What does merchandise inventory include?
All goods that a company owns and holds for sale, regardless of location.
How is inventory cost calculated?
Inventory cost = Invoice cost − discounts + incidental costs.
What are considered incidental costs in inventory?
- Shipping
- Storage
- Insurance
What does FOB shipping point mean?
Goods included in buyer’s inventory when shipped.
What does FOB destination mean?
Goods included in buyer’s inventory after arrival at destination.
Who is the consignor in a consignment agreement?
The owner of the goods.
Who is the consignee in a consignment agreement?
The individual who sells goods for the owner.
How are damaged or obsolete goods treated in inventory?
Not reported in inventory if they cannot be sold; included at NRV if they can be sold.
What is net realizable value (NRV)?
Sales price minus selling costs.
What are the four inventory costing methods?
- Specific identification
- First-in, First-out (FIFO)
- Last-in, First-out (LIFO)
- Weighted average
True or False: The physical flow of inventory must match the accounting method chosen.
False.
What characterizes the specific identification inventory cost flow method?
The unit sold is identified with a specific purchase.
What is the FIFO method in inventory costing?
The first units purchased are assumed to be sold first.
What is the LIFO method in inventory costing?
The last units purchased are assumed to be sold first.
What does the average inventory cost flow method calculate?
The cost of the units sold and in ending inventory is an average of the purchase costs.
What is the LIFO conformity rule?
When LIFO is used for tax reporting, it must also be used for financial reporting.
What happens if ending inventory (EI) is understated?
Cost of goods sold (COGS) is overstated.
What is the effect of an understated beginning inventory (BI)?
Cost of goods sold (COGS) is understated.
What is the lower of cost or market rule?
Inventory must be reported at market value when market is lower than cost.
How can the lower of cost or market be applied?
- Separately to each individual item
- To major categories of assets
- To the whole inventory
What is current replacement cost in the context of inventory?
The current cost to replace an item, not its sales price.
What is the effect on retained earnings if net income is understated in the first year of an inventory error?
Retained earnings are understated.
What is the effect of inventory errors on the income statement in the following year?
If current year NI is overstated, prior year RE is understated, but current year RE is correct.
