F4 - Inventory

Front 1

Types of Inventories Held for Re-sale

Back 1

A. Retail Inventory

B. Raw Materials Inventory

C. Work in Process Inventory

D. Finished Goods Inventory

Front 2

F.O.B. Shipping Point

Back 2

Title passes to the buyer when the seller delivers the goods to a common carrier. Goods shipped in this manner should be included in the buyer's inventory upon shipment.

Front 3

F.O.B. Destination

Back 3

Title passes to buyer when the buyer receives the goods from the common carrier.

Front 4

Shipment of non-conforming goods

Back 4

If the seller ships the wrong goods, the title reverts to the seller upon rejection by the buyer. Thus, the goods should not be included in the buyer's inventory, even if the buyer possesses the goods prior to their return to the seller.

Front 5

Sales with a right to return

Back 5

If goods are sold but the buyer has the right to return the goods, the goods should be included in the seller's inventory if the amount of goods likely to be returned cannot be estimated. If the amount can be estimated, the transaction is recorded as a sale w/ an allowance for estimated returns recorded.

Front 6

Sales with a Right to Return - Revenue recognized when all of these conditions are met:

Back 6

1. sales price is fixed at the date of sale

2. buyer assumes all risk of loss

3. buyer has paid some form of consideration

4. product sold is substantially complete, and

5. The amount of future returns can be reasonably estimated

Front 7

Consigned Goods

Back 7

The seller (the "consignor") delivers goods to an agent (the "consignee") to hold & sell on the consignor's behalf. The consignor should include the consigned goods in its inventory because title & risk is retained by the consignor even though the consignee possesses the goods. Revenue is recognized when goods are sold to 3rd party. Title passes directly to the the 3rd party buyer.

Front 8

Goods & Materials to be Included in Inventory: Public Warehouses

Back 8

Goods stored in a public warehouse and evidenced by a warehouse receipt should be included in the inventory of the company holding the warehouse receipt. The reason is that the warehouse receipt evidences title even though the owner does not have possession.

Front 9

Sales w/ a Mandatory Buyback

Back 9

Seller should include the goods in inventory even though title has passed to the buyer.

Front 10

Goods & Materials to be Included in Inventory: Installment Sales

Back 10

If the seller sells goods on an installment basis but retains legal title as security for the loan, the goods should be included in the seller's inventory if the % of uncollectible debts cannot be estimated. If the % of uncollectible debts can be estimated, the transaction would be accounted for as a sale, and an allowance for uncollectible debts would be recorded.

Front 11

Valuation of Inventory - Cost:

Back 11

In inventory accounting, cost is the sum of the expenditures & charges, direct & indirect, in bringing goods to their required condition or location. Selling expenses, incl. marketing costs & freight out, abnormal spoilage, & idle plant capacity are not part of inventory.

Front 12

Departure from the Cost Basis - Lower of Cost or Market (GAAP)

Back 12

When the utility of goods is no longer as great as their cost, a departure from the cost basis principle is required. This is accomplished by stating such goods at a lower level designated as market value, or the lower-of-cost-or-market principle.

Front 13

Departure from the Cost Basis - Precious Metals & Farm Products

Back 13

Gold, silver, and other precious metals, and meat & some agricultural products are valued at net realizable value (net selling price - costs of disposal). When inventory is stated at a value in excess of cost, this fact should be fully disclosed in the financial statements.

Front 14

Departure from the Cost Basis - Precious Metals & Farm Products - Inventories reported at net realizable value include:

Back 14

a. Gold & silver, when there is effective government-controlled market at a fixed monetary value.

b. Inventories of agricultural, mineral or other products meeting all of the following criteria:

(1) Immediate marketability at quoted prices,

(2) Unit interchangeability, and

(Inability to determine appropriate costs.

Front 15

Lower of Cost or Market (expanded discussion) - Recognize Loss in Current Period

Back 15

Whatever the cause, the difference should be recognized as a loss for the current period. The write-down of inventory to market is usually reflected in COGS, unless the amount is material, in which case the loss should be identified separately in the income statement.

Front 16

Reversal of Inventory Write-Downs

Back 16

Under U.S. GAAP, reversals of inventory write-downs are prohibited.

