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Flashcards in FAR - Inventory Deck (20):
1

Inventory Accounting on Homogenous items, such as agricutlural crops and precious metals

All valued at Net realizable value = NRV

NRV is: Net selling price - costs to sell (disoasl) And NRV includes:

(a) Gold and Silver inventories AND there's Effective Government CONTROLLED market at fixed monetary price (prices passed through legislation)

(b) Inventory (agricultural, mineral or other products) meeting all CRITERIA:

(1) Immediate marketability at quoted prices (recognized during period of Production at Legislation-enforced prices)

(2) Unit interchangeability and

(3) Inability to determine appropriate costs

2

(1) FOB destination vs FOB shipping

 

(2) Hark Corporation's inventory on Dec. 31, 20x1 is $1,800,000 before necessary adjustments:

  • Merch. cost $47,000 shipped FOB shipping poitn from vendor on Dec 30 20x1 was received and recorded on jan 5, 20x2
  • Goods in shipping area were not included in inventory although shipment was not sent out until Jan 4 20x2. Goods billed to customer as FOB shipping oint on Dec. 30 20x1 at cost of $150,000


What amount should be inventory reported on Dec 31, 20x1 balance sheet?

FOB destination:

(a) Buyer records ivnetnroy at cost (Buyer officially owns the inventory when the inventory has arrived at the buyer's location)

(b) Seller record costs for shipping, packaging and handling

Rule: Seller's records will still keep the inventory record until the inventory OFFICIALLY arrived on the buyer's location.  So, if inventory not arrived before balance sheet date (12/31), then inventory still in Seller's balance sheet.  Also, if inventory did officially arrive at buyer's location before balance sheet date (i.e. 12/31), then inventory is no longer on seller's balance sheet.
 

FOB Shipping: Buyer record Inventory at cost and record shipping, packaging, and handling costs. (Buyer owners the inventory while it's still being shipped to buyer's location.)

If Company sells something as FOB shipping point and before 12/31 date, the inventory still not shipped. Company still has to report and include this in the Ending inventory as of 12/31 date.

Rule: The only time an inventory is OFFICIALLY removed (as in like sold) to customer via FOB shipping point is when it's actually shipped on the day or before 12/31 (year 2nd) date.  If FOB shipping inventory has not left yet, it's still in company's inventory records and on balance sheet.

(2) Scenario:
$1,800,000  beg. inventory
+ $47,000  FOB shipping point purchase
+ 150,000  FOB shippoing pt to customer not sent
$1,997,000 ending inventory on Dec 31 20x1 B/S

3

(1) What's included into the cost of inventory when company buys and holds inventory?

(2) Scenario: what is the cost of inventory on this inventory purchase based on the following facts:

Product A purchases (700 total) at $3,570, but company paid it the purchase with 2/15 net 30 condition.

Freight in at $175

Cost of materials & labor incurred to bring inventory to sale condition at $900

Insurance cost during transporting the inventory at $100

(1) Inventory cost =

Purchase cost

+ Freight in costs

+ insurance costs in transit the inventory

+ Labor costs to ready inventory for sale

+ materials cost to ready inventory for sale

- Discounts

(2) Scenario:
$3570
+ $100 insurance
+ $175 freight in
+ $900 costs and labor
- $71.40 discount
= 4,673.6 inventory cost at purchase

4

(1) What is the formula to find cost of goods sold (cost of sale)?

(2) How to find the COGS when only have Sales price and Gross margin?

(3) Scenario: Find the costs of goods sold for the year with the followin information:

Purchases   100,000
Discount       10,000
Freight-in        5,245
Freight out      1,350
Beg. invty.       30,840
End invty.        20,560


(4) Scenario: Find the amount of purchases in $$ with the following info:

  • Sales $300,000
  • Beg inventory = 40,000
  • End inventory = 18,000
  • Gross margin = 20%

(1) Formula:

Beginning inventory
+ Purchases during the year
+ Freight-in costs
+ insurance costs in transit the inventory
+ Labor costs to ready inventory for sale
+ materials cost to ready inventory for sale
- Discounts
= Costs of Goods Available for sale
- Spoilage
- Costs due to obsolete
- Ending Inventory
= Cost of goods sold

 

(2) Find COGS when have Sale price and GM:

