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Flashcards in Inventory Deck (31):
1

What is inventory and where does it appear in a set of F/S?

inventory is merchandise held by an entity for resale purposes, and it appears as a current asset on the balance sheet.

2

What is the FOB point?

What is the significance of the FOB point when preparing F/S?

the FOB point is the point at which the title changes hands on a sale.

FOB Destination - title changes when the buyer receives

FOB Shipping point - title changes when it leaves the seller

the FOB point is important because it marks the moment when the transactions should be reported. For the seller, A/R and sales increase. If a perpetual system is in use, COGS also increases and inventory decreases. For the buyer, inventory increases at the FOB point, as well as A/P.

3

What costs are included in the reported cost of inventory?

it includes all normal and necessary expenditures to get the merchandise into position and condition to be sold.

invoice price
sales taxes paid (only non refundable)
freight-in

4

How is COGS calculated

Where does COGS appear in the F/S?

What is gross profit?

COGS = Beginning Inventory + Purchases - ending inventory

COGS is an expense on the income statement

Gross Profit is the sales revenue less COGS

5

Based on the FOB point, who pays shipping costs for an inventory purchase?

FOB destination - seller owns and pays shipping costs

FOB shipping point - buyer owns and pays shipping costs

6

An entity in Kansas City sells a piano to an entity in Portland, ME. As the shipment passes through Philadelphia, the piano falls off the truck and is destroyed.

Which party suffers this loss?

FOB Destination - seller owns and bears loss

FOB shipping point - buyer owns and bears loss

7

What are the 2 methods to account for purchase discounts?

Gross method - purchase and payable booked at full value. if discount is taken purchase discount is set up to record the difference. this is a contra asset to inventory purchases

Net method - purchase and payable booked at discounted amount. if discount is not taken then a loss is recognized to record difference

8

What is the purpose of a trade discount?

If inventory is bought with a retail price of $1,000 based on a trade discount of 40/20, what is paid?

How is a trade discount reported?

A trade discount is a way to set a price, especially when one store sells to another.

The $1,000 would first be reduced by a 40% discount, or $400. The remaining $600 would then be reduced by 20% discount to arrive at a price of $480.

Trade discounts are not separately recorded. Instead, the A/R and the sale would be recorded at $480.

9

What is consignment inventory?

consignment inventory is owned by one party (a consignor), but held for sale by another party (a consignee)

10

Inventory is bought by A for $800 and shipped to Z to hold on consignment, in hopes of selling it for $1,100.

What is recorded by both companies?

A reports the inventory at its cost of $800.

Z has no cost connection with the inventory and thus reports nothing.

11

Inventory is bought by A for $800 and shipped to Z to hold on consignment. At the time of the transfer, A reported a sale for the retail price of $1,100 and removed the inventory from its accounts.

By how much would the current assets of A be overstated?

the overstatement would be A/R $1,100 less inventory cost $800 so overstatement would be $300

12

An entity is applying the lower of cost or market to inventory. In this situation, what is meant by market?

in most cases, the market value is judged to be its replacement cost

13

In applying lower of cost or market to inventory, replacement cost is normally used as market value. However, if replacement cost is above a "ceiling" or below a "floor" figure, then the ceiling or floor figures are used as boundaries for the market value.

How are the floor figure and the ceiling figure determined?

the ceiling for the market value is the net realizable value of the inventory. sales price less any cost necessary to sell the merchandise.

the floor figure is the net realizable value, less any normal profit margin.

14

How does overstatement of inventory impact reported net income?

Ending inventory overstatement results in the same error in Net income, overstatement

15

How does an overstatement of inventory in year 1 impact the reported NI in year 2?

year 1 error will carry over into an overstatement of beginning inventory which has an opposite error in NI understatement

16

Able has the following balances

$50,000 - Beginning inventory
$200,000 - Purchases
$300,000 - Annual Sales
30% - Estimated gross profit percentage

What is the best estimation of Able's ending inventory?

