Chapter 26 Inventory

Question 1

Cost of purchase for merchandise inventory includes the following:

Answer 1

Item cost + cost of shipping + import duties + other costs directly attributable to the acquisition of finished goods, materials and services - trade discounts - vendor rebates

Question 2

FOB shipping point vs FOB destination

Answer 2

FOB shipping point: legal title of goods transfers to buyer when it is shipped from warehouse.

FOB destination: legal title of goods transfers when it arrives at warehouse, and inventory accepted.

Question 3

What does terms of invoice being “$100,000 2/10 net 30” mean

Answer 3

2% discount if paid within 10 days, otherwise invoice due within 30 days.

Question 4

Main categories of costs added to inventory in a manufacturing environment:

Answer 4

Raw materials, direct labour, production overhead (includes variable production overhead, indirect labour, indirect materials)

Question 5

How do you treat abonrmal amounts of wasted materials, labours, or other production costs, storage costs, administrative overheads that do not contribute to bringing inventories to their presentlocation and selling costs

Answer 5

These costs are expensed and NOT added to inventory.

Question 6

How is inventory subsequently measured?

Answer 6

At the lower of cost and net realizable value (NRV)

Question 7

Why do we subsequently measure inventory

Answer 7

To see if inventory is overvalued on the balance sheet. If it is, there is an impairment of inventory and you need to bring the inventory amount down to the correct value

Question 8

Whats the difference between cost and net realizable value?

Answer 8

Cost is how much it costs for the inventory on hand, net reazliable value is selling price minus any cost of completion or selling expenses

Question 9

Whats the journal entry to record impairment of inventory

Answer 9

DR, COGS, CR, Inventory

Question 10

How is NRV calculated

Answer 10

sale price of item minus selling cost