Front 17

Define Market Value:

Back 17

Under GAAP, its the the median (middle value) of an inventory item's replacement cost, its market ceiling, and its market floor.

Front 18

Define Replacement Cost:

Back 18

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

Front 19

Define market ceiling:

Back 19

An item's net selling price less the costs to complete & dispose (or cost to sell) [aka the net realizable value].

Front 20

Define Market floor:

Back 20

The market ceiling less a normal profit margin.

Front 21

Exceptions to the Lower of Cost or Market Rule:

Back 21

The lower of cost or market rule will not apply if:

a. The subsequent sales price of an end product is not affected by its market value, or

b. The company has a firm sales price contract.

Front 22

Lower of Cost or Net Realizable Value (IFRS): Cost Under IFRS

Back 22

IFRS require inventory to be reported at the lower of cost or net realizable value.

Front 23

Lower of Cost or Net Realizable Value (IFRS): What is Net Realizable Value?

Back 23

An item's net selling price less the costs to complete & dispose of the inventory. Net realizable value under IFRS is the same as the "market ceiling" under U.S. GAAP.

Front 24

Lower of Cost or Net Realizable Value (IFRS): Recognize Loss in the Current Period

Back 24

IFRS do not specify where an inventory write-down should be reported on the income statement

Front 25

Lower of Cost or Net Realizable Value (IFRS): Reversal of Inventory Write-downs

Back 25

IFRS allow the reversal of inventory write-downs for subsequent recoveries of inventory value. The reversal is limited to the amount of the original write-down and is recorded as a reduction of total inventory costs on the income statement (COGS) in the period of reversal.

Front 26

Lower of Cost or Net Realizable Value (IFRS): Disclosure

Back 26

When losses are substantial & unusual from application of lower-of-cost-or-market principle, the amount of loss is disclosed in ICO & identified separately from COGS. The basic principle of consistency must be applied in valuation of inventory & the method should be disclosed in the FSs. If a significant change takes place in the measurement of inventory, adequate disclosure of the nature of the change, & if material, the effect on income should be disclosed in the FSs.

Front 27

Periodic Inventory System (method)

Back 27

The quantity of inventory is determined only by physical count (annually). Units of inventory & the associated costs are counted & valued at the end of the accounting period. The actual COGS is determined after each physical inventory by "squeezing" the difference between beginning inventory plus purchases less ending inventory, based on the physical count.

Front 28

Periodic Inventory System (method) - calculation of COGS

Back 28

Beg. Inventory

+ Purchases

= Cost of goods available for sale

- Ending Inventory (physical count)

= COGS

Front 29

Perpetual Inventory System (method)

Back 29

The inventory record of each item of inventory is updated for each purchase and each sales as they occur. The actual COGS is determined & recorded with each sale. Therefore, the perpetual inventory system keeps a running total of inventory balances.

Front 30

Hybrid Inventory Systems: Units of Inventory on Hand - Quantities Only

Back 30

Some companies maintain a perpetual record of quantities only. A record of units on hand is maintained on the perpetual basis, and this is often referred to as the "modified perpetual system." Changes in quantities are recorded after each sale & purchase.

Front 31

What is a disadvantage of using the periodic inventory system?

Back 31

Shortages are lumped in with COGS

Front 32

Hybrid Inventory Systems - Perpetual with Periodic at Year-End

Back 32

Most companies that maintain a perpetual inventory system still perform either complete periodic physical inventories or test count inventories on a random (or cyclical) basis.

Front 33

IFRS vs. GAAP - Inventory Cost Flow Assumptions

Back 33

The LIFO method is prohibited under IFRS, because it rarely reflects actual physical inventory flows. IFRS requires the use of the same cost flow assumption for all inventories having similar nature & use to the entity. U.S. GAAP does not have this restriction.

Front 34

Specific Identification Method:

Back 34

Under this method, the cost of each item in inventory is uniquely identified to that item. The cost follows the physical flow of the item in and out of inventory to COGS. Specific identification is usually used for physically large or high value items & allows for greater opportunity for manipulation of income.

Front 35

FIFO Method

Back 35

The first costs inventoried are the first costs transferred to COGS. Ending inventory includes the most recently incurred costs; thus, the ending balance approximates replacement cost. Ending inventory & COGS are the same whether a periodic or perpetual inventory system is used.

