Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

FAR - 4 > Inventory > Flashcards

Inventory Flashcards

(96 cards)

Start Studying
1
Q

Inventory

A

core of business operating asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

types held for resale

A

retail (finished goods only)- resold in substantially the same form in which it was purchased- like walmart

manufacturer:
raw materials (inventory being held for use in production process)

work in process (inventory that is in production but incomplete)

finished goods (inventory in production that is complete and ready for sale)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Goods and materials to be included in inventory

A

general rule is that the goods and materials in which the company has legal title should be included in inventory; and this legal title generally occurs after the possession of goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

inventory

A

current asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

goods in transit

A

title passes based on conditions agreed upon by the parties

if no conditions explicitly agreed upon ahead of time, title passes to buyer at the time and place where the seller’s performance regarding the delivery of goods is complete

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

f.o.b

A

free on board; requires seller to deliver goods to location determined as FOB ON THE SELLER’S EXPENSE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Goods in transit**

A

WHO ARE WE? buyer or seller

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

FOB shipping point

think of amazon

A

buyer pays

once the seller’s ships the good or delivers it to the common carrier, included in buyer’s inventory upon shipment

buyer is in LA and seller is in new york the moment seller puts the goods in the truck in new york buyer owns it;

it is freight in for the buyer, adds to the cost of inventory; buyer’s inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

FOB destination

A

seller pays

title passes to buyer when buyer receives good from carrier

title transfers in la in the example above

freight out: selling expense; seller’s inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

shipment of non conforming goods

A

if seller ships wrong goods they belong to the seller once rejected by the buyer

should be included in seller’s inventory

ALWAYS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

sale with a right to return

A

1) CAN YOU REASONABLY ESTIMATE RETURNS?

General rule: sold goods, buyer has the right to return, should be included in seller’s inventory IF the amounts of goods likely to be returned cannot be estimated; cannot record sales cogs etc

if the returns can be reasonably estimated, transaction will be recorded as sale with an ALLOWANCE for returns;

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

revenue from a sale where customer has right to return shall be recognized at time of sale

A

IF ALL THE CONDITIONS ARE MET:

sale price substantially fixed at date of sale, buyer assumes risk of loss; buyer has paid some form of consideration; product sold is subs complete; amount of future returns can be reasonably estimated

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

if returns can be reasonable estimated

A

transfer of title has happened already

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

consigned goods

A

consignor : true owners

consignee: selling agent

inventory cost or COGS: includes shipping cost to the consignee SO:

Sales - Gogs = GP -(commission paid to consignee+ advertising to sell the final products) = NI

the seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor’s behalf

original owners still own the title and risk of loss so they include the inventory

revenue only recognized when all the above conditions are met and the goods are sold to third party

title passes directly to third party buyer at point of sale and not to the consignee at any point in time

ALL this unless there is an agreement otherwise

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

public warehouses

A

inventory held by original owners even though posession with warehouse

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

sales with mandatory buyback

A

seller should include goods in inventory even though buyer has the title

in this case seller has a requirement to repurchase goods from the buyer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

installment sales

A

if goods sold on installment basis but retains legal title as security for the loan:

if % uncollectible debts cannot be estimated: seller includes

can be estimated: sale recorded with an allowance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Valuation

A

US GAAP: general rule stated at cost only if we think the goods are going to be sold at a profit;

as long as you think you’re going to be able to cover your carrying valueand go above it you are going to leave it at cost EVEN if you think replacement or reproduction cost is lower

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Valuation

A

US GAAP: general rule stated at cost only if we think the goods are going to be sold at a profit;

as long as you think you’re going to be able to cover your carrying valueand go above it you are going to leave it at cost EVEN if you think replacement or reproduction cost is lower

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

IFRS

A

does NOT permit LIFO

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Exception to the general cost rule

A

SP< Cost; we think we’re going to have a loss so we book that loss immediately

utility of goods no longer as great as cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

purpose of reducing inventory to lower of cost or market (profit) or lower of cost and net realizable value (loss)

A

to show probable loss is sustained (conservatism) in the period in which loss occurs (matching prin)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Pass Key