COGS = Sales - Profit

$210,000 = $300,000 - ($300,000 x .30)

Beginning inventory + purchases - Cogs = ending inventory

$50,000 + $200,000 -$210,000 = $40,000

17

An entity has a beginning inventory of $100 with a retail value of $150. The entity then buys inventory of $900 with a retail value of $1,600. During the year the entity marks up some of the inventory by $100, while marking down the other inventory by $300. By the end of the year the entity has sales of $1,000.

What is the retail value of the ending inventory?

At retail (sales) value, the entity has a beginning inventory of $150, which was increased by the $1,600 in purchases. It was also increased by the $100 mark-ups, but decreased by the $300 in mark-downs. Thus, if no inventory had been sold, the entity would have had inventory in its store with a retail value of $1,550.

However, the entity made sales of $1,000, thus, only $550 in inventory (at retail) remains at the end of the year.

18

An entity has a beginning inventory of $100 with a retail value of $150. The entity then buys inventory of $900 with a retail value of $1,600. During the year the entity marks up some of the inventory by $100, while marking down the other inventory by $300. Assume the entity has inventory with a retail value of $550 at the end of the year, after all sales have been recorded. The inventory manager wants to estimate the cost of this inventory by multiplying it by a cost to retail ratio.

If the averaging method is used, what is the estimation of the cost of this remaining inventory?

the averaging method uses the beginning inventory, purchases, mark-ups and mark-downs to create the relationship between cost and retail value


cost - 1,000
retail - 1,550


the estimation of this inventory is 1000/1550 multiplied by 550, or $359

19

An entity has a beginning inventory of $100 with a retail value of $150. The entity then buys inventory of $900 with a retail value of $1,600. During the year the entity marks up some of the inventory by $100, while marking down the other inventory by $300. Assume the entity has inventory with a retail value of $550 at the end of the year, after all sales have been recorded. The inventory manager wants to estimate the cost of this inventory by multiplying it by a cost to retail ratio.

If the conventional lower of cost or market method is used, what is the estimation of the cost of this remaining inventory?

the conventional lower of cost or market method uses the beginning inventory and mark ups to create the relationship.

cost - 1,000
retail - 1,850


the estimation of the cost is 1000/1850 x 550 or $297

20

An entity has a beginning inventory of $100 with a retail value of $150. The entity then buys inventory of $900 with a retail value of $1,600. During the year the entity marks up some of the inventory by $100, while marking down the other inventory by $300. Assume the entity has inventory with a retail value of $550 at the end of the year, after all sales have been recorded. The inventory manager wants to estimate the cost of this inventory by multiplying it by a cost to retail ratio.

If the FIFO method is used, what is the estimation of the cost of this remaining inventory?

The FIFO method uses the purchases, mark-ups and mark-downs to create the relationship between cost and retail value


cost $900
retail $1,400


the estimation of cost of this inventory is 900/1400 x 550 or $354

21

An entity buys one item of inventory for $6. Later, the entity buys another unit for $10. Later it makes a sale for $19.

What cost its transferred from inventory to COGS?

FIFO - $6 COGS, $10 inventory

LIFO - $10 COGS, $6 inventory

Average Cost - $8 COGS, $8 inventory

22

In a period of inflation, which cost flow assumption will have the highest COGS? Which will have the highest inventory costs on the B/S?

in periods of inflation, the first purchases will have the lowest cost, while the ending items have the highest cost.

FIFO - cost of early items is transferred to COGS, and the cost of the last items remain in inventory. COGS tend to be low and ending inventory tends to be high.

LIFO - cost of last items is transferred to COGS, and the cost of the early items remains in inventory. Thus COGS tends to be high and ending inventory tends to be low.

23

An entity buys some inventory on Monday, more inventory on Tuesday and even more on Wednesday. On Friday, the entity sells a portion of these goods.