Front 36

During periods of rising prices, which inventory cost flow method results in the highest ending inventory, the lowest COGS, and the highest net income?

Back 36

FIFO method

Front 37

Weighted Average Method

Back 37

At the end of the period, avg. cost of each item is the weighted avg of the costs of all items in inventory. Weighted avg is determined by dividing total costs of inventory available by total # of units of inventory available, remembering that the beginning inventory is included in both totals. This method is best for homogeneous products & a periodic system.

Front 38

Moving Average Method:

Back 38

This method computes the weighted average cost after each purchase by dividing the total cost of inventory available after each purchase (inventory plus current purchase) by the total units available after each purchase. The moving average is more current than the weighted average. A perpetual inventory system is necessary to use the moving average method.

Front 39

LIFO Method (not permitted under IFRS)

Back 39

The last costs inventoried are the 1st costs transferred to COGS. Ending inventory incl. the oldest costs. Ending balance of inventory will typically not approximate replacement cost. LIFO does not relate to actual flow of goods in a company because most companies sell their oldest goods 1st to prevent holding obsolete items. If LIFO is used for tax purposes, it must also be used in GAAP financial statements.

Front 40

LIFO Financial Statement Effects

Back 40

LIFO better matches expense against revenues because it matches current costs w/ current revenues; thus, LIFO eliminates holding gains & reduces net income during inflation. If sales exceed production (or purchases), LIFO will create a distortion of net income because old inventory costs are matched with current revenue. LIFO is susceptible to income manipulation by intentionally reducing purchases to use old layers at lower costs.

Front 41

LIFO Layers:

Back 41

After original LIFO amount is created (base year), it may decrease or additional layers may be created each yr according to the amount of ending inventory. Additional layer is created in any year ending inventory > beg. inventory. An additional layer is priced at the earliest costs of the year in which it was created, because LIFO matches the most current costs w/ current revenues, leaving the 1st cost incurred to be incl. in any inventory increase.

Front 42

Dollar value LIFO:

Back 42

Under the regular LIFO method, inventory is measured in units & is priced at unit prices. Under the dollar-value method, inventory is measured in dollars & is adjusted for changing price levels. When converting from LIFO to Dollar-value LIFO, a price index will be used to adjust the inventory value.

Front 43

Dollar-Value LIFO - Internally Computed Price Index:

Back 43

Price Index = Ending Inventory at current year cost/ Ending inventory at base year cost

To compute the LIFO layer added in the current year at dollar-value LIFO, the LIFO layer at base year cost is multiplied by the internally generated price index.

Front 44

Dollar-value LIFO - Price Index Supplied:

Back 44

Where the price index is given in the problem, the year-end price index is multiplied by the LIFO layer at the base year cost to calculate the LIFO layer added at dollar-value LIFO.

Front 45

Firm Purchase Commitments:

Back 45

A legally enforceable agreement to purchase a specified amount of goods at some time in the future. All material firm purchase commitments are disclosed in the FSs or the notes. If contracted price exceeds the market price & it's expected that losses will occur when the purchase is actually made, the loss should be recognized at the time of the price decline. Description of losses on these commitments must be disclosed in the current period's I/S.

Front 46

Under U.S. GAAP, during periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation methods? FIFO? LIFO?

Back 46

FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory. LIFO or average, perpetual versus periodic will not.

Front 47

A company's inventory has the following associated values:

Cost $5,700

Market Ceiling $5,820

Replacement Cost $5,480

Market Floor $5,515

How will inventory be valued under GAAP? IFRS?

Back 47

GAAP $5,515. IFRS $5,700. Under U.S. GAAP, inventory is valued at the lower of cost or market. Market is defined as the median value of the market ceiling, market floor, and replacement cost. Under IFRS, inventory is valued at the lower of cost or net realizable value (Market ceiling).

Front 48

Which of the following statements are correct when a company applying the U.S. GAAP lower of cost or market method reports its inventory at replacement cost?

I.The original cost is less than replacement cost.

II.The net realizable value is greater than replacement cost.

Back 48

II only. The replacement cost is designated as market value if it is less than the net realizable value and greater than the net realizable value minus disposal costs. Since the inventory is reported at replacement cost, then replacement cost must be the market value (and lower than the original cost) and thus less than the net realizable value.