GAAP

A

If inventory is NOT lifo or retail:
measured at lower of cost and net realizable value. JUST LIKE IFRS

if inventory is LIFO or retail:
lower of cost or market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

IFRS

A

all inventory measured at lower of cost or net realizable value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Precious Metals and Farm Products
net realizable value SP-Cost when stated at a value in excess of cost, should be disclosed on the financial statements
26
Inventory write downs or loss
US GAAP: write down reflected in cogs if immaterial; **higher cogs lower profits if write down amount is material loss is identified separately on i/s IFRS: no specifications
27
Reversal of Inventory Write Downs
GAAP: not allowed IFRS: reversal limited to the amount of original write down; reduction of COGS
28
Lower of cost of market- old rule
US GAAP only: LIFO or retail can be applied to a single item, category, total inventory- method that most clearly reflects periodic income *when you separately apply LCM to each item-> most conservative EI
29
market value
middle value of an inventory's replacement cost, market ceiling, or market floor
30
replacement cost - 53
cost to purchase the item of invenotry as of valuation date
31
market ceiling - 70-4 = 66
item's selling price - costs to complete and dispose or sell called the net realizable value
32
market floor - 66-7 if profit margin is 10% of sp of 70 = 59
market ceiling - normal profit margin
33
Lower of cost and net realizable value
IFRS and GAAP (not LIFO or retail inventory)
34
net realizable value
SP- Cost to complete -> same as market ceiling
35
Example on 24**
max-> prevents loss in future periods min-> prevents excess profit realization in future periods
36
write down under lcm
dr. inventory loss due to decline in market value | cr. inventory
37
losses or write downs-> LCM
substantial and unusual or infrequent from LCM -> loss disclosed in income from continuing operations small losses -> cogs
38
types of inventory systems
periodic vs. perpetual
39
periodic = purchases = COGS = plug
inventory determined by physical count usually atleast annually does not keep running totals; *****ending inventory is physically counted and priced
40
purchases
bi+purchases = cogas - ei = cogs PURCHASES: net of returns and discounts
41
purchases disadvantage
shortages are lumped in with COGS
42
Perpetual
no purchases; everytime we buy inventory we debit it dont wait till the end of the period updated immediately
43
Journal entries
periodic: no cogs till end of period: dr. cash cr. rev purchases: dr. purchases cr. cash ``` perpetual: sale: dr. cash cr. sales dr. cogs cr. inventory ``` purchases: dr. inventory cr. cash THINK OF PERPETUAL AS NORMAL INVENTORY JOURNAL ENTIRES
44
primary cost flow assumptions
US GAAP: cost flow assumption used bu the company is not required to match physical inventory flows needs to most clearly reflect income from the period IFRS: 1) No lifo 2) method should be based on the order in which the products are sold relative to when they were put in the inventory (should match physical flows) 3) specific identification should be used wherever possible 4) same cost flow assumption should be used for all inventories similar in nature
45
specific identification
no estimating; cost of each item in inventory is unique and identified to that system -> BIG ITEM/HIGH VALUE car and win's number; follows the physical flow of that product
46
estimating
FIFO, LIFO, Weighted average
47
FIFO
irrelevant periodic or perpetual first in first out for COGS ei -> most recent items therefore most closely estimates replacement costs Rising prices: cogs are going to be lower; NI is going to be higher
48
FIFO Periodic and Perpectual
every number is same*******
49
weighted average-> generally periodic
total inventory costs including BI/ Total inventory including beg inventory = unit cost unit cost * number of units sold = COGS suitable for homogeneous products and a periodic inventory system
50
Moving average method -> NEED perpetual
computes the weighted average cost after each purchase: total cost of inventory after each purchase including BI/ total units available after each purchase then use that to calculate COGS more current than weighted average page 28**
51
LIFO
not permitted under IFRS, allowed under US Gaap if LIFO is used for tax purposes it must also be used to report financial statements ending inventory usually does not reflect replacement costs
52
LIFO financial statement effect
better matches expenses against revenues because matches current costs with current liab eliminates holding gains if selling for a period exceeds production there will be a distortion of net income because you'll start matching revenues to older LIFO layers
