Flashcards in INVENTORY Deck (67):
List some examples of natural resources.
Items such as gravel pits, coal mines, tracts of timber land, and oil wells.
List the requirements for inclusion in plant assets.
Currently used in operations; Have a useful life extending beyond one year; Have physical substance.
How do land improvements differ from land?
This asset differs from land in that it has a finite useful life and is depreciated.
List the two steps of Dollar Valued (DV) Last In First Out (LIFO) Retail.
Apply DV LIFO; Multiply by the cost ratio.
What is in the cost/retail numerator?
Net purchases at cost.
What is in the cost/retail denominator?
Net purchases at retail plus additional markups minus additional markdowns.
Define "base-year dollars".
Price level for the pool at the beginning of the year Dollar Valued (DV) Last In First Out (LIFO) adopted.
List the steps in applying Dollar Valued (DV) Last In First Out (LIFO retail method.
DV LIFO is applied to inventory at retail; FIFO retail method cost/retail ratio is applied to retail layer; Cost layer is added to beginning inventory at DV LIFO cost.
List the Dollar Valued (DV) Last In First Out (LIFO) conversion index formula.
Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars.
List the advantages of Dollar Valued (DV) Last In First Out (LIFO).
Reduces the effect of the liquidation; Allows companies to use FIFO internally; Reduces clerical costs.
How does the double-extension method affect ending inventory?
The ending inventory is extended at both base year cost and ending current year cost.
Why would an entity utilize Dollar Valued (DV) Last In First Out (LIFO)?
Reduces the effect of the LIFO liquidation.
List the attributes of Last In First Out (LIFO).
Matching of revenues and expenses is significantly improved over FIFO; Income tax advantages associated with LIFO; Balance sheet presentation is less than ideal
What effect does using Last In First Out (LIFO) have on the income statement?
Matching of revenues and expenses on the income statement become significantly improved.
List the attributes of First In First Out (FIFO).
Most closely approximates actual physical flow of goods for most companies; Balance sheet valuation of inventory is at more desired current cost; Matching of revenues and expenses on income statement is not ideal.
List some reasons to avoid Last In First Out (LIFO) liquidation.
Increases taxes; Does not match current period expenses and revenues.
What does Ending Inventory reflect in First In First Out (FIFO)?
Reflects the latest costs.
List the reasons for a Last In First Out (LIFO) liquidation.
Poor planning; Lack of supply.
What is the main reason for using Last In First Out (LIFO) in periods of rising costs?
What elements affect fixed overhead rates?
Subject to estimation errors and affected by the choice of denominator measure and the budgeting horizon reflected in the denominator.
What does inventory for a typical business entity include?
Includes property held for resale, property in the process of production, and property consumed in the process of production.
Is fixed overhead one of the four manufacturing input costs?
Yes, this is one of the input costs.
How is the ownership of goods shipped Free On Board (FOB) destination determined?
The seller owns the goods until they reach destination.
What merchandise is included in ending inventory?
All owned inventory, regardless of location.
What inventory costs are required to be capitalized?
All costs necessary to bring the item of inventory to salable condition.
Who is the owner of consigned goods?
The consignor (firm that shipped the inventory to consignee).
When is inventory reassessed under International Financial Reporting Standards (IFRS)?
At the end of each financial reporting period.
What is the net realizable value as defined by International Financial Reporting Standards (IFRS)?
The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimate costs necessary to make the sale.
Can a company following International Financial Reporting Standards (IFRS) standards use Last In First Out (LIFO) cash flow assumptions?
No, the company cannot use Last In First Out (LIFO) cash flow assumptions.
Under International Financial Reporting Standards (IFRS), is inventory reported at lower of cost or market OR at lower of cost or net realizable value?
Lower of cost or net realizable value.
List the three methods of assigning value to inventory under International Financial Reporting Standards (IFRS).
First In First Out (FIFO), specific identification, and weighted average.
How are adjustments for net realizable value applied?
Under International Financial Reporting Standards (IFRS), is reversal of a write down of inventory permitted?
Yes, it is permitted.
If an inventory error is discovered in year two, where is the difference recorded?
Beginning balance of Retained Earnings.
If an inventory error is discovered in year three, what is the impact on Retained Earnings?
There is no impact on Retained Earnings, the error has self-corrected.
If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on Cost of Goods Sold (COGS)?
The impact on COGS is understated.
In year one of an error, if purchases are understated, what is the impact on Retained Earnings?
The impact on Retained Earnings is overstated.
List the basic inventory equation.
Beginning inventory + net purchases = ending inventory + cost of goods sold.
What is the required accounting for a potential loss on a Purchase Commitment when the commitment cannot be modified?
The loss must be accrued because the loss is probable and estimable; Inventory is recorded at market, and a loss is recorded for the difference between contract and market; If contract is not executed as of the balance sheet date, loss is recognized and liability established.
Define "Purchase Commitment".
Type of commitment made when a firm commits to the purchase of materials at a set unit price.
If a firm has a Purchase Commitment that cannot be modified and the price declines, what journal entry should be booked?
DR: Loss on Purchase Commitment. CR: Liability on Purchase Commitment.
How do we account for the recovery of a Purchase Commitment loss?
A gain to the extent of the previously recognized loss.
What is the required accounting for a potential loss on a Purchase Commitment when the commitment can be modified?
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.
What is the basis on which Lower of Cost or Market (LCM) can be applied?
Individual Item, Category, Total Inventory; But must be consistent from year to year.
How is holding loss reported under the direct method?
Any holding loss related to inventory is simply included in cost of goods sold.
Define "market cost".
Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.
List the steps in Lower of Cost or Market (LCM) analysis.
Compute market value; Value inventory at lower of cost or market.
List the methods of recording Lower of Cost or Market.
Direct method or Allowance method.
Generally, what is replacement cost?
How is the cost of ending inventory determined?
Determined by applying one of the four cost flow assumptions .
How is holding loss reported under the allowance method?
Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.
How is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory.
List the formula to arrive at net realizable value.
Sales price - estimated cost to complete and sell the inventory.
What cost flow assumption utilizes the latest purchases at time of sale?
Last In First Out (LIFO).
What cost flow assumption is the same for both the periodic and perpetual systems?
First In First Out (FIFO).
For which method should an ending inventory count be made?
Both periodic and perpetual.
List the main differences between perpetual and periodic entries.
The use of the inventory account rather than purchases and recording cost of goods sold at sale.
What inventory system is implied when the moving average cost flow assumption is utilized?
Implies the perpetual inventory system.
How is Normal Spoilage handled?
Subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail.
What is excluded in the cost ratio of the First In First Out (FIFO) Lower of Cost or Market (LCM) Retail Method?
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Net markdowns are also excluded from the cost ratio.
What is included in the cost ratio of the Average Retail Method?
The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.
What is Original Selling Price?
Cost plus initial markup.
What are Net Markdowns?
A net decrease in the original selling price.
What is included in the Average Lower of Cost or Market (LCM) or Conventional Retail Inventory Method cost ratio?
The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator but excludes net markdowns from the cost ratio calculation.
What is included in the cost ratio of the First In First Out (FIFO) Retail Method?
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator.
What are Net Additional Markups?
A net increase in the original selling price.