M3 - Inventory

Question 1

Permanent (not temporary) declines in inventory market value should be reflected in interim financial statements in the period incurred. (true or false)

Answer 1

true

Question 2

What does FOB destination mean

Answer 2

It means that title passes when received by the buyer, and that packaging, shipping, and handling are cost of the seller.

Question 3

What does FOB Shipping point mean

Answer 3

It means that title passes when the goods leave the sellers location and that shipping is a cost of the buyer.

Question 4

What is the formula for COGS

Answer 4

Beginning Inventory
\+ Purchases
-------------------------------------
Cost of Goods Available for Sale
- Ending Inventory (physical count)
-------------------------------------
Cost of Goods Sold

This is a periodic method (MEMORIZE)

This is the ACTUAL cogs for the period

Question 5

Which US GAAP inventory costing method approximates most closely the current cost for Cost of Goods Sold?

LIFO or FIFO?

Answer 5

LIFO, because inventory “last-in” (most recently purchased) is “first-out” (expensed currently)

Question 6

Which US GAAP inventory costing method approximates most closely the current cost for Ending Inventory?

LIFO or FIFO?

Answer 6

FIFO, because inventory “first-in” (oldest purchase) is “first-out” (expensed currently) and the most recent purchases remain in ending inventory.

Question 7

FOB Shipping Point = Freight in or Freight out?

Answer 7

Freight in ( in truck)

Included in buyers inventory

Question 8

FOB Destination = Freight in or Freight out?

Answer 8

Freight out

sellers inventory until delivered to buyer

Question 9

Under perpetual inventory system, there are no purchases (like there is with periodic system, and there is 2 journal entries at time of sale.

When we sell an item:
DR: COGS
CR: Iventory

Answer 9

The actual COGS is determined and recorded with each sale, we don’t back into it like we do in the periodic system.

Question 10

Journal Entry to record sale under Periodic and Perpetual methods:

Answer 10

Periodic: (one entry)
DR: Cash
CR: Sales

Perpetual: (because we have two entries)
DR: Cash
CR: Sales
DR: COGS
CR: Inventory

Question 11

Journal Entry to record purchase under Periodic and Perpetual methods:

Answer 11

Periodic (debiting purchases is the dead give away)
DR: Purchases
CR: Cash

Perpetual:
DR: Inventory
CR: Cash

Question 12

In periods of rising pricings, the FIFO method results in the highest ending inventory, the lowest COGS, and the highest net income (i.e., current costs are not matched with current revenues.) True or false?

Answer 12

True (PASS KEY)

Question 13

Under the FIFO method, periodic and perpetual have the same ending results. True or false?

Answer 13

True, periodic is much faster

Question 14

To do weighted average method you have to be periodic, true or false?

Answer 14

True

Determined by dividing
TOTAL COSTS of inventory available
——————————————————
TOTAL NUMBER OF UNITS available

Question 15

Weighted Average Method Cost Per Unit =

Answer 15

Total units purchased (available for sale)

Question 16

To be a moving average method you have to be a periodic system, true or false?

Answer 16

False, you have to be a perpetual system.

Question 17

When prices increase, what inventory costing method will most likely give the lowest ending inventory method?

Answer 17

LIFO will normally result in the lowest ending inventory because items “last-in” (at higher prices) are expensed to COGS, while the items “first-in” (at lower prices) make up the ending inventory.

Question 18

In periods of rising pricings, the LIFO method results in the lowest ending inventory, the highest COGS, and the lowest net income. True or false?

Answer 18

True

Question 19

Whats the difference in LIFO and Dollar Value LIFO?

Answer 19

Dollar Value LIFO inventory is measured in dollars and is adjusted for changing price levels.

Question 20

When there is no price index given on Dollar Value LIFO method, how do you compute it?

Answer 20

Ending Inventory at BASE year cost

Question 21

To compute the LIFO layer added in the current year at dollar-value LIFO, the LIFO layer at base year cost is multiplied by the internally generated price index. (true or false)

Answer 21

true. (example on page F3-34)

Question 22

How to calculate the Lower of cost or market:

Answer 22

Step 1: Find
Replacement Cost
NRV (Selling Price-Cost of Completion)
Floor (NRV-Normal Profit)

Step 2: Take the middle one of those costs
Step 3: Compare to actual cost of inventory or whatever they give you and take the lower one.

Question 23

How to calculate the lower of cost or net realizable value:

Answer 23

Step 1: Find
NRV (selling price-cost of completion)

Step 2: Take the lower of NRV or Selling Price

Question 24

Inventory Turnover Ratio

Answer 24

Average ending inventory

Question 25

Lower of Cost or NRV is required by US. True or false?

Answer 25

False, the IFRS requires the use of the lower of cost or NRV to value inventory.