

Conform with IRS regulations

119

Dollar value LIFO:

Under IRS regulations, a LIFO pool can contain either...2

1 all inventory items for a natural business unit
Or
2 multiple pool approach can be elected

120

Multiple pool approach election (dollar value LIFO)

Business can group similarly used inventory items into several
Groups or pools

121

Dollar value LIFO:

The advantage of using inventory pools is that...

Involuntary liquidation of LIFO layers is less likely to occur

122

Conversing price index equation

Conversion price index =
(EI at end of year prices)/(EI at base year prices)

123

RC

Replacement cost

124

4 steps of using dollar value LIFO

1 convert nominal EI to base year EI (divide)
2 change is a layer at base year
3 convert base year layers to nominal (multiply)
4 add them all up

125

Gross profit:

Ending inventory is estimated by using...

Gross profit percentage to convert sales to cost of goods
presumed sold

126

Gross profit:

Since ending inventory is only estimated, the gross method is...

Not acceptable for either tax or annual financial reporting purposes

127

What are 3 major uses of gross profit?

1 estimate ending inventory for internal use
2 use in interim financial statements

3 establishing amount of loss due to destruction of inventory by
Fire, flood or other catastrophes

128

Standard costs

Predetermined costs in a cost accounting system

Generally used for control purposes

129

Standard costs:

Inventory may be costed at standard only if...

Variances are reasonable (not large)

130

Standard costs:

Large debit (unfavorable) variances would indicate...

Inventory and cost of sales were undervalued

131

Standard costs:

Large credit (favorable) variances would indicate...

Inventory is over valued

132

Direct variable costing is not...

An acceptable method for valuing inventory

133

Directing costing considers only...

2) and fixed production costs as...

Variable costs as product costs

2) period costs

134

In contrast to direct variable costing, absorption costing considers...

Both variable and fixed manufacturing costs as product costs

135

2 items to include in inventory

1 Goods shipped FOB shipping point until received by carrier

2 goods shipped FOB destination until delivered to customer

136

Items to include in inventory:

Goods shipped FOB shipping point, which are in transit should be included in the inventory of the buyer since...

Title passes to the buyer when the carrier receives the goods

137

Items to be included in inventory:

Goods shipped FOB destination should be included in inventory of seller until goods are received by the buyer since...

Title passes to the buyer when the goods are received at their
Final destination

138

Consignors

Consign their goods to consignees, who are sales agents of
Consignors

139

Consigned goods remain property of...

The consignor until they are sold

140

Consignments:

Any unsold goods (including a proportionate share of freight costs incurred in shipping the goods to the consignees) must be...

Included in the consignor's inventory

141

Consignment sales revenue should be recognized by...

The consignor when the consignee sells the consigned goods
To the ultimate customer

142

No revenue is recognized at the time the consignor...

Ships the goods to the consignee

143

Sales commission made by the consignee would be reported as...

2) it would not be...

A selling expenses by the consignor

2) not be netted against sales revenue recognized by the consignor

144

2 important ratios that relate to inventory

1 inventory turnover

2 number of days' supply in average inventory

145

The inventory turnover ratio measures...

The number of times inventory was sold

and reflects inventory order and investment policies

146

Inventory turnover calculation

Inventory turnover = (COGS)/(avg. inventory)

147

Average inventory calculation

Average inventory = (BI + EI)/2

148

Number of days inventory is held...

2) this ratio reflects on...

Before sale

2) efficiency of inventory policies

149

Number of days' supply in average inventory calculation

Number of days' supply in average inventory =

365/(inventory turnover)

150

The faster the inventory turnover...

The better (unless the company can't restock inventory fast enough)

151

FOB shipping vs FOB destination:

If not mentioned on CPA exam, assume...

FOB shipping

152

Long term contracts are accounted for by which 2 methods?

1 completed contract method

2 percentage of completion method

153

Completed contract method

Recognition of contract revenue and profit at contract completion

154

Completed contract method:

All related costs are...

Deferred until completion and then matched to revenues

155

The completed contract method is preferable in circumstances in which...

Estimates can't meet the criteria for reasonable dependability

156

1 contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding foods or services to be provided and received by the parties, the consideration to be exchanged and the manner and terms of settlement
2 the buyer can be expected to satisfy obligations under contract
3 the contractor can be expected to perform contractual obligation

If any of the 3 criteria above aren't met...

The completed contract method must be used

157

The advantage of the completed contract method is that it is...

It is based on results not estimates

158

2 Disadvantages of completed contract method

1 Current performance is not reflected

2 income recognition may be irregular

159

Percentage completion method

Recognition of contract revenue and profit during construction
Based on expected total profit

And estimated progress towards completion in current period

160

Under the percentage completion method, all related costs are...

Recognized in the period in which they occur

161

The use of the percentage of completion method depends on The ability to make reasonably dependable estimates of...3

1 contract Revenues
2 contract costs
3 extent of progress towards completion

162

Percentage of completion method:

For entities which customarily operate under contractual arrangements and for whom contracting represents a significant part of their operations, the presumption is that...

They have the ability to make estimates that are sufficiently
dependable to justify use of percentage completion method

163

Percentage completion method is preferable when all of the following 3 conditions exist:

1 contracts executed by parties normally include provisions that
Clearly specify the enforceable rights regarding goods or services
To be provided and received by the parties, the consideration to
Be exchanged and the manner and settlement of terms
2 the buyer can be expected to satisfy obligations under the
contract
3 the contractor can be expected to perform contractual obligation

164

The advantage of the percentage of completion is...

