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CPAExcel FAR > Inventory > Flashcards

Inventory Flashcards

1
Q

What inventory costs are required to be capitalized?

A

All costs necessary to bring the item of inventory to a salable condition.

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2
Q

How is the ownership of goods shipped Free on Board (FOB) destination determined?

A

The seller owns the goods until they reach destination.

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3
Q

Who is the owner of consigned goods?

A

The consignor (firm that shipped the inventory to consignee).

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4
Q

What does inventory for a typical business entity include?

A

Includes property held for resale, property in the process of production, and property consumed in the process of production.

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5
Q

What elements affect fixed overhead rates?

A

Subject to estimation errors and affected by the choice of denominator measure and the budgeting horizon reflected in the denominator.

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6
Q

What merchandise is included in ending inventory?

A

All owned inventory, regardless of location.

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7
Q

What are the four manufacturing input costs?

A

(1) Fixed overhead
(2) Direct material
(3) Direct labor
(4) Variable overhead

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8
Q

List the formula for calculating cost of goods sold.

A

Beginning Inventory + Net Purchases - Ending Inventory = Cost of Goods Sold

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9
Q

What account holds inventory acquisition cost during the period under a periodic system?

A

Purchases.

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10
Q

List the difference between moving and weighted average cost flow assumptions.

A
  • Moving average computes a new weighted average cost per unit after each purchase of inventory;
  • Moving average results in a lower cost of goods sold during period of rising prices.
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11
Q

List the weighted average cost per unit formula.

A

Cost of Goods Available for Sale / Number of Units Available for Sale

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12
Q

What does the acronym FIFO mean?

A

First In, First Out

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13
Q

List the cost flow assumptions of a perpetual inventory system.

A
  • Specific Identification
  • Moving Average
  • First In, First Out (FIFO)
  • Last In, First Out (LIFO)
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14
Q

List the First In, First Out (FIFO) cost flow assumptions.

A
  • Ending inventory composed of units most recently acquired;
  • COGS comprised of oldest units;
  • Most closely matches most firms’ actual physical flows;
  • Produces higher net income and higher valuation of inventory in periods of rising prices.
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15
Q

List the weighted average (WA) cost flow assumptions.

A
  • Weighted average cost per unit is the average cost of all units held during period;
  • Each item is treated as if costed at WA cost.
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16
Q

List the difference between periodic and perpetual applications of Last In, First Out (LIFO).

A
  • In perpetual, each sale is costed with most recent purchase;
  • Perpetual results in lower COGS in a period of rising prices.
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17
Q

List the Last In, First Out (LIFO) cost flow assumptions.

A
  • Ending inventory composed of oldest inventory;
  • COGS composed of newest inventory;
  • Produces lower net income and ending inventory valuation in periods of rising prices.
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18
Q

List the characteristics for the specific identification cost flow assumption.

A
  • Specifically identifies cost of each item;

- Appropriate for large, costly, distinguishable products.

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19
Q

For which method should an ending inventory count be made?

A

Both periodic and perpetual.

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20
Q

What inventory system is implied when the moving average cost flow assumption is utilized?

A

Implies the perpetual inventory system.

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21
Q

What cost flow assumption utilizes the latest purchases at time of sale?

A

Last In, First Out (LIFO)

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22
Q

List the main differences between perpetual and periodic entries.

A

The use of the inventory account rather than purchases and recording cost of goods sold at sale.

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23
Q

What cost flow assumption is the same for both the periodic and the perpetual systems?

A

First In, First Out (FIFO)

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24
Q

List some reasons to avoid Last In, First Out (LIFO) liquidation.

A
  • Increases taxes

- Does not match current period expenses and revenues.

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25
Q

List the attributes of FIFO.

A
  • Most closely approximates actual physical flow of goods for most companies;
  • Balance sheet valuation of inventory is at more desired current cost;
  • Matching of revenues and expenses on income statement is not ideal.
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26
Q

List the attributes of LIFO.

A
  • Matching of revenues and expenses is significantly improved over FIFO;
  • Income tax advantages associated with LIFO;
  • Balance sheet presentation is less than ideal.
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27
Q

What effect does using LIFO have on the income statement?

A

Matching of revenues and expenses on the income statement become significantly improved.

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28
Q

What is the main reason for using LIFO in periods of rising costs.

A

Tax minimization.

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29
Q

List the reasons for a LIFO liquidation.

A
  • Poor planning

- Lack of supply

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30
Q

What does Ending Inventory reflect in FIFO?

A

Reflects the latest costs.

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31
Q

Define “base-year dollars.”

A

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

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32
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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33
Q

List the steps in applying Dollar Valued LIFO retail method.

