FR - Inventory

Question 1

Defined what inventory is

Answer 1

-It is something that is held for sale in the ordinary course of business
-In the process of production of such
-Material of supplies to be used in production or in rendering of service

Question 2

How is gross profit and gross margin calculated

Answer 2

Gross profit = sales - COGS
Gross margin = gross profit / sales

Question 3

How do you calculate markup %

Answer 3

(selling price - cost)/ cost

Question 4

What is the Handbook used for IFRS and ASPE for inventory

Answer 4

IAS 2 - Inventory
ASPE 3031

Question 5

Defined what cost of conversion is

Answer 5

It is other cost in bring in inventories to present location and condition
Ex. Raw material = DM Conversion=DL& Overhead

Question 6

Explain how merchandise inventory works

Answer 6

When merchandise inventory purchase for resale, cost of inventory is straightforward.
Cost to purchase include - Purchase price + Import cost + Transportation In
Less: Trade discount + vendor rebates + Other similar items

Question 7

What are purchase discount and how can they be accounted for

Answer 7

They are cash discount given to customer if they pay at a specific date: 2%/10 net 30
They can be account for either by gross method or net method

Question 8

How is manufacturing inventory made and provide some examples of cost

Answer 8

Manufacturing inventory is when raw material is used to make a finished product sold to customers.
Examples of cost: Raw material, direct labour, manufacturing overhead

Question 9

What is raw material, direct labour, manufacturing overhead

Answer 9

Raw material - is like merchandise inventory, same inclusion & exclusion
Direct labour - is recorded at the time that can be traceable to the product, added to the cost of inventory
Overhead - Allocation can be fixed or variable that is incurred in conversion material

Question 10

Explain what production overhead and fixed overhead is

Answer 10

Production overhead - composed of variable production cost - Indirect material, labour, change in volume of production
Fixed production overhead - allocated to inventory used a predetermined overhead rate based on cost driver. Ex. Machine labour

Question 11

Provide 4 examples of other costs that can be included in the inventory

Answer 11

1. Storage cost
2. Selling cost
3. Administrative cost
4. Abnormal amount of waste of material, labour

Question 12

What is determine the cost of inventory through subsequent measurement

Answer 12

• The cost of inventory is measured at the lower of cost and NRV
  Net realizable value - Estimated selling price in the ordinary course of business less estimated cost of completion and to make a sale
• Item should be evaluated on an item by item basis. Can also be acceptable to group similar products together

Question 13

What happens if the inventory is written down to it’s NRV?

Answer 13

• Impairment occurs.
• Can use the direct method or indirect method
  Direct method - Debited to COGS
  Indirect method - uses the allowance method to write down the value of inventory. Can also use a contra-asset account

Question 14

Explains the steps of when the inventory written down needs to be reversed.

Answer 14

• Price of goods may increase in subsequent period due to a sudden decrease in supply in marketplace
  1. Entity record increase in the value of inventory up to the amount that inventory was originally written down
  2. Increase cannot exceed this amount, as inventory still needs to be recorded at the lower of cost and NRV

Question 15

What is the formula to use for the recognition of inventory

Answer 15

Opening inventory + Net purchase = Cost of goods available for sale (COGAS) - Ending inventory = Cost of goods sold
- Must be allocated between COGS for the period and the ending inventory value.

Question 16

Provide the three method to use for the cost of inventory

Answer 16

1. FIFO (First in, first out)
   - Oldest inventory item are moved to cost of sale first. Inventory at the end of the year is the newest purchase of inventory
   Ex. Grocery storage item
2. Weighted average
   - Expensing inventory sold and reporting the remaining inventory on the statement of FP at average cost of inventory (by entire period)
   Ex. production bulk ( Toothpaste, Pop)
3. Specific Identification
   - Cost be assigned to specific identification for items that are not morally interchangeable
   - Apply is straightforward.
   Ex. Cars, building of houses.

Question 17

What is needed in IAS 2 for presentation and disclosure of inventory

Answer 17

1. Disclosure requires : Accouting policies adopted in measuring inventory, cost formula used
   - Carrying amount of inventory segregated into appropriate categories
   - Carrying amount of inventory at FV less cost to sell
   - Amount of inventories recognized as an expenses in the period (COGS)

Question 18

Provide the difference between IFRS and ASPE

Answer 18

IAS 2 - Includes the capitalization of borrowing cost
but IAS 23 - does allow capitalization of borrowing cost in large quantities
ASPE - does not require borrowing cost to be capitalized, can be expenses as well.