Inventory

Question 1

<p>Which costs are inventoriable?</p>

Answer 1

<p>Purchases - net of discounts

Freight - FOB Shipping point costs go to buyer, FOB Destination costs charged to seller

Warehouse expenditures</p>

Question 3

<p class=”large” style=”text-align:center”;>When does ownership of goods transfer when shipped FOB Shipping Point?</p>

Answer 3

<p class=”large” style=”text-align:center”;>FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock</p>

Question 3

<p>When does ownership transfer when goods are sent FOB Destination?</p>

Answer 3

<p>FOB Destination keeps the items in the seller’s inventory until it reaches the buyer</p>

Question 4

<p>Which costs are non-inventoriable?</p>

Answer 4

<p>Sales Commissions

Interst on liabilities to vendors

Shipping expense to customers</p>

Question 6

<p class=”large” style=”text-align:center”;>When are discounts recorded under the gross method?</p>

Answer 6

<p class=”large” style=”text-align:center”;>Under the gross method, discounts are recorded only when used.</p>

Question 6

<p>Under the net method, when are discounts recorded?</p>

Answer 6

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

Unused discounts are allocated to financing expense.</p>

Question 7

<p>How is gross margin calculated?</p>

Answer 7

<p>Gross Margin = Sales – COGS (BI + P – EI)</p>

Question 8

<p>Describe the periodic inventory system.</p>

Answer 8

<p>Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.</p>

Question 10

<p class=”large” style=”text-align:center”;>Describe the perpetual inventory system.</p>

Answer 10

<p class=”large” style=”text-align:center”;>Inventory count continually updated

Uses a moving-average cost flow method</p>

Question 10

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

Answer 10

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

Question 11

<p>How is inventory turnover calculated?</p>

Answer 11

<p>COGS / Average Inventory</p>

Question 12

<p>How is Average Day's Sales in inventory calculated?</p>

Answer 12

<p>365 / Inventory Turnover</p>

Question 14

<p class=”large” style=”text-align:center”;>Under a consignment system, who holds the consigned goods in inventory?</p>

Answer 14

<p class=”large” style=”text-align:center”;>The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.</p>

Question 14

<p>Under a consignment system, does the consignee hold consignment inventory in their own inventory?</p>

Answer 14

<p>No. Consignment goods are maintained in the inventory of the consignor, not the consignee.</p>

Question 15

<p>What effect does overstatement or understatement of inventory have on ending retained earnings?</p>

Answer 15

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

Misstatement of ENDING inventory does have an effect on retained earnings.</p>

Question 16

<p>How does misstatement of ending inventory effect Ending Retained Earnings?</p>

Answer 16

<p>EI Over = COGS Under = ERE Over

EI Under = COGS Over = ERE Under</p>

Question 17

<p>Which costs are included in COGS first under the FIFO (first in first out) system?</p>

Answer 17

<p>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</p>

Question 19

<p class=”large” style=”text-align:center”;>Which costs are included in COGS under the LIFO (last in first out) system?</p>

Answer 19

<p class=”large” style=”text-align:center”;>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</p>

Question 19

<p>How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?</p>

Answer 19

<p>COGAS / Total Units = Weighted Average Cost Per Unit</p>

Question 20

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

Answer 20

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

Question 21

<p>How do FIFO and LIFO change in a period of rising prices?</p>

Answer 21

<p>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</p>

Question 22

<p>How do FIFO and LIFO change in a period of falling prices?</p>

Answer 22

<p>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</p>

Question 23

<p>Under a Lower of Cost or Market, how are the benchmarks calculated?</p>

Answer 23

<p>Market Ceiling = Net Realizable Value = Selling Price - Selling Costs

Market = Replacement Cost

Market Floor = Net Realizable Value - Normal Profit</p>