Inventory

Question 1

Items included in Ending Inventory

Answer 1

• -If owned by business on last day of accounting yr, regardless of location, merchandise included in inventory–goods awaiting to be shipped, but buyer has paid for them are not included
• • Goods on Consignment- owned by consignor
• -Goods in Transit- FOB Destination=title passes at destination–FOB Shipping Pt= title passes at Shipping Pt
• -Overhead & Direct Labor

Question 2

Costs included in Inventory

Answer 2

Purchases, purchase returns, purchase discounts, freight-in, sales/taxes on acquisition, packaging costs, insurance on transit from supplier

Question 3

Periodic Inventory

Answer 3

• -Merchandise Inventory is beginning Inventory throughout the yr (less expensive)
• -Purchases will be recorded in purchases and related accts instead of inventory acct

Question 4

Objectives of Adjusting entry under Periodic Inv

Answer 4

1. Ending balance of inv is formally entered in
2. Beginning balance of inv is closed
3. Purchases and related accts are closed
4. COGS for yr is entered in

Beg Inv + Net Purchases = End Inv + COGS

DR Merchandise Inv (Ending)
DR Pur Returns & Allowances
DR Purchase Discounts
DR COGS
      CR Merchandise Inv (Beginning)
      CR Purchases
      CR Transportation In

Question 5

Types of Cost-Flow Assumptions in Periodic Inv

Answer 5

1. Specific Identification- specifically identify cost of each item (car in car dealership)
2. Weighted Average- COGS/# units available for sale
3. FIFO- First-in First-out
4. LIFO- Last-in First-out

Question 6

FIFO

Answer 6

• -Way most move inv, produces highest income and highest inv in periods of rising prices,
• • FIFO favors balance sheet–Periods of rising prices Inventory Value more relevant, but COGS, Gross Margin, Income is not

Question 7

LIFO

Answer 7

• -Less reliable in End Inv than FIFO, Lowest net income and inventory in periods rising prices, get a tax benefit, doesn’t mean way firms actually move their inv
• • LIFO favors Income Statement–COGS, GM, & Income more relevant, but inventory value less
• -Minimizes Inventory profits (aka phantom/illusory profits)
• -Stay away from LIFO liquidation bc it takes away tax benefit and matching current rev/exp is distorted (when need to go to previous period to supply goods sold in this period.

Question 8

Perpetual Inventory

Answer 8

Uses inv acct unlike periodic, record COGS at time of sale

Question 9

Types of Cost Flow Assumptions in Perpetual Inv

Answer 9

1. Specific Identification-same as Periodic
2. Moving Average- new weighted avg cost after each new purchase
3. FIFO - sames as Perodic
4. LIFO- cost determined with most recent cost preceding the sale of item

Question 10

Advantages of Dollar Value LIFO

Answer 10

1. Reduces Effect of Liquidation Problem
2. Allows Companies to use FIFO internally
3. Reduces clerical costs

Question 11

Conversion Index for Dollar Value LIFO

Answer 11

End Inv in Current Yr $ / End Inv in Base-Yr $

Index is multiplied by increase in Inv for the period as measured in base-yr $s

Question 12

Lower of Cost or Market Approaches

Answer 12

1. Individual Item Basis: each individual item is compared (most conservative-lowest-inventory & largest holding loss)
2. Category Basis: items grouped into categories and categories are compared
3. Total Basis: Single comparison of all inventory

Question 13

What valuations are Market, Ceiling Value, & Floor Value

Answer 13

1. Market: Replacement cost if not greater than ceiling or less than floor
2. Ceiling Value: Net realizable value (selling price-estimated cost of completion & selling)
3. Floor Value: Net realizable value minus normal profit margin

Question 14

Lower of Cost or Market Direct Method & Allowance Method

Answer 14

Direct: holding loss (higher cost-lower market value) related to inv is included in COGS.
Allowance: holding loss related to inv is separately identified in contra inv acct w/ separate disclosures of holding loss.

Question 15

Gross Margin Method

Answer 15

• -May not be used for financial reporting of Inv, used ONLY for estimation purposes
• -Estimates COGS from sales using % based on historical data, ending inv can then be inferred from Beg Inv, purchases, and COGS

Question 16

Gross Margin %

Margin on Cost

Answer 16

Gross Margin % = Margin on Sales= (sales-cogs)/sales

Margin on Cost = (sales-cogs)/cogs—–always greater

Question 17

Retail Inv Method

Answer 17

Used to estimate End Inv @ cost can be used for internal decision purposes & for financial reporting of COGS & End Inv–used by retailers

Question 18

Basic Method of Retail Inv Method

Answer 18

Based on 3 basic calc.

1. End Inv @ retail calc or counted @ yr end
2. Cost-to retail ratio calc
3. End Inv @ retail multiplied by cost-to-retail ratio arrived @ est Inv @ cost

Cost = (cost)Retail * cost to retail ratio

Question 19

What's included in Cost/Retail Columns in Retail Inv Method. Also, before or after Cost to Retail is calculated
Net Additional Markups
Net Markdowns
Trans In
Purchase Discounts
Purchase R&A
Employee Discounts
Normal Spoilage 
Abnormal Causality Losses

Answer 19

1. NAMU-Retail only, before C-T-R calc
2. NMD-Retail only, before C-T-R calc
3. Trans In-Cost only, before C-T-R calc
4. Pur Disc-Cost only, before C-T-R calc
5. Pur R&A-Retail & Cost, before C-T-R calc
6. Emp Disc-Retail only, after C-T-R calc
7. Normal Spol- Retail only, after C-T-R calc
8. Abnormal Cas Loss- Retail & Cost, before C-T-R calc

Question 20

5 Variations to Retail Inv Method related to Cost Ratio–probability of these ?s are low on test except Average, LCM that is highly tested–example pg 242

Answer 20

1. FIFO- C/R excludes Beg Inv, If End Inv consists entirely of current-period purchases C/R shouldn’t include Beg Inv
2. FIFO,LCM-Cost ratio excludes Beg Inv and net markdowns causing retail (denominator) to be higher, so ratio is smaller
3. Average- C/R includes Beg Inv & current period purchases in numerator/denominator
4. Average,LCM- (AKA Conventional retail Inv Method) C/R includes Beg Inv & current period purchases in numerator/denominator, but excludes net markdowns from calculation (see FIFO, LCM)
5. Dollar Value LIFO

Question 21

Dollar Value LIFO Retail & Inventory Errors

Answer 21

Pg 243-246

Question 22

Losses on Purchase Commitments

1. Contract can be Modified
2. Contract cant be Modified

Answer 22

If price declines after purchase contract made:

1. Loss required ot be footnoted as contingent liability but not accrued bc loss not probable
2. Loss must be accrued bc loss is probable/estimable. Inventory is recorded at market value and loss recorded for diff b/w market price and contract price