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FAR Flash Card > FASB 7 > Flashcards

FASB 7 Flashcards

1
Q

How to calculate “Conversion Index”?

A

Conversion Index = Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars

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2
Q

Why would an entity utilize Dollar Valued Last In First Out (LIFO)?

A

Reduces the effect of the LIFO liquidation.

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3
Q

List the steps in applying Dollar Valued Last In First Out (LIFO retail method.

A
  1. Dollar Value LIFO is applied to inventory at retail;
  2. FIFO retail method cost/retail ratio is applied to retail layer;
  3. Cost layer is added to beginning inventory at Dollar Value LIFO cost.
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4
Q

List the Dollar Valued Last In First Out (LIFO) conversion index formula.

A

Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars.

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5
Q

Define “base-year dollars”.

A

Price level for the pool at the beginning of the year Dollar Valued Last In First Out (LIFO) adopted.

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6
Q

How does the double-extension method affect ending inventory?

A

The ending inventory is extended at both base year cost and ending current year cost.

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7
Q

List the advantages of Dollar Valued Last In First Out (LIFO).

A
  1. Reduces the effect of the liquidation;
  2. Allows companies to use FIFO internally;
  3. Reduces clerical costs.
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8
Q

List the formula to arrive at net realizable value.

A

Sales price - estimated cost to complete and sell the inventory.

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9
Q

Generally, what is replacement cost?

A

Market cost.

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10
Q

List the methods of recording Lower of Cost or Market.

A

Direct method or Allowance method.

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11
Q

Define “market cost”.

A

Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.

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12
Q

How is the cost of ending inventory determined?

A

Determined by applying one of the four cost flow assumptions .

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13
Q

What is the basis on which Lower of Cost or Market (LCM) can be applied?

A

Individual Item, Category, Total Inventory;

But must be consistent from year to year.

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14
Q

How is holding loss reported under the direct method?

A

Any holding loss related to inventory is simply included in cost of goods sold.

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15
Q

How is the ceiling value of inventory calculated?

A

By reducing the sales price by the estimated cost to complete and sell the inventory.

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16
Q

How is holding loss reported under the allowance method?

A

Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.

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17
Q

List the steps in Lower of Cost or Market (LCM) analysis.

A

Compute market value;

Value inventory at lower of cost or market.

18
Q

List the Gross Margin Percentage formula.

A

(Sales-Cost of Goods Sold) / sales.

19
Q

List the formula for ending inventory for the gross margin method.

A

Beginning inventory + net purchases - sales (cost/sales).

20
Q

Describe the relative sales value method for recording costs.

A

Cost to be recorded for each item is based on its relative sales value to the total sales value of the group.

21
Q

What ratio is multiplied to Sales to estimate Cost of Goods Sold (COGS)?

A

The cost/sales ratio.

22
Q

List the methods used for estimating ending inventory.

A
  1. Gross Margin method;
  2. Retail Inventory method;
  3. Dollar Value LIFO Retail method.
23
Q

Which is always larger, margin on sales or margin on cost?

A

Margin on cost.

24
Q

List the Margin on Cost formula.

A

(Sales-Cost of Goods Sold) / Cost of Goods Sold.

25
Q

How is Normal Spoilage handled?

A

Subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail.

26
Q

What is included in the Average Lower of Cost or Market (LCM) or Conventional Retail Inventory Method cost ratio?

A

The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator but excludes net markdowns from the cost ratio calculation.

27
Q

What are the steps in the Basic Retail Method?

A
  1. Ending inventory at retail is determined;
  2. Cost to retail ratio is calculated;
  3. # 1 x #2 = ending inventory at cost.
28
Q

What are Net Additional Markups?

A

A net increase in the original selling price.

29
Q

What is excluded in the cost ratio of the First In First Out (FIFO) Lower of Cost or Market (LCM) Retail Method?

A

The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Net markdowns are also excluded from the cost ratio.

30
Q

What is included in the cost ratio of the First In First Out (FIFO) Retail Method?

A

The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator.

31
Q

What are Net Markdowns?

A

A net decrease in the original selling price.

32
Q

What is Original Selling Price?

A

Cost plus initial markup.

33
Q

What is included in the cost ratio of the Average Retail Method?

A

The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.

34
Q

What is in the cost/retail numerator?

A

Net purchases at cost.

35
Q

What is in the cost/retail denominator?

A

Net purchases at retail plus additional markups minus additional markdowns.

36
Q

List the two steps of Dollar Valued Last In First Out (LIFO) Retail.

A
  1. Apply Dollar Value LIFO;

2. Multiply by the cost ratio.

37
Q

If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on Cost of Goods Sold (COGS)?

A

The impact on COGS is understated.

38
Q

In year one of an error, if purchases are understated, what is the impact on Retained Earnings?

A

The impact on Retained Earnings is overstated.

39
Q

If an inventory error is discovered in year two, where is the difference recorded?

A

Beginning balance of Retained Earnings.

40
Q

If an inventory error is discovered in year three, what is the impact on Retained Earnings?

A

There is no impact on Retained Earnings, the error has self-corrected.

41
Q

List the basic inventory equation.

A

Beginning inventory + net purchases = ending inventory + cost of goods sold.

FAR Flash Card (10 decks)

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