Gross Profit = GM % or GP %
Sales

I.e.     GP = 0.25  >>   GP = $25 
         100
$100 sale - $25 GP = $75 COGS

Or:   COGS = Sales x (1 - % GM)
COGS = $100 x (1 - 0.25)
COGS = $100 x 0.75
COGS = $75.00

(3) Scenario: Find cost of goods sold:

$100,000 purchases
- 10,000 discount
+ 5,245 Freight in
+ 30,840 Beg. invty.
- 20,560 End inventory
= 105,525 COGS

 

(4) Scenario:

$300,000 sales x (1 - 0.20 GM) 
= $300,000 x 0.80 COGS
= $24,000 COGS

$40,000  Beg
- 18,000 End
- 24,000 COGS
= 2,000 purchases

5

How to allocate shipping costs to year-end inventory valuation and cost of sales valuation based on the following information:

Company import products from overseas.
Company exports products to overseas customers.
And: Purchases at $12,000,000
Shipping costs from overseas: $1,500,000
Shipping costs to customers: $1,000,000
Inventory at year end: $3,000,000

Beg. Inventory     $0.00
+ Purchases      + $12,000,000 
= GOAFS =          $12,000,000
- Ending invty.    - $3,000,000 
= COGS               = $9,000,000

Allocation:
$9,000,000 COGS / $12,000,000 beg. invty. + purchases = 0.75 to COGS

Therefore: 0.25 to End inventory (compare to 0.75 cogs)

Thus:

0.25 x 1,500,000 shipping costs from overseas (imports) = 350,000 ending inventory

0.75 x 1,000,000 shipping costs to customers = $750,000 cost of goods sold

6

(1) Rules on consignment (consignor vs consignee),

(2) Scenario: Find A/P on consigned goods when Alpha company gets consigned goods from Target Corp.

  • Alpha company receives 350 goods consigned by Target Corp
  • Alpha sells these inventory at $100 a piece
  • Alpha will get a 10% commission on the sales
  • 10 sweaters remain (not sold yet) in Alpha's possession

(3) Scenario: Goodman Co. consigned goods to Heart Company at $35,000 original cost.  Heart co. paid $1,400 for advertisement that was reimburseable from Goodman.  At end of year, 40% of inventory sold for $32,000. The agreement stated that 10% commission given to heart company for all ssales. what amount should Goodman report as net income for the year?

(4) Scenario: Jay Corp., a consignee, paid the freight costs for goods shipped from Dave Co., a consignor. These freight costs are to be deducted from Jel's payment (sales proceeds on inventory) to Dale when the consignment goods are sold. Until Jaysells the goods, the freight costs should be included in Jay's _____. 

(5) Scenario: K-Marks has transported its goods to some stores on a consignment basis. What's the reported cost of good sold as per info below?

Beg. Invty.             $122,000
Purchases              500,000
Freight-in                   15,000
Transport to
consignee                  6,000
Freight out               45,000
Ending inventory    150,000 (held by K-mark)
End invty.                  21,000 (held by consignee)
 

(6) Scenario:  Following items are in Oculus ending inventory at Dec 31:

Goods out on consignment at sales price including 40% markup on selling proce >>>  $50,000
Goods purchased in transit FOB shipping point >> $36,000
Goods sold to customer in transit FOB destination and goods have not arrived until Jan 10, next year. >> $5,000

Goods held on consignment by Oculus >> 27,000

By what amount should the ending inventory on Dec 31 to be reduced?

(1) Consignor vs consignee

Consignor:

  • Holds ending inventory in its balance sheet
  • Records cost of goods sold when ending inventory in consignee's possession is SOLD even if it's only a portion of it (i.e. 1/3 of goods under Consignee sold)
  • Records cost in inventory on shipment costs on goods to Consignee
  • Records any Expenses (selling) on advertisement reimbursed to Consignee, and comissions expense paid to Consignee on sales of inventory

Consignee

  • Do not record any inventory in its books.
  • Do not record any cost of goods sold when sell these consigned goods
  • Only record A/R for getting reimbursement money from later from Consignor
  • Only record A/P for paying the cash sale proceeds (net of getting the commission fee) to the Consignor