53
LIFO conformity rule
if you use for tax purposes have to use it for financial statements
54
LIFO Layers
UNLIKE FIFO LIFO PERIODIC IS NOT EQUAL TO LIFO PERPETUAL
55
LIFO layer
created each year in which ending inventory > beginning inventory (more unsold stuff) additional layer is priced at the earliest cost of the year in which it was created
56
Problem on F4-30*
periodic: normal perpetual: first 3000 sold from the first batch because we dont have choice now for the rem 1000 sold could come from the first batch or the second batch -> since its LIFO it comes from the second batch
57
COGAS
ALWAYS SAME perpetual periodic or moving average LIFO FIFO
58
EI
cogas - cogs different is in cogs
59
Table pass key!!
Periodic: FIFO->Weighted Avg-> LIFO EI: goes down COGS: goes up Perpetual: FIFO->Moving Avg->LIFO EI: goes down COGS: goes up SAME direction
60
Moving average
higher EI and lower COGS than weighted average method
61
Dollar Value LIFO
inventory is measured in dollars and is adjusted for changing price levels calculate using inventory numbers like normal LIFO and then adjust using price index
62
price index
internally computed or given to you = TOTAL ending inventory at year end cost/ ending inventory at base year cost
63
LIFO added in the current year at dollar value LIFO
LIFO layer at base year cost * price index
64
dollar value
estimate of change in price levels required relative to base year
65
NOT IN UNITS AT ALL
At base | Current year cost example on page 31
66
price index
different each year; ALWAYS calculated using ending balance
67
at base year or year 1
base year dollar inventory same as current year inventory
68
price index
only applies to LAYERS and not to ending balance
69
Firm purchase commitments
legal agreement to purchase a specific amount of goods at some time in the future must be disclosed if you think the contract price > market price and there is going to be some loss-> you recognize the loss AT THE TIME OF THE DECLINE IN PRICE (end of that year) under Other expenses/losses under IDA JE: Dr. estimated loss on purchase commitment cr. estimated liability on purchase commitment
70
understting overstating
handle each assumption separately then net
71
inventory
cost of inventory same when you are calculating
72
FOB shipping point
when IN THE TRUCK
73
GP%
% of sales
74
year 2 price index
use year 2 EI levels
75
year 2 price index
use year 2 EI levels
76
LIFO perpetual cogs
okay to start liquidating prior layers
77
consignment
ei of consignee + warehousing costs of consignor before they are transferred to consignee + shipping costs to consignee only include inventory at cost not mark up get rid of mark up payable not recorded till goods sold and if 10% commission 90% of sp is payable
78
LCM
can be applied to total inventory, groups of inventory or each item separately LOWEST INVENTORY AMOUNT: when applied to each item separately
79
lifo reserve credit balance DBT: Check!
diff between inventory on lifo method vs any other cost method find required diff between the two methods add or sub to LIFO reserve book additional to cogs should have been more of an increase
80
dollar value
single inv pool only?!! DBT
81
moving average IMP
Subtotals
82
commission
only a portion of sp
83
obsolete inventory
not a part of cogs written off from inventory operating loss not COGS-> unusual gains or losses on i/s
84
disadvantage of periodic
includes COGS and shortages shortages cannot be easily distinguished
85
noncancellable agreement
parts rem for the next two years so if parts become obsolete in year 1 and three year contract at the end of year 1 there are 2 years remaining so 2 years * min contract units * (actual purchase price - scrap value because you will get that value back)
86
advertising on consignment
all of it is expensed even if the entire inventory is not sold! commission however is based on sales and its amount
87
ending inventory consignment
cogs + charges needed to get inventory to place of consignment sale advertising and commission not included in cogs
88
ending inventory consignment
cogs + charges needed to get inventory to place of consignment sale advertising and commission not included in cogs
89
weighted avg normal
ignore actual sp!!
90
cost of inventory
insurance cost included
91
prepayment A/P
should be recorded as an asset and not a reduction in a/p
92
prices increased by 10%
include that as 10% of base prices
93
CPA 05113
DOUBT
94
congignee
freight cost, cost of merchandise shipped part of cogs so only on part sold
95
returns
record once you pass that return date when you cannot reasonably estimate returns
96
reversal of writedown
allowed under ifrs limited to previous write downs affects EI and COGS on I/S

FAR - 4 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions