F4- Inventory

Question 1

Which costs are inventoriable?

Answer 1

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 2

When does ownership of goods transfer when shipped FOB Shipping Point?

Answer 2

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Question 3

When does ownership transfer when goods are sent FOB Destination?

Answer 3

FOB Destination keeps the items in the seller’s inventory until it reaches the buyer

Question 4

Which costs are non-inventoriable?

Answer 4

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

Question 5

How is gross margin calculated?

Answer 5

Gross Margin : Sales - COGS (BI + P - EI)

Question 6

Describe the periodic inventory system.

Answer 6

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

Question 7

Describe the perpetual inventory system.

Answer 7

Inventory count continually updated

Uses a moving-average cost flow method

Question 8

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Answer 8

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Question 9

How is inventory turnover calculated?

Answer 9

COGS / Average Inventory

Question 10

How is Average Day’s Sales in inventory calculated?

Answer 10

365 / Inventory Turnover

Question 11

Under a consignment system, who holds the consigned goods in inventory?

Answer 11

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Question 12

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

Answer 12

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Question 13

What effect does overstatement or understatement of inventory have on ending retained earnings?

Answer 13

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.

Question 14

How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 14

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

Question 15

Which costs are included in COGS ‘first’ under the FIFO system?

Answer 15

• The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes.
• If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

Question 16

Which costs are included in COGS under the LIFO system?

Answer 16

• The last (newest) inventory you have in stock is the first inventory you record for COGS purposes.
• If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Question 17

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

Answer 17

COGAS / Total Units : Weighted Average Cost Per Unit

Question 18

How does FIFO’s COGS relate to LIFO’s in a time of changing prices?

Answer 18

FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.

Question 19

How do FIFO and LIFO change in a period of rising prices?

Answer 19

FIFO has the Lowest COGS

If COGS is Low, that means EI is High

Question 20

How do FIFO and LIFO change in a period of falling prices?

Answer 20

FIFO has the Highest COGS

If COGS is High, that means EI is Low

Question 21

Under a Lower of Cost or Market, how is Market Ceiling Calculated?

Answer 21

• Same As ‘Net Realizable Value’

~ Selling Price - Selling Costs

Question 22

Types of Inventories Held for Re-Sale

Answer 22

• Retail Inventory: Resold in substantially the same form in which it purchased
• Raw Materials Inventory: held for use in the production process.
• W.I.P Inventory : In Production but incomplete
• Finished Goods Inventory: Production inventory that is complete & ready for sale.

Question 23

Goods & Materials Included in Inventory

Answer 23

• Has legal title
• Typically follows possession of the goods.
• Exceptions & special applications apply

Question 24

Goods in Transit

Answer 24

• Title passes from the seller to the buyer in the manner & under the conditions explicitly agreed upon by the parties.

Question 25

Shipment of non-conforming Goods

Answer 25

• Seller’s Inventory

- The title reverts to the seller upon rejection by the buyer

Question 26

If buyer has the Right to Return the goods, included in the seller’s inventory if

Answer 26

• The amount of the goods likely to be returned CANNOT be estimated.
• Can be estimated, transactions will be recorded as a sale with an allowance for estimated returns recorded.

Question 27

Cosigned Goods

Answer 27

• The Seller delivers goods to an agent to hold & sell on the consignor’s behalf.
• Include the cosigned goods in its inventory b/c title & risk of loss is retained by the cosigner even though the consignee possesses the goods.

Question 28

Inventory Cost Valuation

Answer 28

• The price paid or consideration given to acquire an asset.
• Cost is the sum of the expenditures & charges, Direct & Indirect, in bringing goods to their required condition or location.

Question 29

Selling Expenses

Answer 29

• Marketing Costs
• Freight out
• Abnormal spoilage
• Idle plant capacity costs should not be considered a part of inventory costs.

Question 30

Lower of Cost or Market

[US GAAP]

Answer 30

• When the utility of goods is no longer as great as their cost.
• Recognize Loss in Current period
• Reversal of inventory write-downs- Prohibited
  (US GAAP)

Question 31

Lower of Cost Inventory

[IFRS]

Answer 31

• Cost is the sum of the expenditures & charges
• Direct & Indirect
• In bringing goods to their required condition or location.

Question 32

Net Realizable Value Inventory

[IFRS]

Answer 32

• Item’s net selling price less the costs to complete & dispose of the inventory.
• Recognize loss in the current period
• Reversal of Inventory Write-downs

Question 33

Periodic Inventory System

Answer 33

• Quantity of inventory is determined only by physical count, at least annually.
• Doesn’t keep running total of inventory balance.

Question 34

Perpetual Inventory System

Answer 34

• Record for each item of inventory is updated for each purchase & each sale as they occur.
• Keeps running total of inventory balances.

Question 35

FIFO Method

Answer 35

• First costs transferred to COGS
• Ending Inv. includes most recently incurred costs thus approximates replacement costs.
• Ending inv. the same with either periodic or perpetual system.

Question 36

Moving Average Method

Answer 36

• Computes the Weighted Avg. cost after each purchase by the total units available after each purchase.

Question 37

LIFO Method used for Tax Purposes:

Answer 37

• It must also be used in the GAAP financial statements.

Question 38

The Yr-end Price Index is multiplied by the LIFO layer at the Base Year Cost to calculate:

Answer 38

• The LIFO layer Added at Dollar-Value LIFO.

Question 39

Under a Lower of Cost or Market, how is Market Price calculated?

Answer 39

• The Replacement Cost

- Middle Number Betwn Market Ceiling & Floor

Question 40

Under a Lower of Cost or Market, how is Market Floor Calculated?

Answer 40

Net Realizable Value - Normal Profit