(2) Scenario: 
350 goods - 10 remaining = 340 sold

340 goods sold x $100 = $34,000 sales

$34,000 x (1 - 0.10 commission rate) 
= $34,000 x 0.90
= $30,600 A/P

 

(3) Scenarion: Garnett net income on this:

$32,000 sales
- 14,000 Costs of good sold (0.40 x 35,000 cost)
= 18,000 gross profit
- 1,200 advertisment expense
- 3,200 commission (0.10 x 32,000 sales)
= $13,600 net income

 

(4) Scenario: Jay Corp., a consignee, paid the freight costs for goods shipped from Dave Co., a consignor. These freight costs are to be deducted from Jel's payment (sales proceeds on inventory) to Dale when the consignment goods are sold. Until Jaysells the goods, the freight costs should be included in Jay's ACCOUNTS RECEIVABLE

 

(5) K-mark's cost of good sold on this consigneed goods:

$122,000      Beg. Invty.
+ 500,000    Purchases
+ 15,000       Freight-in
+ 6,000        Transport to consignee
= 643,000    Costs of goods available sale
-150,000       Ending inventory - K-MARK
- 21,000        Ending inventory - consignee still in
                       K-mark's books
= 472,000  Cost of goods sold

(6) By amount reduced on Oculus inventory:
$10,000 << 50,000 x 0.40 (from mark-up)
+ 36,000 << FOB shipping point goods purch.
+ 5000 << FOB destination 
$51,000 ending inventory on Dec 31

Note: 
* Consignment to consignee $10,000 (net of market 0.40 x $50,000) should be kept by Oculus company
* FOB shipping point purchased - Oculus company keeps that
* FOB destination - not sent out yet, so, keep $5,000
* 27000 held on consignment is not the company's so, that's out of company's inventory.

7

Rules on Sales with right of return.

Sales with right of return: this deals with buyers refunding the good back to the seller.

Only recognize sales revenue when meet these criteria:

1. The sales price is substantially fixed at the date of sale,

2. The buyer assumes all risk of loss because the goods are in the buyer's possession, 

3. The buyer has paid some form of consideration, 

4. The product sold is substantially complete, and 

5. The amount of future returns can be reasonably estimated.


When recognizing sales with able to Estimate Sales return, then:

Record the Sales Revenue and

Record the Allowance for Estimated Sale returns

8

(1) Rules for Lower cost or market (US GAAP)

and

Lower cost or Net realizable value (Sales price - costs to disposal) [IFRS]

 

(2) Scenario: The historic cost (original cost) of inventory is below net realizable value and above net realizable value less than profit margin. The inentory item's replacement cos tis bleow Net realizable value less normal profit margin. Under US GAAP lower cost or market, the inventory item should be valued at _____.


(3) Scenario: The original (historic) cost of an inventory item is below the replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost. Under the lower cost or marekt method, the inventory item should be valued at Original cost.

US GAAP:  Lower cost or market:

Original (historic cost)
Replacement Cost
Net realizable value (sales price - sell costs) = Market Ceiling
NRV - Normal profit margin = Floor

Market value = Middle value of Repaclemetn cost (RC), Net realizable value (ceiling), and NRV - normal profit margin (Floor). 

NRV  $10
RC        $8 ---> Middle value pick this one
NRV - NPM $1

RC  $11
NRV   $4   --> middle value, pick this one
NRV - NPM $2

NRV   $14   
NRV - NPM $6 --> middle value, pick this one
RC $2

when, pick the Market value compare it to historic original cost. For example:

NRV  $10
RC        $8 ---> Middle value pick this one
NRV - NPM $1

RC $8.00 or   Orignal cost $6.00

Pick $6.00 original cost

RC  $11
NRV   $4   --> middle value, pick this one
NRV - NPM $2

NRV $4.00  or Orignal cost $10.00
Pick $4.00 NRV


NRV   $14   (ceiling)
NRV - NPM $6 (floor)--> middle value, pick this one
RC $2

$6.00 (Floor)  or  $12.00 Original hist. cost
Pick $6.00 floor as the lower value

 

IFRS: Lower Cost or Net realizable value (NRV)
This one is very simple.

Only compare original historic cost and NRV (or Sales price - costs to sell). 
Do not use Replacement cost, do not use NRV - Normal profit margin (floor).

