Section 7 - Inventory

Question 1

What is included in cost of inventory?

Answer 1

All costs of acquisition and preparation for sale

• warehousing costs prior to sale
• insurance, repackaging, modifications
• freight-in paid by buyer
• transportation costs paid by seller on consignment arrangements

DO NOT include abnormal costs for idle factory expense, unallocated fixed overhead costs, excessive spoilage, double freight, and rehandling costs (these should be expenses immediately)

Question 2

Who should report inventory for FOB shipping point?

Answer 2

Buyer (since it’s shipped already)

Question 3

Who should report inventory for FOB destination?

Answer 3

Seller’s (until received by buyer)

Question 4

Should the consignor or consignee include inventory on his balance sheet?

Answer 4

Consignor - has ownership but not possession of the goods.

Question 5

What are typical inventory cost incurred by consignor?

Answer 5

• cost of the goods
• freight paid on shipments to consignee
• warehousing costs
• advertising
• in-transit insurance

These are considered inventory costs until sold.

Question 6

How do you calculate Operating Income on the Income Statement?

Answer 6

Sale - COGS = Gross Margin - SGA = Operating Income

SGA: Selling, general, administrative expenses

Question 7

How do you calculate COGS?

Answer 7

Beg inventory + Net purchases = Goods Available for sale - Ending inventory = COGS

Question 8

What is the periodic inventory system?

Answer 8

Physical inventory count. Inventory quantity is determined by a physical count, usually at the end of the year.

• inventory purchases are debited to PURCHASES
• NO inventory adjustment is made to inventory until end of period, when physical inventory count is made and ending inventory is calculated
• COGS is the plug and the exact amount of inventory shortages cannot be determined since it is buried in COGS

Question 9

What are periodic inventory system JEs?

Answer 9

-At the time of purchase
Purchases
A/P

-At year end
Ending inventory
COGS (plug at year end)
Purchases

Question 10

What is perpetual inventory system?

Answer 10

Ongoing and real-time count

• inventory purchases are debited to INVENTORY.
• quantity on hand can be determined at any point in time

Question 11

What are perpetual inventory system JEs?

Answer 11

-At the time of purchase
Inventory
A/P

-As sales occur
A/R
Sales Rev

COGS
Inventory

Question 12

What are the four inventory costing methods?

Answer 12

1) Specific identification
2) FIFO; (LISH)
3) LIFO; (FISH)
4) Average inventory methods

Question 13

What is specific identification?

Answer 13

• Must be able to identify each unit sold

- Used when inventory is few in number, very specific and can be clearly identified

Question 14

Perpetual and periodic inventory is the same under what inventory costing method?

Answer 14

FIFO

Question 15

If LIFO is used for tax purposes, should it be used for financial reporting purposes?

Answer 15

YES

LIFO conformity rule

Question 16

What happens under FIFO when costs are going up?

Answer 16

• COGS understated
• Net income overstated
• Ending inventory is okay
• Balance sheet is okay
• I/S is not okay

Question 17

What happens under LIFO when costs are going up?

Answer 17

• COGS okay
• Profits okay = I/S okay
• Ending inventory - understated
• Income Statement okay
• B/S not okay

Question 18

What prices are assign to goods/inventory under Average Inventory Method?

Answer 18

Same unit price to similar goods

Question 19

How is the Perpetual (Moving Average) Method inventory price calculated?

Answer 19

The average after each purchase.

Question 20

How is the Periodic (Weighted Average) Method inventory price calculated?

Answer 20

Total costs of all inventory purchases during the year and divides them by the total number of inventory units available during the year.

Question 21

If a periodic approach is used, are all purchases recorded first than sales?

Answer 21

Yes

Question 22

What are two figures needed for Dollar-Value LIFO?

Answer 22

1) Total current cost of inventory at the end of each year (would be replacement cost or ending inventory under FIFO approach)
2) Price index - indicating the overall price level compared to the base date (the date the method was first adopted)

Question 23

How to calculate the price index for Dollar-value LIFO?

Answer 23

ending inventory at current year cost/ ending inventory at base year cost

Question 24

What is the difference between LIFO and Dollar Value LIFO?

Answer 24

Under regular LIFO method, inventory is measured in units and is priced at unit prices. Under Dollar-Value LIFO, inventory is measured in dollars and is adjusted for changing price levels.

Question 25

What principles does LCM address?

Answer 25

Conservatism (probable loss)

AND

Matching principle (in the period in which loss occurred)

Question 26

What is “Cost” in LCM?

Answer 26

Original Cost

Question 27

What is “Market” in LCM?

Answer 27

Middle of these 3 numbers:

Ceiling = Net Realizable Value (NRV)
NRV = selling price - disposal costs
Disposal costs are cost to complete, freight out, sales commission

Floor = NRV - normal profit margin

Replacement cost = purchase or reproduction

***Middle of these numbers used as “Market”

Question 28

For LCM, which price do you take “Cost” or “Market”?

Answer 28

The Lower of the two

Question 29

Which financial statement should inventory losses be recognized?

Answer 29

Income Statement immediately
-Loss cannot be recover once written down

JE
Loss on inventory due to market decline
Inventory

Question 30

What is a “firm purchase agreement”?

Answer 30

A non-cancelable agreement to buy inventory in the future.

If loss is expected in the future, loss recognized at time of decline in price. Loss is difference between contract price and market price.

JE
Estimated loss (I/S)
Estimated liability

Question 31

Under IFRS, what are inventory required to be reported at?

Answer 31

Lower of cost or net realizable value (LCNRV)

*NRV is same as GAAP “ceiling”

Question 32

Are previous impairment losses reverseable under IFRS?

Answer 32

YES.

IFRS allows recoveries in the value of inventory when the NRV increases after inventory has been written down.