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Flashcards in Inventory Deck (43):

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures


When does ownership of goods transfer when shipped FOB Shipping Point? Pg. 7-1

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock (when transferred to carrier)


When does ownership transfer when goods are sent FOB Destination?

FOB Destination keeps the items in the seller's inventory until it reaches the buyer


Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers


When are discounts recorded under the gross method?

Under the gross method, discounts are recorded only when used.


Under the net method, when are discounts recorded?

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.


How is gross margin calculated? Pg. 7-3

Gross Margin : Sales - COGS (BI + P - EI)


Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.


Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method


In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.


How is inventory turnover calculated?

COGS / Average Inventory


How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover


Under a consignment system, who holds the consigned goods in inventory?

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.


Under a consignment system, does the consignee hold consignment inventory in their own inventory? Inventory #14

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.


What effect does overstatement or understatement of inventory have on ending retained earnings?

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.


How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under


Which costs are included in COGS first under the FIFO (first in first out) system?

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes


Which costs are included in COGS under the LIFO (last in first out) system?

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50


How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit


How does FIFO's COGS relate to LIFO's in a time of changing prices?

FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.


How do FIFO and LIFO change in a period of rising prices?

FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High


How do FIFO and LIFO change in a period of falling prices?

FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low


Under a Lower of Cost (how much you paid) or Market, how are the benchmarks calculated? Pg. 7-12

*Why is lower of cost or market implemented? Pg. 7-12

*What is important to remember about the limits?

*What is the main reason to find lower of cost or market?

Ceiling : Sales price - Cost of disposal = NRV
Floor: NRV - Normal Profit = Floor
Replacement Cost: Purchase price
*Whatever is in the MIDDLE of the 3 numbers will be considered MARKET; compare it to cost of item

*Due to conservatism and matching

*The market value of inventory cannot be higher than "ceiling"

*To find ending inventory


What is cost of sale? Pg. 7-1

Prepares it for its INTENDED USE; Includes all cost of acquisition and preparation for sale; NO abnormal costs (expensed as incurred)


Inventory Valuation
Dollar Value LIFO Pg. 7-7 => used for big companies; homogenous; dollars are used and not units

How do you find ending inventory at base year?

*What is the concept of $value LIFO

Ending inventory / Inflation Factor (CPI) => price of each at end of inventory @ Base => find the difference
= Ending inventory @ base year

*Divide ending inventory by inflation factor to compare "APPLES to APPLES"; then reinflate the difference


What are inventory estimation methods and name examples Pg. 7-15

a) Gross Profit Method
b) Conventional Retail Inventory Method
c) LIFO Retail Inventory Method
*What to look for?
*What is not included in cost, and what is not included in retail?

Used to estimate ending inventory to prepare interim financial statements (dont have to wait till end of year), or as an estimate if ending inventory is missing or destroyed

a) COGS% = 1 - gross profit %
b) Markups are up, and markdown are down; find cost/retail %
c) Markups are up, but markdown are also UP
*Look at Cost / Retail % = Good available for sale
*Net markups


How to solve inventory problems which involve: Pg. 7-18
a) Moving average
b) Weighted average

*Main change: Sold on will be different for each
a) Just go in order because "on-time, real-time"; COGS per price is from dividing inventory by units bought
b) Put all "bought" together
c) Same as "Moving Average" but use COGS per price by using cost of first "bought"
d) Same as "Moving Average" but split amount of COGS with last and first and use their dollar amounts


How to find ending inventory at base year? (Dollar Value LIFO) Pg. 7-7

*Purpose of dollar value LIFO?

Ending inventory / Inflation factor

*Instead of counting per units, count how much its worth


What are the characteristics of FIFO if prices go up? Pg. 7-4

*Fairly states B/S therefore ending inventory is OK
*COGS understate
*Income overstate

*Perpetual and periodic inventory systems are same


What are the characteristics of LIFO if prices go up? Pg. 7-4

*Fairly states I/S
*Income OK
*Ending inventory understated

*Perpetual and periodic inventory systems are different


What should be the cost of inventory? Pg. 7-1

All NORMAL costs incurred to acquire inventory and get it ready for its intended use


What is the equation of the conventional retail method which is a part of retail inventory methods? Pg. 7-15

*Cost VS Retail

*Cost: Beginning Inventory + Purchases + Freight in (NET MARKUP not included) = Get C/R %
* Retail: Beginning Inventory + Purchase + (Freight IN not included) + Net markup = Get C/R %


How to get COGS? Pg. 7-15

*Relationship between Gross Profit and COGS

*How to get Operating Income with is part of the income statement

Beginning Inventory
+ Purchases
= Goods Available for Sale

= Cost of Goods Sold


= Gross Margin

= Operating Income


For long-term construction contracts, when do losses get booked? Pg. 23-1



What is the Cost to Cost Method? (Percentage of Completion) Pg. 23-2 Purpose?

*Purpose: To find profit; not used to find liability

Cost Incurred to Date / TOTAL construction costs (acutal + estimated to complete)
= Percentage of Completion
x Total Profit (profit always changes) => contract price - total cost
= Profit Recognized to Date (what you spent so far, and not just that year)
- Profit Previously Recognized (prior years)
= Profit to recognize This Year


What are characteristics of a long-term construction contract? Pg. 23-1

What is the percentage of completion method?

Provides that the seller may bill the purchaser at intervals as it reaches various points in the project

Recommended when collection is assured and when costs to complete the contract and estimates of progress toward the completion are reasonably dependble; better MATCHING


What part of cost of inventory will be capitalized? Pg. 7-1

Includes all costs of acquisition and preparation for sale => INTENDED USE; includes transportation and insurance; dont include ABNORMAL COSTS!!!


For IFRS, which inventory costing method is not used, FIFO or LIFO? Pg. 7-4



a) FIFO relates to which financial statement? Pg. 7-4
b) LIFO relates to which financial statemnt?

a) B/S
b) I/S


Is a perpetual inventory system record keeping simple or complex? Inventory #17



For each inventory system, what is the equivalent term?
a) Perptual
b) Periodic

a) Moving avg
b) Wtd avg


What is the significance of cost of goods sold? Pg. 7-1

What is SG&A?

It's is the cost of acquisition and preparation for sale for its INTENDED USE!!!; considered its product cost

Selling, general, and administrative; it is considered a period cost; includes freight out


What is the significance of inventory errors? Pg. 18-6

They correct themselves after 2 years; therefore retained earnings would only include current year