Example:  
Item            Cost     RC   Sales price  Sell costs
Invty. 1        $41      $25     $38             20

Invty. 2       $21      $45     $50            8

Inventory 1: 
Cost: $41              
Sales price - costs = $38-20 = $18

LC NRV = pick $NRV of $18.00

Inventory 2:
Cost: $21
Sale price - costs to sell (NRV) = $50-$8.00
= $42.00 NRV

LC NRV = Pick $21.00 original cost

Now, if this was total inventory (carry value): then: 

Example:  
Item            Cost     RC   Sales price  Sell costs
Invty. 1        $41      $25     $38             20

Invty. 2       $21      $45     $50            8

Item        NRV           Cost           LC NRV

invty. 1     $18.00        $41.00        $18.00
Invty. 2    $42             $21           + $21.00
Total LC NRV                             = $39.00

 

 

(2) Scenario: The historic cost (original cost) of inventory is below net realizable value and above net realizable value less than profit margin. The inentory item's replacement cos tis bleow Net realizable value less normal profit margin. Under US GAAP lower cost or market, the inventory item should be valued at Net realizable value

So, how to figure it out:

NRV

OC

NRV - NPM (floor)

RC >> RC is below NRV-NPM, so, this is ignored.

Then: compare:  OC to NRV-NPM (floor), which one is the lower one:

OC
NRV - NPM >> NRV-NPM is lower.

(3) Scenario: The original (historic) cost of an inventory item is below the replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost. Under the lower cost or marekt method, the inventory item should be valued at Original cost.

NRV and RC

OC

NRV-NP

 

Another way to understand this:

NRV 

RC  >>>>> RC is the middle value
NRV-NP 

So, RC is compared to OC. 
RC

OC  and since OC is lower than RC, then OC is the value to based the inventory on as per Lower cost or market.
 

9

(1) What's allowed under IFRS?

FIFO (first in, first out)
LIFO (last-in, first out)
Specific identification
Weighted average
Moving average

 

(2) What is specific identification?

Allowed under IFRS:

FIFO (first in, first out)
Specific identification
Weighted average
​Moving average

 

Note: LIFO not allowed under IFRS because it does not reflect actual flows of inventory. 

 

(2) Specific identification: the cost of each item in inventory is uniquely identified to that item. The cost follows the physical flow of the item in and out of inventory to cost of goods sold. Specific identification is usually used for physically large or high value items and allows for greater opportunity for manipulation of income.   

IFRS allows the use of Specific identifciation esp. when dealing inventory that are not interchangeable and when there's a small number inventory that has high $$ value.

 

10

In periods of rising prices, the FIFO method results in the ___ ending inventory, the ___ costs of goods sold, and the ___ net income (i.e., current costs are not matched with current revenues).

 

In periods of rising prices, the LIFO method generally results in the ___  ending inventory, the ___ costs of goods sold, and the ___ net income. 

 

In periods of rising prices, the FIFO method results in the highest ending inventory, the lowest costs of goods sold, and the highest net income (highest profit) (i.e., current costs are not matched with current revenues).

 

In periods of rising prices, the LIFO method generally results in the lowest ending inventory, the highest costs of goods sold, and the lowest net income (lowest profit). 

11

Comparison of FIFO, LIFO, Average:

Periodic Invent.   Ending Invent.  Cost ot Goods Sold
FIFO                            $23,250        $17,000
Weighted Average     $22,361        $17,889
LIFO                             $21,500         $18,750

 

Perpet'l Invent.  Ending Invent.  Cost ot Goods Sold

FIFO                       $23,250           $17,000 
Moving Average   $23,083             $17,167 
LIFO                      $23,000            $17,250

Things to know:

FIFO pertual and FIFO periodic:

  • SAME ending inventory
  • SAME Cost of goods sold

 

LIFO pertual and LIFO periodic:

  • LIFO perpetual has higher End Inventory > LIFO periodic end inventory
  • LIFO periodic has higher COGS > LIFO perpetual

Moving average pertual and W. Ave periodic:

  • They're in between FIFO and LIFO
  • Weighted average COGS > Moving average COGS
  • Moving average End inventory > Weighted average

12

(1) What is Firm Purchase Agreements?

(2) What is journal entry for Firm purchase agreement losses?

