Flashcards in Inventory Deck (36):
The Seller bears all costs ot transporting the goods to the buyer.
Title passes to the buyer when the goods are received at their final destination.
FOB Shipping Point
Buyer is reponsible for shipping costs .
Title passes to the buyer when the carrier recieves the goods.
If the test is silent on whether FOB ship or destination assume it's FOB Shipping Point.
When you keep the goods even when they're non-comformant bc the seller gives you a "discount" break on the bill - making the payable smaller.
Avg. Invenotory = End Inv. from PY+Ending inventory from CY/2
#of times your inventory goes down to 0 during the year, the higher the better.
Number of days' supply in average inventory
# of days inventory is held before sale, shows efficiency of inventory policies.
Percentage of Completion Method - Construction Accounting
Income = Cost Incurred to date/Total estimated cost to complete x Profit
Profit = Contract Rev - Total estimated cost to complete.
In the 2 and every year after, you need to subtract the prior year income, bc this is an accumulated amount.
=COG Avail for sale
- Ending Inventory
Cost of Goods Purchased Calculation
-Puchase Returns and Allowances
+Freight-in or Transport-in
Net Mothod of accounting for purchases
Any purchases discounts offered are assumed taken and the puchase account reflects the net price.
Purchase $100 discount 2/10 net 30
Dr. Purchases $98
Cr. AP $98
Dr. AP $98
Cr. Cash $98
Discount not taken
Dr. AP $98
Cr. Cash $100
Cr. Purch disc lost $2 Treated as a period cost
Gross method of accounting for purchases
Purchases are recorded at gross then a seperate account "Purchase discount" - contra account to the purchases. Considered to be a product cost.
Don't take the discount
Dr. AP $100
Cr. Cash $98
Cr. Purchase discount $2
Weighted-Average Method (Periodic System)
Seller averages the costs of all items on hand and purchased during the period. The units in ending inventory and units sold (COGS) are costed at this average cost.
The goods from beginning inventory and the earliest purchased are assumed to be the first goods to be sold.
FIFO- describes COGS
Ending inventory - LIST - last in still there
B/S focus - better matching for ending inventory
FIFO under periodic and perpetual are the same
Last-In, First-Out (LIFO)
The most recent purchases are assumed to be the first goods sold; thus, ending inventory is assumed is assumed to be composed of the oldest goods.
Ending Inventory - FIST - First in still there
I/S focus - better matching for COGS
Different calc under periodic and perpetual
periodic- doesn't matter when we made the sale - find COGAS then find ending inventory
perpetual- does matter when you make the sale using the LIFO approach sell the items last in, first.
Moving Average (Perpetual System)
The average cost of goods on hand must be recalculated any time additional inventory is purchased at a unit cost different from the previously calculated average cost of goods on hand.
Determine Market Price (Lower of Cost or Market)
Market Cost = Replacement Cost
Replacement cost has to fall between the ceiling and the floor.
NRV= Sales Price - Cost to complete and dispose of.
Floor = NRV-Normal Profit Margin (% of Sales Price x Sales Price)
If replacement cost falls below the floor, the market is Floor, and if it's above the ceiling, market will be the ceiling.
If replacement cost falls between the ceiling and floor this is the market value.
Compare the cost vs. the Market (replacement cost).
Lower of Cost of Market (steps to calculate)
1. Determine the Market
Replacement cost - limited to the ceiling and floor.
2. Determin cost
Ending inventory: LIFO, FIFO, Weighted Avg, and moving avg.
3. Select either the lower of cost or market for each individual item or inventory as a whole.
Methods of recording inventory write-downs
1. Dr. COGS
The write down gets lost in COGS, losses aren't seperately disclosed.
2. Dr. Loss due to Market Decline
Seperate recognition, treated as a period cost.
Losses on purchase commitments
Result from legally enforceable contracts to purchase specific quantities of goods at fixed prices in the future.
Decline in market below the contract price at B/S date and contracts are noncancellable. Unrealized loss occurs and if material should be recorded on the period of decline.
Dr. Estimated loss on PC
Cr. Accrued loss on PC
LIFO applied to pools of inventory items rather than to individual items.
1. Nominal EI convert to the Base Year EI
2. Chang in the layer at Base Year prices
3. Convert Base Year layers to Nominal
4. Add up the layers
Find Price index= nominal year/base year
EI is estimated by using the GP percentage to convert sales to COG Presumed sold.
Not acceptable for tax or annual FS
Used to estimate ending inventory for internal use, interim FS, establishing loss due to destruction of inventory
Net Sales - COGS = GP
Mark up on sales: set sales at 100%(of sales $) and GP at the mark up % (ex. 25%)
Net Sales 100%
COGS- plug 75%
If markup on cost: set COGS at 100% and GP at 25% the plug is net sales at 125%
Consignor ships goods to Consignee wo sells them, goods belong to Consignor until sold.
Revenue is recognized by the consignor when goods are sold. Commission paid to the consignee is a selling expense, can not be netted against sales revenue.
Recognition of contract revenue and profit at contract completion.
Advantages- based on results not estimates
Disadvantages - current performance is not reflected and income recognition may be irregular.
Recognition of contract revenue and profit during construction based on expected total profit and estimated progress towards completion in the current period.
Advantage - periodic recognition of income
Disadvantage - dependence on estimates
Loss under Completed contract method or Percentage of Completion
If a loss is noticed during Year 2 of a 3 year contract, loss is recognized in the year that it becomes apparent. (Conservatism)
Percentage of Completion- Estimated Income calculation
Cost incurred to date/total estimated costs to complete x profit
Total estimated costs to complete - includes the cost incurred so far and the estimated costs to complete.
Profit = contract revenue - total estimated cost to complete.
Construction in Progress Inventory - % of completion
- the cost of construction
- the income recognized each year.
Billings on Contracts
Contra account to Construction in Progress
Any time you bill in excess of your cost and your profit (CIP), this is considered a CL.
Inventory ASC 330
Tangible personal property
1. held for sale in the ordinary course of business (Finished goods)
2. in the process of production for such sale (WIP)
3. to be used currently in the production of items for sale (raw materials)
Anticipated loss on a long-term contract
Should be recognized immediately for both the percentage -of-completion and the completed-contract method.
Classification of Progress Billings on Contracts account
Under the percentage-of-completion method
Progress billings is a contra-account to the CIP account, CIP is netted with the progress billings account. If CIP exceeds billings, the excess is reported as a current asset. If billings exceed CIP, the excess is reported as a current liability.
Which method of accounting for inventory is not allowed under IFRS?
Under IFRS, the Specific Identification method of accounting for inventory is required for?
Inventory items that are not interchangeable and goods that are produced and segregated for specific projects.
Gross Profit method of accounting for inventory- IFRS
Can be used to estimate ending inventory when a physical count is not possible.
Valuation of Inventory- IFRS
Inventories are carried at the lower of cost or Net realizeable value
Exception: Agricultural inventories (biological assets) which are carried at Fair Value less costs to sell at the point of harvest.
Net realizeable Value (calculation)
NRV= Estimated selling price - estimated costs of completion and sale.