Front 49

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

a. Conventional retail.

b.Average cost retail.

c. Dollar-value LIFO.

d. Weighted average cost.

Back 49

The dollar-value LIFO method adjusts inventory retail prices and ending inventory cost for price-level changes.

Front 50

GAAP lower of cost or market rule may be applied to total inventory, to groups of similar items, or to each item. Which generally results in the lowest inventory amount?

a. Groups of similar items.

b. Separately to each item.

c. Total inventory.

d. All applications result in the same amount.

Back 50

Choice "b" is correct. Applying the lower of cost or market rule (item by item) separately to "each item" results in the lowest inventory amount.

Front 51

Bren Co.'s beg. inventory at Jan 1, 1993, was understated by $26,000, & ending inventory was overstated by $52,000. As a result, Bren's cost of goods sold for 1993 was:

a. Overstated by $26,000.

b. Understated by $26,000.

c. Overstated by $78,000.

d. Understated by $78,000.

Back 51

Understated by $78,000. The $26,000 understatement of beg. inventory creates an understatement of COG available which leads to a $26,000 understatement of COGS. The $52,000 overstatement of ending inventory creates a $52,000 understatement of COGS. Thus, COGS, is understated by $78,000 ($26,000 plus $52,000).

Front 52

Drew uses avg cost inventory method for internal reporting & GAAP LIFO for FS & income tax reporting. At Dec 31, the inventory was $375,000 using avg cost & $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on Dec 31 was $35,000. What adjusting entry should Drew record to adjust from avg cost to LIFO at Dec 31?

Back 52

DR: Cost of Goods Sold $20,000
CR: LIFO Reserve $20,000

Inventory using avg. cost $ 375,000

Less: Inventory using LIFO 320,000

LIFO reserve - required balance 55,000

Less: unadjusted bal in LIFO reserve 35,000

Adjustment required $ 20,000

Front 53

Dec 1, 1992, Alt Store received 505 sweaters on consignment from Todd. Todd's cost for the sweaters was $80 each, and they were priced to sell at $100. Alt's commission on consigned goods is 10%. At December 31, 1992, 5 sweaters remained. In its December 31, 1992, balance sheet, what amount should Alt report as payable for consigned goods?

Back 53

$45,000. Consigned goods are not included in inventory by Alt and a payable is not recorded until the goods are sold. 500 sweaters were sold for $50,000. After a 10% commission, $45,000 is payable.

Front 54

The following information pertains to Deal Corp.'s cost of goods sold:

Inventory, 1/1 $ 90,000

Purchases 124,000

Write-off of obsolete inventory 34,000

Inventory, 12/31 30,000

What amount should be reported for COGS?

Back 54

Inventory, 1/1 $ 90,000

Purchases 124,000

Goods available 214,000

Obsolete inventory (34,000)

Inventory, 12/31 (30,000)

Cost of goods sold $150,000

Front 55

Jan 1, Card signed a 3-yr, noncancelable contract allowing Card to purchase 500,000 part units annually from Hart Supply at $.10/unit & guarantees a minimum annual purchase of 100,000 units. During the Year, the part unexpectedly became obsolete. Card had 250,000 units of inventory at Dec 31 & believes these parts can be sold as scrap for $.02/unit. What amount of probable loss from the contract should Card report in its Dec 31 I/S?

Back 55

The probable loss from the purchase commitment is the minimum annual purchase of 100,000 units times the 2 years left on the noncancelable purchase contract at $0.08 per unit ($0.10 purchase price - $0.02 scrap value), or $16,000.

Front 56

Which is correct concerning the U.S. GAAP LIFO method (as compared to the FIFO method) in a period when prices are rising?

a. Deferred tax and COGS are lower.

b. Current tax liability's lower & ending inventory is higher.

c. Current tax liability & ending inventory are higher.

d. Current tax liability's lower & COGS is higher.

Back 56

Current tax liability is lower and cost of goods sold is higher.

Front 57

A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements in regard to current assets & gross profit?

Back 57

Current assets: overstated

Gross profit: overstated

Front 58

Which U.S. GAAP inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

a. Weighted average.

b. FIFO.

c. Moving average.

d. Dollar-value LIFO.