 

(3) Scenario A: Claude Co. signed 5-year non-cancellable purchase contract to buy 1,000,000 units of computer parts per year at $0.12 per unit and guarantee a minimum annual purchase of 100,000 units. During the year, the inventory becomes obsolete.  Claude has about 850,000 units at ending inventroy on Dec. 31 and belives the parts can be sold for $0.03 per unit. What's the probable loss on this purchase commitment on Dec 31 income statement?

 

(4) Scenario B:  On Jan 1, year 1, Data Company got into a 3 year non-cancellable contract to buy up to 2,000,000 units of product each year at $0.10 per unit with minimum 500,000 units purchase. Company only bought 10,000 units. At year end, Data co. cancels the purchase contract. What's the loss on this cancellation?

(1) Firm purchase agreement =  a legally enforceable agreement to purchase a specified amount of goods at some time in the future. All material firm purchase commitments must  be disclosed in either the financial statements or the notes thereto.

(2) Journal entries:
Dr.  Estimated loss on purchase commitment

    Cr. Estimated liabi lity on purchase commitment 

 

(3) Scenario A: 
Because $850,000 purchased and still in possession is above the $100,000 gurantee limit then:  

4 years x  100,000 units x (0.12 cost - 0.03 sale)

= 400,000 units x (0.12 cost - 0.03 sale scrap)

= 400,000 units x (0.09)

= $36,000 loss 

Journal entries:
Dr. Estitmate loss on purchase commit. 36,000
     Cr. Est. liability on purch. commit.          36,000

 

(4) Scenario B:  becuase only purchase a small units amount of 10,000 units.

 

Then: Calculate loss via the minimum purchase:

500,000 min. units guarantee purch. x 3 years x $0.10 
= 1,500,000 units x $0.10
= $150,000 loss

Dr. Estitmate loss on purchase commit. 150,000
     Cr. Est. liability on purch. commit.          150,000

13

(1) Overstatment / Understatement on Inventory, COGS, and Retained earnings (R/E)

 

 

(2a) what is inventory turnover ratio?
(2b) What increases inventory turnover?
(2c) What decreases inventory turnover?


(3) Scenario:  Brand company's beg. invty. on 1/1/20X1 was understated by $38,000 and its ending inventory was overstated by 56,000. As a result, Brandon's cost of good sold for 20x1 is _________ by $__________.

 

(1) Overstatement / understatement
Beg Inventory
+ Purchases                  Sales revenue
- Ending Inventory         COGS
= COGS                         Gross profit --> Ret. earnings


Beg Inventory (low)
+ Purchases (low)         Sales revenue
- Ending Inventory       COGS (low)
= COGS (low)              Gross profit (UP) --> R/E (up) 

​Beg Inventory (UP)
+ Purchases (UP)         Sales revenue
- Ending Inventory       COGS (UP)
= COGS (UP)              Gross profit (low) --> R/E (low) 

Beg Inventory 
+ Purchases                   Sales revenue
- End Inventory (UP)       COGS (low)
= COGS (low)               Gross profit (Up) --> R/E (Up)


Beg Inventory 
+ Purchases                   Sales revenue
- End Inventory (low)       COGS (UP)
= COGS (UP)               Gross profit (low) --> R/E (low)


(2a) Inventory turnover ratio
=  Costs of goods sold / Average inventory

So, UP inventory sold >> UP costs of goods sold

(2b) Decreases inventory turnover
FIFO method because:  --> Low COGS, high End Inventory, thus (FYI - high profit, income)

(2c) Increases inventory turnover:

LIFO method becuase: >> HIGH COGS means higher inventory sold, thus higher inventory turnover. And FYI - low ending inventory and low income / profit.

 

(3) Scenario: 
Beg Inventory              0
+ Purchases               - 38,000 understatement
- Ending Inventory     - 56,000 overstatement
= COGS                      - 94,000 understated

Note: INCREASE ending inventory --> LOW COGS
(low) Beg. invt or (low)purchases --> (low) COGS

14

Weighted average - how to calculate?

Unit costs      Units purchased = Total
$4.25                  4,000              $17,000
$4.50                  2,000                 9,000
$4.75                  3,000                 14,250
Total                  9,000                $40,250

Weighted ave cost per unit = $40,250 = $4.4722
                                                   9000

Let's say for example:
4,000 sold (that means 9000 units - 4000 sold = 5,000 ending inventory)

4,000 sold x $4.4722 = $17,889 COGS
5,000 end invty. x $4.4722 = $22,361 end invt.

