Flashcards in Section 7 - Inventory Deck (32):
What is included in cost of inventory?
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)
Who should report inventory for FOB shipping point?
Buyer (since it's shipped already)
Who should report inventory for FOB destination?
Seller's (until received by buyer)
Should the consignor or consignee include inventory on his balance sheet?
Consignor - has ownership but not possession of the goods.
What are typical inventory cost incurred by consignor?
-cost of the goods
-freight paid on shipments to consignee
These are considered inventory costs until sold.
How do you calculate Operating Income on the Income Statement?
Sale - COGS = Gross Margin - SGA = Operating Income
SGA: Selling, general, administrative expenses
How do you calculate COGS?
Beg inventory + Net purchases = Goods Available for sale - Ending inventory = COGS
What is the periodic inventory system?
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
What are periodic inventory system JEs?
-At the time of purchase
-At year end
COGS (plug at year end)
What is perpetual inventory system?
Ongoing and real-time count
-inventory purchases are debited to INVENTORY.
-quantity on hand can be determined at any point in time
What are perpetual inventory system JEs?
-At the time of purchase
-As sales occur
What are the four inventory costing methods?
1) Specific identification
2) FIFO; (LISH)
3) LIFO; (FISH)
4) Average inventory methods
What is specific identification?
-Must be able to identify each unit sold
-Used when inventory is few in number, very specific and can be clearly identified
Perpetual and periodic inventory is the same under what inventory costing method?
If LIFO is used for tax purposes, should it be used for financial reporting purposes?
LIFO conformity rule
What happens under FIFO when costs are going up?
-Net income overstated
-Ending inventory is okay
-Balance sheet is okay
-I/S is not okay
What happens under LIFO when costs are going up?
-Profits okay = I/S okay
-Ending inventory - understated
-Income Statement okay
-B/S not okay
What prices are assign to goods/inventory under Average Inventory Method?
Same unit price to similar goods
How is the Perpetual (Moving Average) Method inventory price calculated?
The average after each purchase.
How is the Periodic (Weighted Average) Method inventory price calculated?
Total costs of all inventory purchases during the year and divides them by the total number of inventory units available during the year.
If a periodic approach is used, are all purchases recorded first than sales?
What are two figures needed for Dollar-Value LIFO?
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)
How to calculate the price index for Dollar-value LIFO?
ending inventory at current year cost/ ending inventory at base year cost
What is the difference between LIFO and Dollar Value LIFO?
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.
What principles does LCM address?
Conservatism (probable loss)
Matching principle (in the period in which loss occurred)
What is "Cost" in LCM?
What is "Market" in LCM?
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"
For LCM, which price do you take "Cost" or "Market"?
The Lower of the two
Which financial statement should inventory losses be recognized?
Income Statement immediately
-Loss cannot be recover once written down
Loss on inventory due to market decline
What is a "firm purchase agreement"?
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.
Estimated loss (I/S)
Under IFRS, what are inventory required to be reported at?
Lower of cost or net realizable value (LCNRV)
*NRV is same as GAAP "ceiling"