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FAR > Inventory > Flashcards

Inventory Flashcards

1
Q

Trading organization - flow of inventory

A

buys and sells goods. does not produce goods.

opening finished goods
+ purchases
- units sold
= closing finished goods

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2
Q

Manufacturing organization - flow of inventory

A

produces goods from raw materials

opening raw materials
+ purchases
- UNITS TRANSFERRED TO PRODUCTION
= ending raw materials units

opening WIP
\+ UNITS TRANSFERRED FROM PRODUCTION
\+ freight-in
\+ insurance
\+ warehouse
\+ labor
\+ overheads
- UNITS PRODUCED
= ending WIP

opening finished goods
+ UNITS PRODUCED
- units sold
= closing finished goods

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3
Q

What is capitalized in inventory?

A

Capitalized:
direct material
direct labor
overheads (fixed & variable; aka indirect costs)
freight-in
inventory handling costs (insurance, warehouse cost)

Not capitalized:
freight-out
interest paid on loans to finance inventory
discount lost when using net method on purchases with credit discounts.

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4
Q

Inventory purchased on credit terms

A

If inventory is purchased and there are credit terms (e.g. 2/10 net 30), the expense needs to be recorded gross or net.

Gross - you do not expect to utilize the discount.

Net - you do expect to utilize the discount. If you record at net, but do not end up taking the discount the additional expense is treated as a financing expense. It is NOT added to inventory costs (capitalized)

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5
Q

When is revenue recognized and inventory derecognized?

A

When risks and rewards of ownership is transferred, revenue is recognized and inventory is derecognized.

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6
Q

FOB Destination

inventory policies

A

“freight-on-board” destination

risk transferred to buyer when the inventory REACHES the buyer’s destination

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7
Q

FOB Shipping Point

inventory policies

A

risk transferred to buyer when the inventory is handed over to the common carrier

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8
Q

Sales with right to return

inventory policies

A

Sale where the buyer has the right to return the goods.

If the amount of returns can be reasonably estimated, then sales s/b recorded with an allowance for expected returns.

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9
Q

Consignment sales

inventory policies

A

Goods are shipped from the consignor to a 3rd party (consignee) who holds and sells the inventory on the consignor’s behalf.
Unsold inventory held by the consignee is included in the consignor’s inventory.
Freight costs for shipping to consignee, in-transit insurance, and warehousing costs by consignee are all included in inventory costs (capitalized).

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10
Q

Specific identification method

inventory costing methods

A

Used for unique (not homogenous) goods. Cost and selling price of the individual goods varies. E.g. airplane

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11
Q

Specific identification method

inventory costing methods

A

Used for unique (heterogeneous) goods. Cost and selling price of the individual goods varies. E.g. airplane

Cost for the specific item sold is identified and booked to the IS.

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12
Q

First in first out

inventory costing methods

A

used for homogeneous units; selling price for each unit is the same. the oldest cost is booked to the IS first.

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13
Q

Last in first out

inventory costing methods

A

used for homogeneous units; selling price for each unit is the same. the newest cost is booked to the IS first.

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14
Q

Weighted average cost method

inventory costing methods

A

used for homogeneous units; selling price for each unit is the same. the average of price of all the inventory is booked to the IS.

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15
Q

Periodic system - weighted average cost

inventory costing methods

A

At the end of the period, the weighted average price is calculated and assigned to the inventory sold.

aka…average inventory method

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16
Q

Perpetual system - weighted average cost

inventory costing methods

A

At every point of sale, the average of all previous inventory purchases is calculated. This cost amount is assigned to the inventory sold.

aka…moving average inventory method

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17
Q

Periodic system

inventory systems

A

Inventory and cost of goods sold balance is known only at the year end.

During the year, all inventory purchases are accumulated into purchase account(s).

At the year end, all units sold are removed from purchases and transferred to cost of goods sold.

Remaining purchases are transferred to the inventory.

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18
Q

Difference between COGS valued using FIFO perpetual and periodic?

inventory systems

A

FIFO perpetual = FIFO periodic

none; cogs calculated under both systems will be the same. they are both pulling from the oldest purchases first.

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19
Q

Difference between COGS valued using LIFO perpetual and periodic?

inventory systems

A

LIFO perpetual != LIFO periodic
under perpetual system, the cogs will be valued using the most recent purchase.
under periodic, cogs will be valued using the last purchase of the year.

