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FAR - CPA test > Inventory > Flashcards

Flashcards in Inventory Deck (27):
1

Define Inventory.

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

2

Is inventory a current or noncurrent asset?

Inventories are always current assets to the seller even though they may be noncurrent assets to the buyer.

3

What items are included in inventory

Goods in transit (FOB destination if seller and FOB shipping point if buyer) Goods on Consignment, frienght in, taxes, material handling costs and packaing costs, fixed overhead, direct material, labor and variable overhead

subtract out any purchase discounts and returns and allowances.

do not include any interest fees

4

What is FOB Shipping point?

means title passes at the shipping point (the selling company's warehouse), therefore the goods belong to the purchaser as soon as it is loaded on a common carrier

5

What is FOB Destination?

means that title to the goods transfers to the buyer when the goods reach the destination

6

What is the Retail Inventory Method?

The retail inventory method, which is really a family of related methods, is based on three basic calculations.

First, ending inventory at retail is calculated or counted at year-end.

Second, the cost-to-retail ratio is calculated.

Third, the ending inventory at retail is multiplied by the cost-to-retail ratio to arrive at estimated inventory at cost.

EI(cost) = EI(retail) X Cost to retail ratio

7

What is the Original Selling Price?

Cost plus initial markup

8

What are the Net Additional Markups in the retail inventory method? ?

A net increase in the original selling price. This amount is added only in the retail column and before computing the cost-to-retail ratio.

9

What are net additional mark downs in the retail inventory method?

A net decrease in the original selling price.
This amount is subtracted only from the retail column and before computing the cost-to-retail ratio.

10

How is Transportation In treated in the retail inventory method?

Added in the cost column only, before computing the cost-to-retail ratio.

11

How is Purchase Discounts treated in the retail inventory method?

Subtracted in the cost column only, before computing the cost-to-retail ratio.

12

How is Purchase Returns and Allowances treated in the retail inventory method?

This amount is subtracted in both the cost and retail columns before computing the cost-to-retail ratio

13

How is Employee Discounts treated in the retail inventory method?

This amount is subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio.

14

How is Normal Spoilage treated in the retail inventory method?

Shown at retail value, subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio.

15

How is abnormal casualty loss treated in the retail inventory method?

Shown at both cost and retail, the amount of merchandise available for sale has declined. Reduce the cost and retail value of goods available for sale before computing the cost-to-retail ratio

16

What is Dollar Value Lifo Retail?

Shown at both cost and retail, the amount of merchandise available for sale has declined. Reduce the cost and retail value of goods available for sale before computing the cost-to-retail ratio

17

What are the two steps for Dollar Value LIFO Retail?

1. DV LIFO is first applied to inventory at retail only
2. the FIFO retail method cost-to-retail ratio is applied to this retail layer yielding the increase in cost at current prices. Finally, this cost layer is added to beginning inventory at DV LIFO cost to yield ending inventory at DV LIFO cost.

18

What is the basic steps in Dollar Value LIFO Retail?

BI DV LIFO $ 100.00
EI(retail, FIFO) = $285.00
EI(retail, base-year dollars) = $285(1.00/1.08) = $263.89
Increase in EI(retail, base-year dollars) = $263.89 - $145 = $118.89
Increase in EI(retail, FIFO) = $118.89(1.08/1.00) = $128.40
Increase in EI(cost, FIFO) = $128.40(.6383)* 81.96
EI DV LIFO $181.96

19

What does a counterbalancing error mean?

If it is never discovered, retained earnings automatically corrects itself, and with the new count of inventory at the end of the second year, the error disappears. However, the errors in the two years' financial statements do not automatically correct and would be present in the comparative statements

20

What happens if the inventory error is never discovered?

1. 1st year: purchases are understated, CGS understated, net income overstated, ending retained earnings overstated.
2. 2nd year: purchases are overstated, CGS overstated, net income understated, ending retained earnings is correct (error has counterbalanced).
3. But the errors remain in both years' statements shown comparatively with later statements.

21

What happens if the inventory error is discovered in year 2?

Retained earnings at the beginning of year 2 is corrected by this entry, and year 1's income (and any other accounts affected) would be corrected in the year 1 statement reported comparatively with year 2.

22

What happens if the inventory error is discovered in year 3?

No entry is needed because retained earnings is correct - the error has counterbalanced. The statements for years 1 and 2 would be corrected if shown comparatively with year 3.

23

What is a purchase commitment?

Companies often commit (in a contract) to the purchase of materials to lock in the unit price of an item needed for production or resale in order to aid in cash flow budgeting and to protect against price increases. Sometime the market price of the item declines below the contract price. The accounting for this price decline depends on whether the contract can be revised in light of the changing market conditions

24

How do you treat the loss on a purchase commitment when the contact can be modified?

In this case, 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.

25

How do you treat the loss on a purchase commitment when the contact cannot be modified?

In this case, the loss must be accrued because the loss is probable and estimable

26

Does IFRS value inventory at LCM?

No, lower of cost or net realizable value

27

Does IFRS allow LIFO?

No, its prohibited