F3 M3 Inventory

Question 1

What is the formula for computing COGS?

Answer 1

Beginning Inventory + Purchases - Ending Inventory

Beginning Inventory + Purchases = cost of goods available for sale. Subtracting Ending Inventory indicates how much of the cost of goods available for sale was sold.

Question 2

If beginning inventory is understated, COGS will be ___________.

Answer 2

Understated

COGS = Beginning Inventory + Purchases - Ending Inventory

Question 3

If ending inventory is overstated, COGS will be ___________.

Answer 3

Understated

COGS = Beginning Inventory + Purchases - Ending Inventory

Question 4

If purchases are overstated, COGS will be __________.

Answer 4

Overstated

COGS = Beginning Inventory + Purchases - Ending Inventory

Question 5

How do you compute ending LIFO perpetual inventory?

Answer 5

Add purchases and subtract sales in the order they occur during the period. Subtact sales from the most recent purchases, progressing backwards through layers.

Example:
* Acme began the year with inventory of $2,000, which consisted of 2,000 units purchased at $1/ea.
* On Jan. 8, Acme purchased 1,200 units at $3/ea.
* On Jan. 23, Acme sold 1,800 units, which consisted of 1,200 units $3/ea. and 600 units at $1/ea. (progressing backwards)
* On Jan. 28, Acme purchased 800 units at $5/ea.

Ending inventory = $2,000 + $3,600 - $3,600 - $600 + $4,000 = $5,400

Question 6

How do you compute ending LIFO periodic inventory?

Answer 6

Ending inventory in units × oldest cost

Example:

Acme began the year with inventory of $2,000, which consisted of 2,000 units purchased at $1/ea. During January, Acme purchased 1,200 units at $1/ea. and 800 units at $5/ea. Also during the month, Acme sold 1,800 units.

Ending inventory = 2,000 + 1,200 + 800 - 1,800 = 2,200 x $1 = $2,200

Question 7

What kinds of costs are added to the value of inventory while it is held by a company?

Answer 7

Costs that add “time” or “place” utility to the inventory, such as storage, transportation, and insurance.

Question 8

If Company A ships inventory on consignment to Company B, when does Company A recognize revenue?

Answer 8

When Company B sells the goods to a third party.

Question 9

If Company A ships inventory on consignment to Company B, which company recognizes the inventory on its books?

Answer 9

Company A recognizes the inventory on its books until Company B sells the inventory to a third party.

Question 10

What costs are included in the cost of consigned inventory?

Answer 10

The cost of the inventory and any costs needed to get the inventory in place for sale, such as freight and storage.

Question 11

Should a company capitalize interest on an inventory loan as a cost of inventory?

Answer 11

No, interest is a period expense.