15

(1) Moving average - how to calculate?

(2) Scenario: Using the moving average, what's the amount to report the inventory on year-end with the following data:
 

Date   Units    Unit Cost     total cost   Units on hand
1/1             1,000       $2            $2000             1000
Prch. 1/7   780        $5             $3900            1780
Sold          900                                                 880
Prch. 1/25   400       $8            $3200            1280

 

Calculated via: 

Inventory cost + purchases $$    =  Moving ave
 Total units left + new purchases

 

Example:
Beg. inventory    Mov. cost    = Total cost
   4,000   x          4.25               $17,000


Quantity       Mov. Cost         End inventory
4,000             4.25                    $17,000


3,000 units sold:
    3,000 sold x 4.25 = $12,750 COGS

    1,000 units leftover (4K - 3K) x 4.25 = $4,250 end inventory

Quantity       Mov. Cost         End inventory
  1,000             4.25                    $4,250


2000 purchase at $4.50:

    2,000 x $4.50 = $9,000

New moving average:

$4,250 end invt. + $9,000 purchase
  (1000 end units + 2,000 new units)

= $13,250 new end inventory
     3,000 units
= $4.4167 new moving average    

Quantity         Moving cost        Total end invt.
3,000                $4.4167             $13,250

1,000 units sold:

   1,000 x $4.4167 = $4,417 COGS

   2,000 leftover (3K - 1K sold) $4.417 = $8,833 new end inventory

Quantity         Moving cost        Total end invt.
2,000                $4.4167             $8,833


3,000 units purchased at $4.75: 
             3,000 units x $4.75 = $14,250
 

$8,833 + $14,250    =  $23,083  end inventory
2,000 + 3000 units     5000
= $4.6166 new mov. cost

Quantity     Moving Cost       End inventory
5000             4.6166               $23,083

End of Year:
COGS (add them up): 

   $12,750 COGS + $4,417 COGS = $17,167

Ending invnetory:  $23,083

 

(2) Scenario:

Date   Units    Unit Cost     total cost   Units on hand
1/1             1,000       $2            $2000             1000
Prch. 1/7   780        $5             $3900            1780
Sold          900                                                 880
Prch. 1/25   400       $8            $3200            1280


$2000 + $3900  = $5,900      = 3.314 mov. av.
1000 + 780 units     1780 units

Sold 900 =   900 x 3.314 = 2,982 COGS

Total cost                   Units on hand
$2000                            1000
$3900                             780
-$2982                            (900)
$2,918 remaining         = 1280

Purchase 400 x $8 = $3200

$2918 + $3200 = $6,118       = $4.78
880 + 400 units   1280 units

So:
$6118 ending inventory of mov. ave. inventory

FYI - new mov. av. for next inventory sold = $4.78
Ending inventory units = 1280 units

16

(1) Dollar LIFO price index formula

(1a) Dollar LIFO is used for estimates of ___-___ changes.

(2) Example: 

                                                       (Inventory value)
Base cost           Current cost           Dollar-Lifo
$40,000                  $40,000           $40,000
   ??                            ??                         ??     
45,000                     54,000                 ??
15,000                      26,000                 ??     
$60,000                  80,000                ??

 

(3) Example: Find the ending inventory value via Dollar Lifo method with the following facts below:

Date   Current Cost       Base Cost         Index
1/1/02     $150,000          $150,000         1.00
12/31/02   220,000         200,000           1.10
12/31/03   276,000          230,000           1.20

(4) Example:  Walter Co. adopted US GAAP Dollar-LIFO method on Jan 1, when inventory was valued at $400,000. Walter's entire inventory is considered as a single pool. Using relevant price index of 1.10, Walter determined that it's Dec 31 inventory was $427,500 at current year cost, and $415,000 at base cost.  What's the Dollar-LIFO inventory on Dec. 31?
 

(1) Dollar LIFO index =  End invty. @ curr. yr. cost
                                       End invty. @ Base. yr. cost

 

(1a) Dollar LIFO is used for estimates of PRICE-LEVEL changes.


