Chapter 7: Inventories

Question 1

How is inventory measured under FIFO?

Answer 1

The lower of cost or net realizable value (NRV)

Question 2

How do you calculate goods available for sale?

Answer 2

Beginning Inventory + Purchases + Freight-in

Question 3

How do you calculate COGS using gross margin %?

Answer 3

100% - Gross margin % = COGS %

Question 4

How do you calculate COGS with goods available for sale?

Answer 4

(Goods available for sale) - Ending Inventory

Question 5

How can you calculate a price index?

Answer 5

Ending inventory at current-year cost/ending inventory at base-year cost

Dividing the ending inventory at current-year cost by the ending inventory at the base-year cost. Base year will always have a 1.0 price index

Question 6

How do you calculate the cost of goods sold for manufacturer?

Answer 6

Beginning finished goods inventory + Cost of goods manufactured = Goods available for sale - Ending finished goods inventory = COGS

Question 7

How do you calculate the costs of goods manufactured?

Answer 7

Beginning WIP inventory + Manufacturing costs - Ending WIP inventory

Question 8

How do you calculate manufacturing costs?

Answer 8

Direct materials costs + Direct labor costs + Manufacturing overhead costs

Question 9

How do you calculate direct materials used?

Answer 9

Beginning raw materials inventory + Net purchases, including freight - Ending raw materials inventory

Question 10

What are the three manufacturing inventory accounts?

Answer 10

Raw materials
WIP
Finished goods

Question 11

What are the two inventory systems? And what is the difference?

Answer 11

Perpetual - Always up to date, JE will hit the inventory immediately
Periodic - Up to date with a physical count at year-end, JE hits purchases and then at year end, we DB inventory and costs of goods sold and CR purchases

Question 12

What does a right of return journal entry look like?

Answer 12

When inventory is sold:
(DB) Cash
(CR) Sales
(CR) Refund Liability
(DB) Costs of goods sold
(DB) Return asset
(CR) Inventory

Question 13

What are the five cost flow methods for inventory?

Answer 13

Moving average
Weighted average
FIFO
LIFO periodic
LIFO perpetual

Question 14

In inflationary times, FIFO and LIFO will

Answer 14

FIFO will have highest ending inventory and highest net income
LIFO will have the lowest ending inventory and lowest net income

Question 15

What are the four steps for dollar-value LIFO

Answer 15

1. Restate at base-year cost
2. Identify layers of inventory
3. Determine price index for each layer
4. Restate each layer of inventory using price index

Question 16

How is LIFO inventory measured?

Answer 16

Lower of cost or market (LCM), Market has to be between the ceiling and the floor (ceiling = NRV) (floor = NRV - normal profit margin). Market is current replacement cost

Question 17

What would an overstatement of ending inventory result in for COGS and NI?

Answer 17

Because Cost of Goods Available for Sale - Ending inventory = COGS, an overstated ending inventory would result in an understated COGS. Because Revenue - COGS = NI, an understated COGS would result in an overstated NI.

Question 18

Accelerating purchases at the end of the year when using last-in, first-out inventory method in times of rising prices will result in what for NI?

Answer 18

A decrease in income.

Question 19

What does the moving-average require you to do?

Answer 19

It requires that you calculate the determination of new weighted-average cost after each purchase.

Question 20

What is the cost of goods sold equal to for the moving-average?

Answer 20

It will be the average after each purchase prior to the sale x the amount sold