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FAR 4 > Inventories > Flashcards

Inventories Flashcards

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1
Q

Under US GAAP and during periods of inflation, perpetual inventory system and periodic inventory system will result in the same dollar amount of ending inventory under what inventory valuation method?

A

FIFO

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2
Q

What type of expense is “freight-out”?

A

Selling expense

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3
Q

What type of expense is “freight-in”?

A

Capitalized as part of inventory

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4
Q

What inventory valuation method requires estimates of price-level changes for specific inventories?

A

Dollar-value LIFO

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5
Q

When applying lower of cost or market to total inventory, groups of similar items, or each item, which generally results in the lowest inventory amount?

A

Applying to each item separately

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6
Q

LIFO reserve

A

The difference between inventory on the LIFO method versus any other cost method

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7
Q

Dollar-value LIFO ending inventory

A

Dollar value base layer plus the current year base layer times the conversion factor

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8
Q

Four types of inventories held for resale

A
  1. Retail inventory
  2. Raw materials inventory
  3. Works in process inventory
  4. Finished goods inventory
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9
Q

Retail inventory

A

Finished goods only

Re-sold in substantially the same form in which it was purchased

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10
Q

Raw materials inventory

A

Inventory being held for use in production process

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11
Q

WIP inventory

A

Inventory that is in production but incomplete

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12
Q

Finished goods inventory

A

Production inventory that is complete and ready for sale

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13
Q

General rule for goods and materials in which company has legal title

A

Should be included in inventory

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14
Q

Title passing for goods in transit

A

Title passes from seller to buyer in the manner and under the conditions explicitly agreed upon by parties

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15
Q

What if no conditions are explicitly agreed upon ahead of time for goods in transit?

A

Title passes from seller to buyer at the time and place where the seller’s performance regarding delivery of goods is complete

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16
Q

F.O.B

A

“free on board”

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17
Q

FOB shipping point

A

Buyer’s inventory (buyer pays)

Title passes to the buyer when the seller delivers the goods to common carrier

“Freight in” added to cost of inventory

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18
Q

FOB destination

A

Seller’s inventory (seller pays)

Title passes to the buyer when the buyer receives the goods from the common carrier

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19
Q

What happens if the seller ships the wrong goods (shipment of nonconforming goods)?

A

The title reverts to the seller upon rejection by the buyer (seller’s inventory)

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20
Q

What happens if goods are sold but the buyer has the right to return the goods?

A

GR. The goods should be included in the seller’s inventory if the amount of goods likely to be returned cannot be estimated (no sale yet)

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21
Q

What if the buyer has the right to return but amount of goods likely to be returned can be reasonably estimated?

A

Transaction will be recorded as sale w/an allowance for estimated returns recroded

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22
Q

What conditions must be met for revenue from a sales transaction where buyer has right to return to be recognized at the time of sale?

A
  1. Sales price substantially fixed at date of sale
  2. Buyer assumes all risk of loss b/c goods are in buyer’s possession
  3. Buyer has paid some form of consideration
  4. Product sold is substantially complete
  5. Amount of future returns can be reasonably estimated
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23
Q

Consignment arrangement

A

Seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor’s behalf

Seller = true owners and inventory costs include shipping cost to sonsigned

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24
Q

Who has title of inventory in public warehouses

A

The company holding the warehouse receipt (warehouse receipt evidences title even though owner does not have physical possession)

