Chapter 8 Flashcards
What is the formula for cost of goods sold?
Beginning inventory + goods purchased - ending inventory = COGS
What is the formula for cost of goods available for use?
Cost of goods on hand at the beginning of the period + cost of goods acquired/produced = cost of goods available for use
What is included as inventory?
-Finished goods that are held for sale
-Work in the process of production for such a sale (direct labour, fixed production cost)
-Raw materials in the form of materials or supplies to be consumed in production or rendering services
What is FOB shipping point? FOB destination?
-Shipping point is when inventory belongs to buyer the moment it is shipped
-Destination is when inventory belongs to seller until delivered to buyer
What are consigned goods and how are they accounted for?
Inventory is included in the consignor’s inventory at purchase price OR production cost+cost of handling/shipping to consignee
Who should recognize inventory on sale with buyback? Purchase commitments?
In both these cases inventory should be recorded on the vendors side
What is the effect of understating ending inventory?
Retained earnings: understated
Working capital: understated
Current ratio: understated
Cost of goods sold: overstated
Net income: understated
What is the effect if a purchase is not recorded or counted in ending inventory?
Inventory: understated
Retained earnings: no effect
Account payable: understated
Working capital: no effect
Current ratio: overstated
Purchases: understated
Ending inventory: understated
Cost of goods sold: no effect
Net income: no effect
*opposite for overstated
How do you correct an overstatement under periodic and perpetual method?
Periodic:
Purchases
A/P
Inventory
COGS
Perpetual:
Inventory
A/P
What costs are included in inventory?
-Actual cost of product
-Transportation and handling costs
-Other direct costs (non-recoverable taxes and duties)
When can you recognize rebates before they are received?
- Rebate is non-discretionary
- It is probable the terms of the rebate will be met
- The amount can be reasonably estimated
- The amount of receivable is proportional to total rebate expected
Ex. 0.1 if more than 100,000, bought 60,000 so far
Rebate Receivable 6,000
Inventory 500
COGS 5,500
When should borrowing costs be included in inventory according to IFRS? ASPE?
IFRS: interest cost on any items that take extended time to produce
ASPE: if interest is capitalized full disclosure is required
What are the cost formulas and what should be considered when choosing one?
FIFO, specific identification, and weighted average cost
You should consider:
1. Corresponds to physical flow of goods
2. Reports inventory cost at most recent
3. Uses same method for all inventory with similar characteristics
What are the two methods of recording inventory at LCNRV?
-Direct method: record NRV directly in inventory account if NRV is less than cost (loss in COGS)
Ex.
COGS
Inventory
Inventory
COGS
-Indirect method: keeps inventory at cost and uses allowance to adjust inventory on statement
Ex. COGS
Inventory
Inventory
COGS
Loss on Inventory Due to Decline NRV
Allowance to Reduce Inventory
What is an exception to the LCNRV rule?
Inventories measured at fair value less costs to sell
-Grain and live stock futures
-Changes in fair value less costs to sell recognized in net income
-Biological assets and products of it
*Assets that produce inventory over long periods of time can be considered PPE