(2) Example:
                                                         (Inventory value)
Base cost           Current cost           Dollar-Lifo
$40,000                  $40,000           $40,000
   5,000                      14,000                 ??     
45,000                     54,000                 ??

   $54,000 curr =  1.20  x $5,000 base = $6,000
    45,000 base

So, therefore:
                                                      (Inventory value)
Base cost           Current cost           Dollar-Lifo
$40,000                  $40,000           $40,000
   5,000                      14,000                6,000     
45,000                     54,000               46,000

Next:

                                                          (Inventory value)
Base cost           Current cost           Dollar-Lifo
$40,000                  $40,000           $40,000
   5,000                      14,000                6,000     
45,000                     54,000               46,000
15,000                      26,000                 ??     
$60,000                  80,000                ??

$80,000 curr  = $1.33 x 15,000 = 20,000
  60,000 base

So, therefore:

                                                     (Inventory value)
Base cost           Current cost           Dollar-Lifo
$40,000                  $40,000           $40,000
   5,000                      14,000                6,000     
45,000                     54,000               46,000
15,000                      26,000               20,000     
$60,000                  80,000                66,000

 

Ending inventory = $66,000

(3) Example: 

Date   Current Cost       Base Cost         Index
1/1/02     $150,000          $150,000         1.00
12/31/02   220,000         200,000           1.10
12/31/03   276,000          230,000           1.20

Curr.           *Base*             Dollar-LIFO
150,000     150,000        150,000
+70,000     +50,000      +55,000 << 50,000 x 1.10
220,000    200,000       205.000
+ 56,000     +30,000     + 36,000 << 30,000x1.20
276,000     230,000       241,000  

Dollar LIFO inventory ending value = 241,000

(4) Example:
 Hint: when use Dollar LIFO in first period, the value under in this method on first day is the same as the beginning current cost and beginning base cost.

Date     Curr. cost      base cost     Dollar life
1/1         $400,000      $400,000    $400,000
Layer       ??                  ??                      ??     
12/31    $427,500      $415,000           ??

Date  Curr. cost  Base cost   Dollar life
1/1    $400,000    $400,000  $400,000
Layer  27,500        15,000   30,250 << 27500 x 1.10 
12/31   $427,500   $415,000   $430,250

12/31 Ending inventory value = $430,250

17

Flip over to see tips and some concepts to learn.

Tip for the CPA exam: 
The first year the Dollar LIFO is implemented, the Dollar-LIFO ending inventory like $500,000 is the same for Current cost and Base cost in that first year.

Example:

Date  Base Cost        Current Cost      Dollar Life
1/1/Y1   $500,000       $500,000       $500,000


(2) Dollar Lifo preserves old inentory costs by charging current costs to cost of goods sold. This is done via grouping inventory into layers and charges the most recent items to costs of goods sold before using older layers which have older inventory costs

(3) Dollar LIFO method measures changes in inventory layers based on Total dollar value changes. 

(4) It uses a Price index to measure changes in inventory.

(5) There 3 methods to price index:
(a) Simplified = general available index such as Consumer Price index for urban consumers (CPI)
(b) Double extension = client is required to count inventory and then extend inventory prices twice such as:

  • Current quantity x current unit cost = current cost
  • Curent quantity x base cost = base cost
  • Current cost / base cost = price index

(c) Link-chain method: it's like Double extension except year-to-year price changes rather than cumulative changes are computed and then annual changes are linked (multiplied) together to determine a prixe index.  Like this:

  • Current quantity x end-of-year-unit cost = current cost
  • Current quantity x start-of-year unit cost = prior year cost
  • Current cost / prior year cost = annual cost index

(6) Specific identification: this is used for inventory that are NOT interchangeable and goods that are produced and segregated for specific projects. It's also used for when there is a small # of significant dollar value items in inventory.

18

LIFO Reserves

(1) What is it?

(2) What is the journal entry for adjusting the LIFO reserve account with the following data:

  • Ending inventory via AVE is $125,000
  • Ending invntory via LIFO is $40,000
  • Unadjusted LIFO reserve is $65,000

LIFO Reserve = valuation account that holds the difference amount between LIFO method and other methods.

