FAR 11 - Inventory 1 - Periodic/Perpetual Flashcards Preview

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Flashcards in FAR 11 - Inventory 1 - Periodic/Perpetual Deck (20):

What is the appropriate treatment for goods held on consignment?
A. The goods should be included in the ending inventory of the consignor.
B. The goods should be included in ending inventory of the consignee.
C. The goods should be included in cost of goods sold of the consignee only when sold.
D. The goods should be included in cost of goods sold of the consignor when transferred to the consignee.

A. Consigned goods belong to the consignor and are included in the consignor's ending inventory.


Jel Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor. These freight costs are to be deducted from Jel's payment to Dale when the consignment goods are sold. Until Jel sells the goods, the freight costs should be included in Jel's
A. Cost of goods sold.
B. Freight-out costs.
C. Selling expenses.
D. Accounts receivable.

D. Jel will recover the freight costs when Jel deducts the costs from the amount it submits to Dale. Until that happens, the amount spent on freight is recorded in a receivable.

When Jel submits its payment for the sale of Dale's goods (also less a commission), the receivable is credited; thus reducing the amount of cash that must be paid to Dale. Therefore, the freight costs are borne by Dale. Jel simply paid the costs for Dale and will be reimbursed later. This is not a cost or expense of Jel.


Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods.

Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?
Insurance premium Advanced commissions

Yes, No
The insurance in transit is included in inventory because it is a cost necessary to bring the inventory into a salable condition. This is the criterion for capitalizing inventory costs.

The advance commissions are not inventoriable. They are not incurred to bring the inventory to a salable condition but rather are selling expenses. The costs will be recognized as such when the goods are sold. At that time, the commission is earned by the consignee and is an expense to the consignor. The commissions are never inventoried.


On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:

Packaging for shipment
Special handling charges

These goods were received on December 31, 2005. In Kerr's December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?

Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.

Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr's recorded cost is $50,000.


Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson's assets and retained earnings at year end?
Assets Retained earnings

Understated, Understated
Both responses in this choice are correct. FOB shipping point means that the title passed to the buyer at the selling company's warehouse. Therefore, Garson should have included this inventory in the ending inventory. This leaves inventory (assets) understated. This error also has overstated the cost of goods sold, which understates net income and retained earnings.


On October 20, 2005, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs.
On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission.

What amount should Grimm recognize as consignment sales revenue for 2005?
A. $7,700
B. $8,500
C. $9,800
D. $10,000

D. Consignment sales revenue is the revenue recognized on consignment sales.

In this case, total consignment revenue is 10 x $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.


T/F: An inventory item can be a noncurrent asset (such as a parcel of land) to the buyer, but must be a current asset to the seller.



T/F: All costs that help to sell inventory are included in the inventory account.

Advertising is not...


T/F: All goods on the premises of a firm must be included in the firm's ending inventory.

Not if they are sold, FOB shipping point...


T/F: The specific identification method is feasible primarily for low volume firms.



T/F: It is possible to assume the sale of goods that were not owned by the firm at the time of sale, under the LIFO method.



T/F: Under the weighted average method, if the beginning inventory of Year 2 had instead been sold in Year 1, and if prices have been steadily rising, the portion of cost of goods sold for Year 1 relating to these goods would be a smaller number than if the beginning inventory were sold in Year 2.



T/F: In a periodic system, the purchases account is used during the year to record purchases of inventory, rather than the inventory account.



T/F: Cost of goods sold in a periodic system can be computed only after all the other inventory costs and components are known.



T/F: The weighted average method can be used only in a periodic system.



T/F: The journal entry to recognize cost of goods sold in a periodic system debits purchases returns, allowances and discounts.



Which of the following statements regarding inventory accounting systems is true?
A. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
C. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.
D. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.

B. A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.


T/F: The cost of goods sold account in a perpetual system has a running balance throughout the year.



T/F: In a period of steadily rising prices, LIFO will generally result in lower cost of goods sold in a perpetual system as compared to a periodic system.



T/F: The purchases account is not used in a perpetual system.


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