FAR 4 Inventory

Question 1

Types of inventory

Answer 1

• Retail inventory
• Raw materials inventory
• Work in progress inventory
• Finished goods inventory

Question 2

Goods and materials to be included in inventory

Answer 2

a. Goods in transit
1. FOB Shipping point
2. FOB Destination
b. Shipment of nonconforming goods
- if wrong goods shipped, the titile goes back to the seller, when goods are rejected.
c. Sales with a right to return.
- include in sellers inventory if can’t estimate return.
- if can estimate, then allowance
d. Consigned goods
e. Public warehouse
f. Sales with mandatory buyback
g. Installment sales

Question 3

Valuation of inventory

Answer 3

A. Cost - inventories are accounted at cost

B. Departure from the Cost Basis

1. Lower of cost or market (US GAAP)
2. Precious metals and farm poducts - net realizable value (selling price - costs of disposal)

C. Lower of cost of market

1. Recognize loss in current period
2. Reversal of inventory write downs in prohibited

Question 4

Market value

Answer 4

Middle value of an inventory item’s:

• replacement cost,
• market ceiling,
• market floor

Question 5

Replacement Cost

Answer 5

The cost to purchase the item of inventory as of the valuation date

Question 6

Market ceiling

Answer 6

Net selling price - costs to dispose = Net realizable value (market ceiling)

Question 7

Market floor

Answer 7

Market ceiling - profit margin = market floor

OR

NRV - profit margin = market floor

Question 8

Lower of cost or market

Answer 8

1. We calculate market:

• Ceiling = Selling - disposal
• Floor= Ceiling - Profit
• Replacement cost

2. We pick the middle number from ceiling, floor and replacement cost.
3. We pick the lower of cost or market

Question 9

When market is lower than cost, record loss

Answer 9

Inventory loss due to decline in market value

       Inventory

Question 10

IFRS - determine the lower of cost or net realizable value

Answer 10

1. Determine the net realizable value

NRV = selling price - disposal

2. Pick lower of cost or net realizable value

Question 11

Periodic Inventory system

Answer 11

Beginning inventory

+ Purchases

= Cost of goods available for sale

• Ending inventory

= Cost of goods sold

Question 12

Periodic system

Journal entries

A sells 20000 units of inventory for $7 per unit. Inventory cost $5

Answer 12

1. Sale

Cash xxx

     Sales             xxx

**2. Purchase **

Purchases xxx

     Cash            xxx

Question 13

Perpetual system

Journal entries

Answer 13

1. Sale

Cash xxx

     Sales             xxx

COGS xxx

        Inventory     xxx

2. Purchase

Inventory xxx

     Cash            xxx

Question 14

Dollar value LIFO

Answer 14

Price index = Ending inventory at current year cost/Ending inventory at base year cost

Question 15

Firm purchase commitments

Answer 15

• legally enforceable agreement
• loss should be recognized at the time of the decline in price

Estimated loss on purchase commitment

        Estimated liability on purchase commitment

Question 16

Inventory cost

FOB Destination

FOB Shipping point

Answer 16

• _FOB Destination _
• title passes, when received by the buyer,
• packaging, shipping and handling are cost of the seller
• FOB Shipping Point
• title passes, when goods leave the seller’s location,
• packaging, shipping and handling are cost of the buyer