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20
Q

FIFO objective

A

to match the accounting with the actual flow of inventory

21
Q

LIFO objective

A

to make sure the COGS is at current prices

22
Q

IFRS v. LIFO

A

IFRS wants COGS to match the flow of inventory, so FIFO is allowed.
Because LIFO does not necessarily match the flow of inventory, it is not allowed in IFRS.

23
Q

Period of rising prices - FIFO & LIFO effects

A

FIFO: cogs lower, net income higher, taxes higher
LIFO: cogs higher, net income lower, taxes lower

24
Q

Period of falling prices - FIFO & LIFO effects

A

FIFO: cogs higher, net income lower, taxes lower
LIFO: cogs lower, net income higher, taxes higher

25
Q

LIFO conformity rule

A

If LIFO is used for taxes, then it must be used for accounting as well.

LIFO generally produces a lower tax burden, which mgmt wants. However, it also results in lower value of inventory on the balance sheet, which mgmt does not want. Can’t have cake and eat it too.

HOWEVER - you can use LIFO for accounting and FIFO for taxes.

26
Q

LIFO reserve

A

Using LIFO method for accounting, but other method for taxes (FIFO, weighted average, specific identification)

LIFO reserve is the difference between COGS per the accounting financials (higher) and the tax financials (lower).

Tax COGS + LIFO reserve = LIFO cogs
Tax inventory - LIFO reserve = LIFO inventory

27
Q

Dollar Value LIFO v. LIFO (standard)

A

Normally under LIFO, inventory is valued in units, then converted to dollars.

In dollar value LIFO, inventory is immediately valued in dollars.

28
Q

Dollar Value LIFO - calculation method

A

Count only the layers of inventory added in the current year. Measure at CPI (current price index).
The balance of inventory is measured at base yer prices.

29
Q

Dollar Value LIFO - example

A

Year EB Inv(CY$) CPI EB Inv(Base$) Layer
2015 10,000 / 1.0 10,000 -0-
2016 12,100 / 1.1 11,000 1,000
2017 15,000 / 1.2 12,500 1,500
2018 13,500 / 1.25 10,800 (1,700)

Year Layer(B$) Used Bal(B$) Bal(CY$)
2015 -0- -0- -0- X1.0 -0-
2016 1,000 (200) 800 X1.1 880
2017 1,500 (1,500) -0- X1.2 -0-
2018 (1,700) 1,700 -0- X1.25 -0-

Year      Layer Bal(CY$)
2015              -0-
2016            880
2017             -0-
2018             -0-
---------------------------
Net Layer             880
Base Layer   + 10,000
                     =  10,880 2018 Inventory EB
30
Q

Dollar Value LIFO - steps

A

1) convert inventory to standard unit (BY$ base yr)
2) calculate increase (decrease) in inv for each year
3) calculate what portion of each year’s inc(dec) was utilized (when there is a decrease, aka “LIFO liquidation”)
4) calculate the balance of each years inc(dec)
5) convert each year’s remaining amt back to CY$
6) sum the amounts in #5
7) add the base layer = EB inventory CY$

COLUMNS IN SPREADSHEET
A) EB inv CY$
B) CPI
C) EB inv BY$ (A / B)
D) Increase(Decrease)  BY$
     2020 EB - 2019 EB   year over year
E) Utilized BY$
    from newest to oldest, subtract the portion of the 
    layer utilized
F) Balance BY$
     Net coulmn D and E
G) Convert back to CY$ (BY$ X CPI)
H) Sum amounts in column G
I)   Add base year inventory
31
Q

Inventory Valuation - US GAAP

A

Purpose: revalue the inventory every year to account for losses in inventory value. (Account for future losses now - matching)

LIFO methods or Retail Inventory Method –> must value using Lower of Cost or Market Value (LCM)

FIFO or Specific Identification Method –> must value using Lower of Cost or Net Realizable Value (LCNRV)

32
Q

Net realizable value

Inventory Valuation - US GAAP

A

Selling price - selling cost

used in revaluing inventory at LCNRV for FIFO or specific identification methods

33
Q

Market value

Inventory Valuation - US GAAP

A

Median value of…
ceiling NRV
floor NRV - normal profit margin
replacement cost cost to replace inv now

used in revaluing inventory at LCM for LIFO or Retail Inventory Method

34
Q

Ceiling

Inventory Valuation - US GAAP

A

ceiling equals net realizable value

selling price - selling cost

35
Q

Floor

Inventory Valuation - US GAAP

A

floor equals net realizable value less the normal profit margin
NRV - Normal Profit Margin
(selling price - selling floor) - normal profit margin

