Inventory Flashcards

1
Q

How is inventory valued?

A

Inventory should be recognized at the amount that includes all of the costs to acquire and get the inventory ready and available for sale (“their intended use”). Purchases - Net of any discounts.

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2
Q

Are Sales Commissions an inventoriable cost?

A

No! This is a common mistake!

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3
Q

When does ownership of goods transfer when shipped FOB Shipping Point?

A

Title passes to the buyer when the seller delivers goods to a common carrier (is shipped). Included in buyer’s books at year end if in hands of common carrier.

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4
Q

When does ownership transfer when goods are sent FOB Destination?

A

Title passes to the buyer when the buyer actually receives the goods from the common carrier (shipper). Remains in seller’s books until received by buyer.

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5
Q

Describe the periodic inventory system. What is its associated average cost method?

A

Inventory is “physically counted” at certain times throughout the period (minimum at EOY). Weighted-average cost flow method is the associated average cost method.

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6
Q

Under the periodic inventory system, where do purchases go?

A

Purchases go to an intermediate “Purchases” asset account.

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7
Q

Describe the perpetual inventory system. What is its associated average cost method?

A

Inventory count is continually updated, the calculation of the cost of the item of inventory sold is made after each individual sale.

Moving-average cost flow method is the associated average cost method.

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8
Q

Under the perpetual inventory system, where do Purchases go?

A

Purchases go straight to “Inventory”.

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9
Q

What type of items is the specific identification method of inventory applicable?

A

Heterogeneous (different or unique, and thus usually rather expensive) items of inventory, such as merchandise in a jewelry store or serialized electronic merchandise where records are kept by serial number

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10
Q

What type of items (heterogeneous or homogeneous) are most inventory methods applicable to?

A

Homogeneous (similar) items of inventory

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11
Q

What are consigned goods?

A

Consigned goods are given by one company (the consignor) to another company (the consignee) for that second company to sell to the end consumer. Goods may be consigned because the consignee is physically closer to the consumer or because consignment enables the consignor to get a wider distribution of goods than the company could achieve on its own.

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12
Q

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

A

The CONSIGNOR holds the consigned items in their inventory count.

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13
Q

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

A

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

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14
Q

Are costs incurred by the consignor in transferring goods to the consignee considered inventory costs? What might some of these costs be?

A

Yes. Freight on shipments, warehousing costs, and in-transit insurance would be the most likely additional costs that would be included

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15
Q

How is Cost of Goods Sold calculated?

A

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

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16
Q

How is Cost of Goods Available for Sale calculated? (Provide both equations)

A

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

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17
Q

How is Gross Profit calculated?

A

Sales - COGS (i.e. Begin Inventory + Purchases - Ending Inventory) = Gross Profit

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18
Q

How is Operating Income calculated?

A

Sales - COGS (which equals Gross Profit) - SGA = Operating Income

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19
Q

Under the periodic inventory system, when are Cost of Goods Sold (and changes in inventory) calculated?

A

The end of the operating period (when a physical ending inventory count is made). At a minimum, at the end of the year

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20
Q

Under the periodic inventory system, what is the journal entry to determine the COGS “plug”?

A

Dr. Ending Inventory (physically counted)
Cr. Beginning Inventory
Cr. Purchases
Dr. Cost of Goods Sold (PLUG)

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21
Q

Are the newest or oldest costs included in COGS under the FIFO (first in first out) system?

A

“LISH” (Last in, Still Here). The first (oldest) inventory in stock is the first inventory recorded for COGS purposes.

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22
Q

Are the newest or oldest costs included in COGS under the LIFO (last in first out) system?

A

“FISH” (First in, Still Here). The last (newest) inventory in stock is the first inventory recorded for COGS purposes.

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23
Q

How does the FIFO cost flow system relate to LIFO’s regarding valuations for COGS, Inventory, and/or Profit in a time of changing prices (up or down)?

A

FIFO has an opposite relationship to LIFO in periods of rising or falling prices.

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24
Q

How do LIFO and FIFO impact inventory, COGS, and Profit calculations under rising prices?

A

FIFO Higher Ending Inventory and Higher Profits (as it will have the Lowest associated COGS); LIFO will have Higher COGS (and thus lower associated Inventory and Profit).

25
Q

How do LIFO and FIFO impact inventory, COGS, and Profit calculations under falling prices?

A

LIFO Higher Ending Inventory and Higher Profits (as it will have the Lowest associated COGS); FIFO will have Higher COGS (and thus lower associated Inventory and Profit).

26
Q

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

A

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

27
Q

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

A

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

28
Q

What is a self-correcting error?

A

A self-correcting error is one that will correct itself in time, even if it is not discovered. The miscounting of inventory is a self-correcting error. While the error in ending inventory will have an effect on two balance sheets and two income statements, if inventory is correctly counted at the end of the next year, then there will be no further errors as a result of the miscounting.

29
Q

How does overstating and understating ending inventory affect Ending Retained Earnings?

A

Ending Inventory Overstated = COGS is Understated, so Profit (and Ending RE) is Overstated. Ending Inventory Understated = COGS is Overstated, so Profit (and Ending RE) is Understated.

30
Q

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

A

Cost of Goods Available for Sale (i.e., Beginning Inventory + Purchases) ÷ Total Units

31
Q

What does the LIFO Conformity rule stipulate?

A

That if an entity uses LIFO for tax purposes, it must also use it for financial reporting purposes.

32
Q

What is a LIFO layer?