Example: Ending inventory amount via below:

FIFO                  LIFO                   LIFO reserve
$500,000    $445,000               $55,000

(2) 
Ending inventory - AVE:    $125,000
Ending inventory - LIFO:      -40,000
LIFO reserve ending             85,000
Minus: Unadj. LIFO resrve   - 65,000
Adj. Amnt. to LIFO reserve   20,000

Journal Entry
Dr. COGS    20,000
       Cr. LIFO reserve   20,000

 

19

During Jan, Mankind Corp, uses LIFO inventory system on the following:

Date      Units   Unit cost   total cost   Units on hand
1/1            1000        $3           $3000          1000
1/7 Prch.   400        $5           $2000           1400
1/20 sold  650                                            800      
1/25 Prch.  300       $9           $2700         1100

(a) What's the LIFO perpetual inventory on year end?

 

(b) What's the LIFO periodic inventory on year end?

 

(a) LIFO method perpetual system:

Focus on total cost (since that's given to you) to calculate information quickly

Total cost
$3000  Beg. 1/1
$2000   Purch 1/7
$5000
- $2000 << 400 x $5 sold  (from sale 600 units)
- $750 << 250 remaining x $3 (from sale 600 units)
= $2,250
+ $2,700 purchase (300 x $9)
= $4,950 ending inventory (LIFO perpetual)

FYI - LIFO perpetual's COGS: 
** $400 x $5 = $2000
** $250 x $3 = $750
                          $2750 COGS (LIFO perpetual)
 

(b) LIFO periodic method:
Date      Units   Unit cost   total cost   Units on hand
1/1            1000        $3           $3000          1000
1/7 Prch.   400        $5           $2000           1400
1/20 sold  650                                            800      
1/25 Prch.  300       $9           $2100         1100

Sold 650 units, so:
* 300 x $9 is wiped out (because that's sold first)
* Then: 350 units x $5 wiped out next 

 

Leaving:
Date      Units   Unit cost   total cost   Units on hand
1/1            1000        $3         $3000          1000
1/7 Prch.   50         $5           $250           1050
                     Total end invt= $3250 periodic
 

FYI - LIFO Periodic COGS:

* 300 x $9 = $2700
* 350 x $5 = $1,750
                      $4,450 COGS (LIFO periodic)

Comparison
LIFO perpetual
          End inventory = $4,950
                       COGS = $2,750

LIFO periodic
            End inventory = $3,250
                         COGS = $4,450 

20

During Jan, Mankind Corp, uses FIFO inventory system on the following:

Date      Units   Unit cost   total cost   Units on hand
1/1            1000        $3           $3000          1000
1/7 Prch.   400        $5           $2000           1400
1/20 sold  1200                                            200      
1/25 Prch.  300       $9           $2700         500

(a) What's the FIFO perpetual inventory on year end?

 

(b) What's the FIFO periodic inventory on year end?
 

(a) FIFO perpetual inventory at year end:

Date      Units   Unit cost   total cost   Units on hand
1/1            1000        $3           $3000          1000
1/7 Prch.   400        $5           $2000           1400
1/20 sold  1200                                            200      
1/25 Prch.  300       $9           $2100         500

Total Cost w/ 1200 sold 
$3000
+ $2000
$5,000
- $3,000 sold (1000 x $3 (from sold 1200)
- $1,000 sold (200 x $5 (from sold 1200)
$1,000 total cost (ending inventory) remaining
+ 2700 purchases

$3,700 ending inventory (FIFO) perpetual


(b) FIFO periodic inventory:

Date      Units   Unit cost   total cost   Units on hand
1/1            1000        $3           $3000          1000
1/7 Prch.   400        $5           $2000           1400
1/20 sold  1200                                            200      
1/25 Prch.  300       $9           $2700         500


Units   Unit cost   total cost   Units on hand
1000      $3             $3000        1000
400        $5             $2000        1400
300        $9             $2700         1700
                                $7,700         4,100 units

Sold 1200 units:
* 1000 x $3 = $3000 sold (costs of goods sold)
* 200 x $5 = $1,000 sold  (costs of goods sold)
                      $4,000 cogs

Then:     $7,700 
              - 4,000 COGS
               $3,700 ending inventory periodic

Comparison
FIFO perpetual inventory ending:
         End inventory = $3700
                      COGS = $4000


FIFO periodic inventory ending:
         End inventory = $3700
                      COGS = $4000

Decks in FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) Class (61):