36
Q

LIFO/Retail Identification Method

Inventory Valuation - US GAAP

A 
1) Find median of
      NRV
      NRV - profit margin
      Replacement cost
      = MARKET

2) Find lower of
COST
MARKET
= inventory valuation amount

37
Q

FIFO/Specific Identification

Inventory Valuation - US GAAP

A

1) Find NRV (selling price - selling cost)

2) Find lower of
NRV
COST
= inventory valuation amount

38
Q

Inventory valuation adjustment - journal entries

Inventory Valuation - US GAAP

A

Loss on inventory write-down XXX
Inventory XXX

US GAAP does NOT allow a reversal of a loss

39
Q

Inventory Valuation - IFRS

A

Regardless of inventory method, ALWAYS use LCRNV

Loss on inventory write-down XXX
Inventory XXX

Reversal of loss on inventory write-down is ALLOWED (only to the extent of the reversal though, not more)

40
Q

Inventory Estimation - steps

A

Allowed only for interim financial statements

COGS + PROFIT = SALES
1) Estimate COGS:  using profit mark-up or margin
    mark-up (profit is % of cost) 
    margin (profit is % of sales)
2) Calculate Inventory:
    BB inv
 \+ purchases
 - COGS (estimated above)
= EB inv
41
Q

Mark-up

Inventory Estimation

A

Profit, expressed as a percentage of cost
E.g. Sales = Y
Cost = X
Profit = 0.25X

COGS + 0.25COGS = SALES
1.25 COGS = SALES
COGS = SALES / 1.25

42
Q

Margin

Inventory Estimation

A

Profit, expressed as a percentage of sales
E.g. Sales = Y
Cost = X
Profit = 0.25Y

SALES - 0.25 SALES = COST
COST = 0.75 SALES

43
Q

Retail inventory method

A

Businesses in the retail industry might have to keep inventory at two prices, cost and sales. Prior to computers, this would have been cumbersome and costly.
Instead of maintaining two sets of inventory prices, businesses keep inventory at retail price and calculate a cost-to-retail ratio to estimate the cost of inventory.

44
Q

Conventional method

retail inventory method

A

To calculate the cost-to-retail ratio calculate the total inventory available for sale at both cost and retail prices. Divide cost price by retail price.

                                           COST               RETAIL BB inv                                     xxx                   yyy \+ purchases                           xxx                   yyy \+ freight-in                             xxx                    ---- \+ net-markups                       ----                     yyy = Inv available for sale         XXX       /          YYY    (XXX / YYY)                         cost-to-retail ratio

= inv available for sale XXX YYY
- net markdowns —– (yyy)
= total inv AFS @ retail —– YYY
- sales —– (yyy)
= EB inv @ retail ZZZ

ZZZ * cost-to-retail ratio = EB inv @ cost

45
Q

LIFO retail method

retail inventory method

A

COST RETAIL
purchases xxx yyy
+ freight-in xxx —-
+ net markups —- yyy
- net markdowns —- (yyy)
= inventory XXX / YYY
(XXX / YYY) cost-to-retail ratio

= inventory XXX YYY
+ beginning inv @ retail —- yyy
= total inv AFS @ retail —– YYY
- sales —– (yyy)
= EB inv @ retail ZZZ

46
Q

Differences b/w conventional and LIFO retail methods

A

1) LIFO does not start with BB inv (PY EB). Conventional does start w/ PY EB, which is based on the PY cost-to-retail ratio
2) LIFO includes markups and markdowns in the cost-to-retail ratio

47
Q

Total list of inventory calculation methods

A

total of eleven methods
a)
perpetual periodic
specific identification x x
FIFO x x
LIFO x x
weighted average x x

b) dollar value LIFO method
c) retail method: conventional LIFO

48
Q

Purchase commitment

A

Forward contract to set price for purchase in the future

contracted price > market price = probable loss in future, so have to recognize estimated loss
(contract price - market price)

estimated loss on purchase commitment XXX
accrued loss on purchases commitment XXX

at time of actual purchase, accrued loss is reversed
purchases XXX
accrued loss on purchase commitment XXX
accounts payable or cash XXX

FAR (25 decks)

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