A

A LIFO layer arises when a company purchases more inventory before it sells all of its previous purchase of inventory. Because we assume in LIFO that the most recently purchased (newest) inventory item is sold, it leads to having many different individual prices for the units in ending inventory. Each time the company buys more inventory before selling all of the inventory it has on hand, a layer is added.

33
Q

What is the main benefit to using Dollar-Value LIFO?

A

Reduced record-keeping costs

34
Q

Under Dollar-Value LIFO, is inventory measured in units?

A

No. It is measured in terms of dollar value by combining like inventory into “inventory pools”

35
Q

What is used to convert inventory value(s) from FIFO to Dollar-Value LIFO?

A

A price level index, with the CPI being perhaps the most common.

36
Q

Under Dollar-Value LIFO, what are the different methods for arriving at the needed price level index?

A

1) Simplified Method
2) Double Extension Method
3) Link-Chain Method

37
Q

Under Dollar-Value LIFO, how is the index calculated using the Simplified Method?

A

Trick question! No calculation is needed. A generally available price index, such as the CPI for our respective industry is used.

38
Q

Under Dollar-Value LIFO, what steps are taken to calculate ending inventory at current cost?

A

1) Calculate the ending inventory value @ base year prices by using inflation factor (CPI)
2) Subtract base to arrive at annual increase in inventory at base year price level
3) Multiply this annual increase by the inflation factor to give us the “layer” cost
4) Add this “layer” to the older (base cost) inventory “layer”

39
Q

Under Dollar-Value LIFO, how could the inflation factor/price level index be “back-calculated” for Simplified and Double Extension methods?

A

Ending Inventory (@ curent cost) ÷ Ending Inventory (@ base year cost)

40
Q

Under Dollar-Value LIFO, how does the Double Extension Method differ from the Simplified Method?

A

Instead of using a given price index with the Simplified Method, the Double Extension Method requires calculating the base year and current year inventory costs to back derive a price level index using quantities and unit costs applicable to both the base and current years

41
Q

How are the benchmarks calculated for Lower of Cost or Market?

A

Market Ceiling = Net Realizable Value = Selling Price - Selling Costs
Market = Replacement Cost
Market Floor = Net Realizable Value - Normal Profit

42
Q

What is obsolete inventory and how is treated/recognized?

A

Inventory that is obsolete can no longer be sold and should not be included in the inventory balance on the balance sheet. Any inventory that becomes obsolete should be written off as a loss in the period in which it is determined to be obsolete.

43
Q

How is Gross Profit Margin calculated?

A

Gross Profit ÷ Sales

44
Q

Using the Gross Profit Method (i.e. given a gross profit margin), how does one determine Ending Inventory?

A

A Gross Profit Margin allows us to “back in” to calculating Cost of Goods Sold (1 - gross profit margin = COGS %; multiplying COGS % by sales = COGS). With the Cost of Goods Sold figure, you then plug it into the equation for Cost of Goods Sold (Begin Inv. + Purchases - Ending Inv.) to solve for Ending Inventory.

45
Q

Which inventory estimation method approximates LCM?

A

Conventional Retail Inventory Method

46
Q

Using the Conventional Retail Inventory Method, what comprises the Cost to Retail percentage?

A

The Goods Available for Sale amounts for both Cost and Retail amounts, which are calculated by:

1) The respective Beginning Inventory and Purchases figures associated with Cost and Retail amounts
2) The Cost amount includes Freight-in
3) The Purchases amount includes Net Markups

47
Q

Using the Conventional Retail Inventory Method, how is Ending Inventory at Cost calculated?

A

Beginning with the Goods Available for Sale figure from the Cost to Retail Percentage, remove any 1) Net Markdowns, 2) Losses, and 3) Sales @ Retail to arrive at Ending Inventory (@ Retail). Multiplying this figure by the Cost to Retail percentage to yield Ending Inventory (@ Cost)

48
Q

How does the Cost to Retail percentage under the LIFO Retail Inventory Method differ from the Conventional Retail Inventory Method’s Cost to Retail percentage?

A

1) Beginning inventory is excluded from the cost to retail percentage calculation.
2) Net Markdowns are included in the calculation

49
Q

How are losses stemming from firm purchase agreements recognized? What Journal Entry is used?

A

Estimate until realized. Use below JE:
Dr. Estimated Loss (I/S)
Cr. Estimated Liability

50
Q

What are goods out on approval?

A

Goods currently held by the customer, but have yet to be purchased by the customer. The customer physically has the product and has a period of time to decide whether to purchase or return it. Goods-out-on-approval items should be included in inventory at their original cost until the customer accepts the goods. Only when the customer accepts the goods (or the time period for return passes without the customer returning the goods) will the sale be recognized and the cost of the inventory moved to cost of goods sold.

51
Q

Is Interest on liabilities to vendors an inventoriable cost?

A

No! This is a common mistake!

52
Q

Is Shipping expense to customers an inventoriable cost?

A

No! This is a common mistake!

53
Q

Are warehousing costs prior to sale an inventoriable cost?

A

Yes

54
Q

Is insurance an inventoriable cost?

A

Yes

55
Q

Is repackaging an inventoriable cost?

A

Yes

56
Q

Are modifications an inventoriable cost?

A

Yes

57
Q

Is Freight-in paid by the buyer an inventoriable cost?

A

Yes

58
Q

Are “abnormal costs” such as idle factory expense, unallocated fixed overhead, excessive spoilage, and double freight an inventoriable cost? How are abnormal costs recognized?

A

No. They should be expensed as incurred.