When does the entity transfer costs from inventory account to COGS?

If the entity is using a perpetual system to monitor its inventory, it will transfer the cost of the units sold to COGS on Friday. A perpetual system is designed to provide up-to-date figures in both the inventory account and COGS so the change is recorded when it happens.

If the entity is using a periodic system to monitor its inventory, it will wait until the end of the year to determine COGS. A periodic system makes no attempt to keep an up-to-date balance for the inventory accounts.

24

An entity buys inventory 3 times during the year and makes one sale, shown chronologically as follows

Buy 100 units @ $10
Buy 100 units @ $12
Sell 100 units
Buy 100 units @ $15

The entity has 200 units left at the end of the year. The entity paid a total of $3,700 for the 3 batches of inventory.

If the entity is using a perpetual FIFO system what is COGS?

100 units @ $10 or $1,000

25

An entity buys inventory 3 times during the year and makes one sale, shown chronologically as follows

Buy 100 units @ $10
Buy 100 units @ $12
Sell 100 units
Buy 100 units @ $15

The entity has 200 units left at the end of the year. The entity paid a total of $3,700 for the 3 batches of inventory.

If the entity is using a periodic FIFO system what is COGS?

100 units @ $10 or $1,000

26

An entity buys inventory 3 times during the year and makes one sale, shown chronologically as follows

Buy 100 units @ $10
Buy 100 units @ $12
Sell 100 units
Buy 100 units @ $15

The entity has 200 units left at the end of the year. The entity paid a total of $3,700 for the 3 batches of inventory.

If the entity is using a periodic LIFO system what is COGS?

100 units @ $15 or $1,500

27

An entity buys inventory 3 times during the year and makes one sale, shown chronologically as follows

Buy 100 units @ $10
Buy 100 units @ $12
Sell 100 units
Buy 100 units @ $15

The entity has 200 units left at the end of the year. The entity paid a total of $3,700 for the 3 batches of inventory.

If the entity is using a perpetual LIFO system what is COGS?

100 units @ $12 or $1,200

28

An entity buys inventory 3 times during the year and makes one sale, shown chronologically as follows

Buy 100 units @ $10
Buy 100 units @ $11
Sell 100 units
Buy 100 units @ $15

The entity has 200 units left at the end of the year. The entity paid a total of $3,700 for the 3 batches of inventory.

If the entity is using a periodic average cost system what is COGS?

100 units @ $12 or $1,200

1,000
1,100
1,500
3,600/300 = 12

29

An entity buys inventory 3 times during the year and makes one sale, shown chronologically as follows

Buy 100 units @ $10
Buy 100 units @ $11
Sell 100 units
Buy 100 units @ $15

The entity has 200 units left at the end of the year. The entity paid a total of $3,700 for the 3 batches of inventory.

If the entity is using a perpetual average cost system what is COGS?

100 units @ 10.50 or $1,050


1,000
1,100
2,100/200 = 10.50

30

Inventory is sold to a customer for $1,000 with terms of 2/10, n/30. What do these terms mean?

The term 2/10, n/30 means that the buyer can take a 2% discount on the invoice price if paid within 10 days. The net amount that is not paid in 10 days must be paid in full in 30 days.

31

An entity has a beginning inventory of $100 with a retail value of $150. The entity then buys inventory of $900 with a retail value of $1,600. During the year the entity marks up some of the inventory by $100, while marking down the other inventory by $300. Assume the entity has inventory with a retail value of $550 at the end of the year, after all sales have been recorded. The inventory manager wants to estimate the cost of this inventory by multiplying it by a cost to retail ratio.

If the FIFO lower of cost or market method is used, what is the estimation of the cost of this remaining inventory?

the FIFO lower of cost or market method uses the purchases and the mark-ups to create the relationship between cost and retail value.

cost - 900
Retail - 1,700

the estimation of the cost of this inventory is 900/1,700 x 550 or $291