Chapter 26 - Inventory

Question 1

What are the three main types of inventory?

Answer 1

Raw materials, work-in-progress, and finished goods.

Question 2

What items are not included as inventory?

Answer 2

Items not for sale in the ordinary course of business (e.g., goods for internal use).

Question 3

How are non-inventory items classified?

Answer 3

As prepaids or other assets until used.

Question 4

Formula for gross profit?

Answer 4

Sales – Cost of Goods Sold (COGS).

Question 5

Formula for gross margin?

Answer 5

Gross Profit ÷ Sales.

Question 6

If sales = $400,000 and COGS = $300,000, what’s the gross margin?

Answer 6

25%.

Question 7

Formula for markup %?

Answer 7

(Selling Price – Cost) ÷ Cost.

Question 8

Difference between gross margin and markup?

Answer 8

Margin is % of sales; markup is % of cost.

Question 9

If gross margin = 30% and selling price = $100, what’s cost and markup?

Answer 9

Cost = $70; Markup = 43%.

Question 10

What determines initial measurement?

Answer 10

Type of inventory (merchandise vs. manufacturing).

Question 11

How is inventory measured?

Answer 11

At cost to bring it to condition and location for sale.

Question 12

What costs are included in inventory?

Answer 12

Purchase price, import duties, freight-in, and direct acquisition costs.

Question 13

What costs are deducted from inventory cost?

Answer 13

Trade discounts, vendor rebates, and subsidies.

Question 14

What costs are excluded from inventory?

Answer 14

Recoverable taxes, customer shipping, and post-sale costs.

Question 15

When does ownership transfer under FOB shipping point?

Answer 15

When goods are shipped.

Question 16

When does ownership transfer under FOB destination?

Answer 16

When goods are delivered and accepted.

Question 17

What does “2/10, net 30” mean?

Answer 17

2% discount if paid within 10 days; otherwise, full payment in 30 days.

Question 18

Under the gross method, how is discount recorded?

Answer 18

Reduce inventory when discount is taken.

Question 19

Under the net method, how is a missed discount recorded?

Answer 19

As “Purchase Discounts Lost” expense.

Question 20

Three components of manufacturing inventory?

Answer 20

Raw materials, direct labour, and production overhead.

Question 21

What are conversion costs?

Answer 21

Direct labour + production overhead.

Question 22

What are examples of variable overhead?

Answer 22

Indirect materials and indirect labour.

Question 23

What are examples of fixed overhead?

Answer 23

Factory rent, equipment amortization, manager salaries.

Question 24

What costing method allocates all production costs to inventory?

Answer 24

Absorption costing.

Question 25

Formula for predetermined overhead rate?

Answer 25

Estimated total overhead ÷ Normal volume of cost driver.

Question 26

What costs are included only if they bring inventory to condition/location?

Answer 26

Necessary handling, transportation, or preparation costs.

Question 27

What costs are always expensed?

Answer 27

Abnormal waste, storage (unless necessary), admin, and selling costs.

Question 28

How do borrowing costs differ under ASPE vs. IFRS?

Answer 28

ASPE – choice; IFRS – must capitalize (unless repetitive mass production).

Question 29

When is inventory measured at lower of cost and NRV?

Answer 29

At each reporting date.

Question 30

Formula for NRV?

Answer 30

Estimated selling price – costs to complete & sell.

Question 31

What are the two write-down methods?

Answer 31

Direct method and allowance (indirect) method.

Question 32

Can write-downs be reversed?

Answer 32

Yes, if NRV increases, up to original cost.

Question 33

When is inventory derecognized?

Answer 33

When sold (as COGS).

Question 34

Formula for Cost of Goods Available for Sale (COGAS)?

Answer 34

Opening inventory + Purchases/Production.

Question 35

Three main cost flow assumptions?

Answer 35

Specific Identification, FIFO, Weighted Average.

Question 36

Under FIFO, which inventory is sold first?

Answer 36

Oldest units.

Question 37

Weighted average formula?

Answer 37

Total cost ÷ Total units available.

Question 38

Does cost formula choice affect cash flow?

Answer 38

No, only reported profit and inventory value.

Question 39

Common cause of inventory errors?

Answer 39

Misclassifying goods in transit or using wrong FOB terms.

Question 40

What happens if ending inventory is overstated?

Answer 40

Assets overstated, COGS understated, Net income & equity overstated.