A
  • DV LIFO is applied to inventory at retail;
  • FIFO retail method cost/retail ratio is applied to retail layer;
  • Cost layer is added to beginning inventory at DV LIFO cost.
34
Q

List the Dollar Value LIFO conversion index formula.

A

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

35
Q

List the advantages for Dollar Valued LIFO.

A
  • Reduce the effect of the liquidation.
  • Allows companies to use FIFO internally.
  • Reduces clerical costs.
36
Q

Why would an entity utilize Dollar Valued LIFO?

A

Reduces the effect of the LIFO liquidation.

37
Q

How is the cost of ending inventory determined?

A

Determined by applying one of the four cost flow assumptions.

38
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.

39
Q

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

A
  • Compute market value.

- Value inventory at lower of cost or market.

40
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.

41
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.

42
Q

Generally, what is replacement cost?

A

Market cost.

43
Q

List the formula to arrive at net realizable value.

A

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

44
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.

45
Q

List the methods of recording Lower of Cost or Market.

A

Direct Method or Allowance Method.

46
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.

47
Q

List the methods used for estimating ending inventory.

A
  • Gross Margin method.
  • Retail Inventory method.
  • Dollar Value LIFO Retail method.
48
Q

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

A

Margin on cost.

49
Q

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

A

Beginning Inventory + net purchases = Ending Inventory + Sales (Cost/Sales)

50
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.

51
Q

List the Margin on Cost formula.

A

(Sales - COGS) / COGS

52
Q

List the Gross Margin Percentage formula.

A

(Sales - COGS) / Sales

53
Q

What ratio is multiplied to Sales to estimate COGS?

A

The cost/sales ratio.

54
Q

What are the steps in the Basic Retail Method?

A
  • Ending inventory at retail is determined;
  • Cost to retail ratio is calculated;
  • # 1 X #2 = ending inventory at cost.
55
Q

What is included in the cost ratio of the 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.

56
Q

What are Net Markdowns?

A

A net decrease in the original selling price.

57
Q

What is excluded in the cost ratio of the 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.

58
Q

What are Net Additional Markups?

A

A net increase in the original selling price.

59
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.

60
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.

61
Q

What is Original Selling Price?

A

Cost plus initial markup.

62
Q

What is included in the Average Lower of Cost of 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.

63
Q

List the two steps of Dollar Valued (DV) LIFO Retail.

A
  • Apply DV LIFO

- Multiply by the cost ratio

64
Q

What is the cost/retail numerator?

A

Net purchases at cost.

65
Q

What is the cost/retail denominator?

A

Net purchases at retail plus additional markups minus additional markdowns.

66
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.

67
Q

List the basic inventory equation.

A

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

68
Q

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

A

Beginning balance of Retained Earnings.

69
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.

70
Q

If the beginning inventory is understated and purchases and ending inventory are correct, what is the impact on COGS?

A

The impact on COGS is understated.

71
Q

If a firm has a Purchase Commitment that cannot be modified and the price declines, what journal entry should be booked?

A

Dr: Loss on Purchase Commitment
Cr: Liability on Purchase Commitment

72
Q

What is the required accounting for a potential loss on a Purchase Commitment when the commitment cannot be modified?

A
  • The loss must be accrued because the loss is probable and estimable;
  • Inventory is recorded at market, and a loss is recorded for the difference between contract and market;
  • If contract is not executed, as of the balance sheet date, loss is recognized and liability established.
73
Q

Define “Purchase Commitment.”

A

Type of commitment made when a firm commits to the purchase of materials at a set unit price.

74
Q

What is the required accounting for potential loss on a Purchase Commitment when the commitment can be modified?

A

The loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the loss is not probable given that the contract can be revised.

75
Q

How do we account for the recovery of a Purchase Commitment loss?

A

A gain to the extent of the previously recognized loss.

76
Q

Under IFRS, is inventory reported at lower of cost or market OR at lower of cost or net realizable value?

A

Lower of cost or net realizable value.

77
Q

When is inventory reassessed under IFRS?

A

At the end of each financial reporting period.

78
Q

How are adjustments for net realizable value applied?

A

Item-by-item basis.

79
Q

Under IFRS, is reversal of a write down of inventory permitted?

A

Yes, it is permitted.

80
Q

Can a company following IFRS use LIFO cash flow assumption?

A

No, the company cannot use LIFO cash flow assumptions.

81
Q

List the three methods of assigning value to inventory under IFRS.

A
  • FIFO
  • Specific identification
  • Weighted average
82
Q

What is the net realizable value as defined by IFRS?

A

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

CPAExcel FAR (20 decks)

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