Periodic recognition of income

165

The disadvantage of the percentage completion method is...

Dependence on estimates

166

In practice, various procedures are used to measure the extent of progress toward completion under the percentage completion method, but the must widely used one is...

Cost to cost

167

Percentage of completion method:

Cost to cost is based on...

The assumed relationship between a unit of input and productivity

168

Percentage of completion method:

Under cost to cost, either revenue and/or profit to be recognized in the current period can be determined by the following formula

Revenue (profit) =
[(cost to date/total expected cost based on latest estimate)
X contract price AKA expected profit]
- Revenue (profit) recognized in previous periods

169

Percentage of completion method:

Revenue and profit are 2 different terms. Profit is calculated by...

2) revenue is the...

Subtracting construction expenses from revenue

2) contract price

170

Ledger account titles are unique to...

Long term construction contracts

171

Long term construction contracts:

In practice, there are numerous account titles for the same item: give example

Billings on LT contracts

vs. Partial billings on construction in progress

172

Long term construction contracts:

In practice there are various methodologies for journalizing the same transactions: example

Separate revenue and expense control accounts in lieu of
"Income on LT contracts account"

173

Completed contract method means recognize no profit until...

Contract completed

174

Calculation from Yaeger Video for Percentage completion method

2) how estimated GP is calculated

Profit - previous year's profit recognized =
(Total costs incurred to date/total estimated costs to complete) x GP

2) contract price - total est. cost to complete = est. GP

175

Billings on contract

Contra account to construction in process

176

LT contracts:

Journal entry 4 is...

Different under completed contract method vs. Percentage
Completion method

177

Complete contract vs. Percentage completion method:

Income recognition

Timing of income recognition differs

178

Complete contract vs. Percentage completion method:

Completed contract method never includes...

Gross profit

179

LT contracts:

If billings on contracts is greater than construction in progress, how is it recognized?

As a current liability

180

LT construction contracts:

Losses

Must recognize loss in full when you think there will be a loss
On both completed contract and percentage completion methods

181

Journal entry for completed contract method and percentage completion method for: first entry costs of construction

Construction in process inventory. Xxx
Cash/payables. Xxx

182

Costs of construction journal entry under the completed contract method may include...

A reasonable allocation of general and administrative (G&A)
expenses for periods prior to completion

183

Journal entry for completed contract method and percentage completion method for: second entry progress billings

A/R. Xxx
Billings on contracts. Xxx

184

Journal entry for completed contract method and percentage completion method for: 3rd entry collections on billings

Cash. Xxx
A/R. Xxx

185

Under the completed contract method the 4th journal entry of recognition of income when there is still more construction...

No income is recognized until completion

186

Under the percentage completion method the 4th journal entry of recognition of income...

Construction in process inventory. Xxx
Income on construction Xxx

187

In the 4th journal entry for recognition of income, what account is income on construction closed to?

Closed to income summary

188

4th journal entry, recognition of income for both completed contract and percentage completion methods in final year

Billings on contracts. Xxx
Construction in process inventory. Xxx
Income on construction. Xxx

189

Alternative final 4th journal entry for percentage completion method

Construction in process inventory. Xxx
Billings on contracts. Xxx
Construction in process inventory Xxx
Income on construction. Xxx

190

IFRS:

IFRS accounting for inventory differs from US GAAP in what 3 areas?

1 cost flow assumption

2 valuation of inventory at year end

3 capitalization of interest

191

With IFRS, the LIFO cost flow assumption is...

Not permissible

192

IFRS:

Specific ID is required for inventory of goods that are...2

1 Not interchangeable

2 goods that are produced and segregated for specific projects

193

IFRS:

FIFO and weighted average method are...

Acceptable methods under IFRS

194

IFRS:

The retail method may...

Only be used for certain industries

195

IFRS:

The gross profit method can be used to...

Estimate ending inventory when a physical count is not possible

196

IFRS:

Inventories are carried at...

Lower cost or net realizable value (LCNRV)

197

IFRS:

An exception to the lower cost or net realizable value (LCNRV) rule applies to...

Agricultural inventories (biological assets) which are carried at
Fair value less costs to sell at point of harvest

198

In US GAAP! what is used to value inventories?

Lower of cost or market (LCM)

199

Under US GAAP, market is defined as...

Replacement cost, subject to ceiling and floor

200

Under GAAP, ceiling is...

2) and floor is...

Net realizable value (NRV)

2) NRV less normal profit margin

201

Under GAAP, once inventory is written down...

A loss may not be recovered

202

IFRS VS GAAPS: valuing inventories

GAAP: NRV is calculated as estimated selling price less estimated selling price less estimated costs of completion of sale

IFRS: values inventory at lower of cost or net realizable value
(LCNRV)

203

Under IFRS, LCNRV is applied on...

2) however, under IFRS if there are groups of items that have similar characteristics, they may be grouped for...

An item by item basis

2) the application of LCNRV

204

If LCM, were applied under US standards, additional information would be need, specifically US GAAP would require...

Replacement cost and normal profit margin in order to arrive at
Ceiling and floor

205

IFRS VS GAAP:

Rules for capitalization of interest (1 for GAAP, 2 for IFRS)

GAAP: no capitalization of interest for inventories routinely manufactured/produced on repetitive basis

IFRS: 1 doesn't allow interest or financing costs to be capitalized
For inventory if it is paid under normal credit terms
2 IFRS allows interest costs to be capitalized if there is a lengthy
Production period to prepare goods for sale