Back 58

Under FIFO, the first costs inventoried are the first costs transferred to cost of goods sold. In a period of rising prices, FIFO results in the lowest cost of goods sold and the highest net income.

Front 59

At the end of the year, Ian Co. determined its inventory to be $258,000 on a FIFO (first in, first out) basis. The current replacement cost of this inventory was $230,000. Ian estimates that it could sell the inventory for $275,000 at a disposal cost of $14,000. If Ian's normal profit margin for its inventory was $10,000, what would be its net carrying value under U.S. GAAP?

Back 59

$251,000. The market floor of $251,000 is the middle value and therefore market value. Because the market value of $251,000 is less than the cost of $258,000, the inventory will be reported at $251,000.

Front 60

Costs pertaining to Den's inventory purchase:

- 700 units of product A $ 3,750

- Freight-in 175

- Cost of materials and labor incurred to bring product A to saleable condition 900

- Insurance cost during transit of purchased goods 100

What amount should Den record as the cost of inventory as a result of this purchase?

Back 60

$4,925. The cost of the 700 units of product A, the freight-in, the cost of the materials and labor to make product A saleable, and the insurance costs are all included in the cost of inventory.

Front 61

Corp. entered a purchase commitment to buy inventory. At the end of the period, current market value of inventory was materially < the fixed purchase price. Which of the following accounting treatments is most appropriate?

a. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account.

b. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.

c. Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statement.

d. Neither describe the purchase obligation, nor recognize a loss on the income statement or balance sheet.

Back 61

Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.

Front 62

Chewy determined its inventory on a FIFO basis at $26,000 w/ replacement cost of $20,000. Chewy estimated that, after further processing costs of $12,000, the inventory could be sold as finished candy for $40,000. Chewy's normal margin is 10% of sales. Under the IFRS lower of cost or net realizable value rule, what should Chewy report as inventory in its Dec 31 B/S?

Back 62

$26,000.

Net realizable value is computed as selling price less costs to complete and sell:

Net realizable value = $40,000 - $12,000 = $28,000

The net realizable value of $28,000 is greater than the cost of $26,000, so the inventory will be reported at the cost of $26,000.

Front 63

Which of the following inventory accounting methods is not permitted under IFRS?

a. Moving average.

b. FIFO.

c. LIFO.

d. Specific identification.

Back 63

LIFO. IFRS state that the inventory accounting method used by an entity should match the actual flow of goods. LIFO rarely reflects the actual flow of goods and is therefore prohibited under IFRS.

Front 64

Garson Co. recorded goods in transit purchased F.O.B. shipping point at year end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson's assets and retained earnings at year end?

Back 64

Assets: Understated

Retained Earnings: Understated

Because the goods are in transit, buyer should have incl. them in inventory. Otherwise, inventory and assets are understated. An understatement of ending inventory results in an overstatement of COGS, which results in an understatement of NI and retained earnings.

Front 65

What is the appropriate treatment for goods held on consignment?

a. The goods should be included in ending inventory of the consignee.

b. The goods should be included in COGS of the consignee only when sold.

c. The goods should be included in ending inventory of the consignor.

d.The goods should be included in COGS of the consignor when transferred to the consignee.

Back 65

The goods should be included in ending inventory of the consignor. While an agent (consignee) will hold and sell goods on behalf of the consignor, until the inventory is sold, the seller (consignor) will include in his/her inventory because title and risk of loss are retained by the consignor.

Front 66

In January, Stitch adopted the dollar-value LIFO method. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch's inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?

Back 66

$83,000. Since inventory increased $30,000 using base-year prices, under dollar value LIFO we must restate this increase by the price-level index,10%. $30,000 x 10% = $3,000, so this increase becomes $33,000 using current-year prices. The amount of inventory Stitch should report in its year-end B/S is $83,00=$50,000 + $33,000.

Front 67

Which inventory-costing method will produce a lower inventory turnover ratio in an inflationary economy?

a. FIFO (first in, first out).

b. Moving average.

c. LIFO (last in, first out).

d. Weighted average.

Back 67

FIFO. Inventory turnover ratio = COGS/avg. inventory. Under FIFO, our COGS would be lower, and our ending inventory would be higher, causing our average inventory to be higher as well. Therefore, FIFO will result in a lowest inventory turnover in an inflationary environment assuming constant inventory quantities.