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25
Who includes inventory in sales with a mandatory buyback in their FS?
The seller (even though title has passed to buyer)
26
Who includes the inventory in their FS if goods are sold on an installment basis and the seller still retains legal title as security for the loan?
Included in seller's inventory if percentage of uncollectible debts cannot be estimated If can be estimated, transaction accounted for as a sale and allowance recorded
27
Under US GAAP, what should inventory be stated at?
At cost (if evidence indicates cost will be recovered with an approximately normal profit on sale)
28
Cost
Price paid or consideration given to acquire an asset
29
What method are used to determine the cost of inventory
FIFO LIFO Average cost Retail inventory method
30
When would there be a departure from the cost basis principle of measuring inventory?
SP < Cost When the utility of goods is no longer as great as their cost Lower of cost or market OR Lower of cost or net realizable value
31
What is the purpose of reducing inventory to lower of cost or market/NRV?
To show the probable loss sustained (conservatism) in the period in which the loss occurred (matching principle)
32
ASU 2015-11, Simplifying the Measurement of Inventory
All inventory that is not costed using LIFO or the retail inventory method should be measured at the lower of cost and NRV Inventory costed using LIFO or the retail inventory method should be measured at the lower of cost or market
33
Under IFRS, how is inventory measured?
Lower of cost or NRV
34
What are gold, silver and other precious metals, and meats and some ag. products valued at?
Net realizable value (selling price - costs of disposal)
35
Under US GAAP, where are write-downs of inventory usually reflected?
COGS, unless the amount is material, in which case the loss should be identified separately in the IS (unusual/infrequent non-operating)
36
Under IFRS, how much is reversal of inventory write-downs permitted?
Limited to the amount of the original write-down
37
When would LCM and LCNRV not apply?
When: 1. Subsequent sales price of an end product is not affected by its mkt value; or 2. Company has a firm sales price contract
38
What can the LCM and LCNRV principles be applied to?
Single item, a category, or total inventory
39
Under US GAAP, what doe "market" mean?
Current replacement cost provided it does not exceed NRV (market ceiling) or fall below NRV reduced by normal profit margin (market floor)
40
Market value (LCM)
The median (middle value) of an inventory item's replacement cost, its market ceiling, and its market floor
41
Replacement cost
Cost to purchase the item of inventory as of the valuation date
42
Market ceiling
Net selling price less cost to complete and dispose (NRV)
43
Market floor
Market celing (NRV) less a normal profit margin
44
Steps in finding LCM
1. Calculate market ceiling (NRV) 2. Calculate market floor (NRV - normal profit margin) 3. Find middle value
45
J/E to write-down inventory to separate account
Dr. Inventory loss due to decline in market value | Cr. Inventory
46
How are losses that are both substantial and unusual from the application of LCM principle disclosed?
In income from continuing operations in the IS and identified separately from the consumed inventory costs described as COGS
47
what is a disadvantage of the periodic inventory system?
COGs amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages (b/c qty of inventory is determined only by physical count)
48
If a company wants to maximize profits in a period of rising prices, what inventory costing method would they use?
FIFO
49
If the current mkt value of inventory is less than the fixed purchase price in a pruchase commitment, what is it accounted for?
Describe the nature of the contract in a not, recognize a loss in IS, and recognize a liability for accrued loss
50
What are the two types of inventory systems to count inventory?
1. Periodic | 2. Perpetual
51
Periodic inventory system | use purchases
Qty of inventory is determined only by physical count, usually at least annually => units of inventory and associated costs are counted and valued at the END of the accounting period COGS is "squeezed"
52
How is COGS calculated under the periodic method?
BI + Purchases (net of returns and discounts) = COGAFS - EI (physical count) = COGS
53
Perpetual inventory system | no purchases
Inventory record for each item of inventory is UPDATED for each purchase and each sale as they occur Actual COGS is determined and recorded with each sale
54
Modified perpetual inventory system | Units of inventory on hand
Record of units on hand is maintained on a perpetual basis; changes in qty recorded after each sale and purchase
55
J/E to record purchases under PERIODIC method
Dr. Purchases | Cr. Cash
56
J/E to record purchases under PERPETUAL method
Dr. Inventory | Cr. Cash
57
J/E to record sales under PERIODIC
Dr. Cash | Cr. Sales
58
J/E to record sales under PERPETUAL
Dr. Cash Cr. Sales Dr. COGS Cr. Inventory
59
Under US GAAP, what is the primary objective in selecting an inventory valuation method?
Selecting a method that will most clearly reflect periodic income
60
What is inventory valuation dependent on?
The cost flow assumption underlying computation LIFO, FIFO, and average cost provide a practical bases for the measurement of periodic income
61
Why is LIFO prohibited under IFRS?
Because it rarely reflects actual physical inventory flows
62
Specific identification method
Cost of each item in inventory is UNIQUELY identified to that item Used for physically large and high value items No estimating
63
FIFO
Fist costs inventoried are the first costs transferred to COGS
64
Under FIFO, how are the values of EI and COGS compared for periodic and perpetual?
They are the same
65
In periods of rising prices, what does the FIFO method result in?
Highest EI Lowest COGS Highest NI (highest tax liability)
66
Weighted average method
At the end of the period, the average cost of each item in inventory would be the weighted average of the costs of all items in inventory Weighted average = Total costs of inventory available / Total number of units of inventory available Periodic
67
Moving average method
Computes the weighted average cost after each purchase Perpetual
68
Assuming constant inventory quantities, what inventory costing method would produce a lower inventory turnover ratio in an inflationary economy?
FIFO b/c would result in lower COGS and higher average inventory valuation
69
LIFO
Last costs inventories are the first costs transferred to COGS
70
Can LIFO be used for tax purposes? | LIFO Conformity Rule
Yes, but it must also be used for GAAP purposes
71
In periods of rising prices, what does the LIFO method result in?
Lowest EI Highest COGS Lowest NI (lowest taxable income)
72
When comparing weighted average with moving average, which results in a higher EI and lower COGS?
Moving average
73
Dollar-value LIFO
Inventory is measured in dollars and is adjusted for changing price levels (estimate of change in price levels required) Price index used to convert from LIFO to dollar-value LIFO
74
Price index
Price index = EI at current year cost / EI at base year cost
75
Compute LIFO layer added in the current year at dollar-value LIFO
LIFO layer at base year cost x internally generated price index
76
Firm purchase commitments
Legally enforceable agreement to purchase a specified amount of goods at some time int he future If material, must be disclosed in FS or notes
77
How is it accounted for if the contracted price in a firm purchase commitment exceeds the market price and if it is expected that losses will occur when the purchase is actually made?
The loss should be recognized at the time of the decline in price Description of losses recognized must be disclosed in current period's IS
78
J/E to record loss on firm purchase commitment
Dr. Estimated loss on purchase commitment | Cr. Estimated liability on purchase commitment

FAR 4 (5 decks)

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