Inventory

Question 1

Cost of Inventory

Answer 1

Includes all cost of acquisition and preparation for sale:

• Warehousing costs prior to sale
• Insurance, repackaging, modifications
• Freight-in paid by the buyer
• Transportation costs paid by the seller on consignment arrangements
• DO NOT include abnormal costs for idle factory expenses, unallocated fixed overhead cost, excessive spoilage, double freight, and re-handling costs (these should be expensed immediately).

Question 2

FOB Shipping Point

Answer 2

Title passes to the buyer when the seller delivers the goods to a common carrier (shipped). Included in buyer’s books at year end.

Question 3

FOB Destination

Answer 3

Title passes to the buyer when the buyer receives the goods from the common carrier (received). Included in seller’s books until received by buyer.

Question 4

Consignor

Answer 4

• Includes inventory in his balance sheet
• has ownership but not possession of the goods
• cost incurred by consignor in transferring goods to the consignee are considered inventory costs until sold.

Question 5

Consignee

Answer 5

• Items are not included in his inventory balance
• has possession but not ownership of goods.
• when sold, the sales price is given to the consignor after deducting any reimbursable costs and commissions earned by the consignee

Question 6

Cost of Goods Sold (COGS)

Answer 6

Beginning Inventory
\+ Net Purchases
= Goods Available for sale
- Ending Inventory
=Cost of Goods Sold

Question 7

Operating Income

Answer 7

Sales
- COGS
= Gross Margin
- SGA
= Operating Income

Question 8

Periodic Inventory System

Answer 8

Physical inventory count. Inventory quantity is determined by a physical count usually done at year end.

• Inventory purchases are debited to purchases.
• No adjustment is made to inventory until the end of the period, when a physical inventory count is made and ending inventory is calculated
• COGS is the plug and the exact amount of inventory shortages cannot be determined since it is buried in COGS

Question 9

Perpetual Inventory System

Answer 9

(ongoing, real-time count)

- Inventory purchases are debited to inventory. The quantity on hand can be determined at any point in time.

Question 10

Specific Identification

Answer 10

Must be able to identify each unit sold. Used when inventory is few in number, very expensive and can be clearly identified, very heterogeneous items.

Question 11

FIFO: First-in, First-out (LISH)

Answer 11

The inventory on hand is presumed to consist of the most recent purchases. In periods of rising prices, FIFO results in the highest inventory, lowest cost of goods sold and the highest net income.
- Perpetual and periodic inventory systems are the same.

Question 12

LIFO: Last-in, First-out (FISH)

Answer 12

The most recent cost are expensed and matched with current revenues. The inventory remaining on hand is presumed to consist of the goods acquired first. In periods of rising prices LIFO results in the lowest ending inventory, highest cost of goods sold and the lowest net income.

• Better represents the flow of cash
• Perpetual and periodic inventory systems are different.

Question 13

Average Inventory Methods

Answer 13

Assign the same unit price to similar goods available during the period.

Question 14

Perpetual (Moving Average)

Answer 14

This method computes the average after each purchase

Question 15

Periodic (Weighted Average)

Answer 15

This method takes total costs of all inventory purchases during the year and divides them by the total number of inventory units available during the year.

Question 16

Dollar Value LIFO

Answer 16

• Inventory is measured in terms of dollars, not units, and is adjusted for changing price levels.
• Inventory is combined into natural groups called “Inventory Pools” and each pool is valued separately. A price level index is used to convert the inventory from LIFO to Dollar-value LIFO.

Question 17

Lower of Cost or Market Rule (LCM (ARB 43)

Answer 17

• Conservatism & Matching principle
• Cost = Original Cost
• Market = middle of 3 numbers (Ceiling, Floor, and Replacement Cost)

Question 18

Market - Ceiling

Answer 18

Net Realizable Value (NRV) (selling price - disposal costs)

- disposal cost = cost to complete, freight out, sales commissions

Question 19

Market - Floor

Answer 19

NRV - normal profit margin

Question 20

Market - Replacement Cost

Answer 20

Purchase or reproduction

- Middle of these numbers is used as market, then compare market with cost and take the Lower (LCM)

Question 21

Dollar Value LIFO - Price Index Formula

Answer 21

Current year Cost divided by base year cost to get price index