Inventories

Question 1

What three types of costs are included in inventory on the balance sheet?

Answer 1

1. Purchase cost,
2. conversion costs, and
3. other costs necessary to bring the inventory to its present location and condition.

Question 2

How are period costs, such as abnormal waste, most storage costs, administrative costs, and selling costs handled?

Answer 2

They are expensed as incurred.

Question 3

Describe FIFO:

Answer 3

The cost of the first item purchased is the cost of the first item sold. Ending inventory is based on the cost of the most recent purchases, thereby approximating current cost.

Question 4

Describe LIFO:

Answer 4

The cost of the last item purchased is the cost of the first item sold. Ending inventory is based on the cost of the earliest items purchased. LIFO is prohibited under IFRS.

Question 5

Which is prohibited under IFRS? LIFO or FIFO?

Answer 5

LIFO

Question 6

Describe weighted average cost:

Answer 6

COGS and inventory values are between their FIFO and LIFO values.

Question 7

Describe specific identification:

Answer 7

Each unit sold is matched with the unit’s actual cost

Question 8

What are the four inventory cost flow methods?

Answer 8

1. FIFO
2. LIFO
3. Weighted average cost
4. Specific identification

Question 9

When purchase or production costs are rising, which COGS is higher? LIFO or FIFO?

Answer 9

LIFO

Question 10

When purchase or production costs are rising, which method produces a higher gross profit? LIFO or FIFO?

Answer 10

FIFO

Question 11

When purchase or production costs are rising, which method results in the lowest inventory? LIFO or FIFO?

Answer 11

LIFO

Question 12

Which inventory cost flow method always represents true COGS best?

Answer 12

LIFO

Question 13

What inventory cost flow method always best represent true inventory value best?

Answer 13

FIFO

Question 14

When prices are rising and inventory quantities are stable or increasing LIFO results in what four things?

Answer 14

higher COGS

lower gross profit

lower inventory balances

higher inventory turnover

Question 15

When prices are rising and inventory quantities are stable or increasing FIFO results in what four things?

Answer 15

1. lower COGS
2. higher gross profit
3. higher inventory balances
4. lower inventory turnover

Question 16

What are the two inventory valuation methods that can be used with IFRS?

Answer 16

1. The lower of cost or
2. net realizable value

Question 17

Are inventory write-ups allowed under IFRS?

Answer 17

Yes, inventory write-ups are allowed, but only to the extent that a previous writedown to net realizable value was recorded.

Question 18

Under US GAAP, what is the allowed inventory valuation methods?

Answer 18

The lower of cost or market.

Question 19

How is “market” determined in lower cost or market valuation?

Answer 19

Market is usually equal to replacement cost but cannot exceed net realizable value or be less than net realizable value minus a normal profit margin.

Question 20

Are inventory write-ups allowed under US GAAP?

Answer 20

No, no subsequent write-up is allowed.

Question 21

What are the seven required inventory disclosures?

Answer 21

1. The cost flow method (LIFO, FIFO, etc.) used.
2. Total carrying value of inventory and carrying value by classification (raw materials, work-in-process, and finished goods) if appropriate.
3. Carrying value of inventories reported at fair value less selling costs.
4. The cost of inventory recognized as an expense (COGS) during the period.
5. Amount of inventory writedowns during the period.
6. Reversals of inventory writedowns during the period (IFRS only because U.S. GAAP does not allow reversals).
7. Carrying value of inventories pledged as collateral.

Question 22

What three ratios can be used to evaluate the quality of a firm’s inventory management?

Answer 22

1. Inventory turnover,
2. days of inventory on hand, and
3. gross profit margin

Question 23

What can an inventory turnover that is too low indicate?

Answer 23

• high days of inventory on hand
• may be an indication of slow-moving or obsolete inventory.

Question 24

What could high inventory turnover together with low sales growth relative to the industry indicate?

Answer 24

Inadequate inventory levels and lost sales because customer orders could not be fulfilled.

Question 25

What could high inventory turnover together with high sales growth relative to the industry average suggest? ## Footnote

Answer 25

That high inventory turnover reflects greater efficiency rather than inadequate inventory. ## Footnote