Chapter 7 - Inventory (Cost Measurement & Flow Assumption)

The periodic system, does it also update the inventory account similar to the perpetual system? If not, how does it work? What accounts does it debit? When does periodic system record COGS?

- no inventory account; has temporary accounts like purchase account. - debits purchase account - periodic system records COGS at the end of the accounting period.

Year end entry to record COGS will do:

1) adj. inventory to correct amounts. 2) adjust temporary inventory related accounts "0" 3) record COGS

For each of the following statements, indicate whether the FIFO, LIFO, or Average Cost method is being described. 1) This method assumes the newest inventory items remain in ending inventory. 2) This method assumes the newest inventory items are sold first.

1) assumes newest inventory items remain in EI - FIFO 2) newest inventory are sold first - LIFO

Assuming inventory costs are rising over time, for each of the following statements, indicate whether the FIFO, LIFO, or Average Cost method is being described. 1. This method produces the lowest cost of goods sold. 2. This method produces the highest income income taxes. 3. This method produces the lowest cost of ending inventory.

1. lowest COGS - FIFO 2. highest income taxes - FIFO 3. lowest cost of EI - LIFO

If we are the BUYER and goods are shipped at FOB Shipping point vs. FOB destination point, who owns the legal title of the inventory while in transit? Who gets charged for freight and how is it accounted for?

BUYER & FOB Ship point - buyer pays & owns legal title, therefore freight charges are incurred, hence debits - inventory account BUYER & FOB destination point - buyer doesn't pay or own legal title, therefore no freight charges and no buyer account.

Under the perpetual system, which account is directly updated for all increase and decreases to inventory's cost ASAP? What other account has been majorly affected here?

Perpetual system - inventory account is always up to date b/c COGS is recorded at time of inventory's sale, meaning inventory account is directly related to inventory cost. - COGS is also affected here

Which party is assumed to be responsible for freight charges if goods are shipped F.O.B. destination point? Select one: a. the buyer b. the seller

the seller

Brown Inc. uses the periodic inventory system and has the following selected information available at its 12/31/X5 year-end: Inventory at 1/1/X5 $20,000 Inventory at 12/31/X5 per a physical count 35,000 Purchases during 20X5 500,000 Purchase returns and allowances 60,000 Purchase discounts 12,000 Freight-In 15,000 Sales returns and allowances 18,000 Sales discounts 5,000 Sales revenue 900,000 Question: In the year-end journal entry to record cost of goods sold, cost of goods sold should be debited for what amount?

428000; Debit: CGS - 428,000(plug) Purchase Discounts - 12,000 Purchase Returns and Allowances - 60,000 Inventory (ending) - 35,000 Credit: _____Inventory (beginning) - 20,000 _____Purchases- 500,000 _____Freight-In - 15,000

Shaw Corp. has the following inventory information available for the month of August: August 1 Beg. Inv. 15 units @ $20 each = $300 August 8 Sales 8 units August 10 Purchase 25 units @ $30 each = $750 August 20 Sales 20 units QUESTION: Using the perpetual weighted-average method, what should be the cost of goods sold for August?

716.2; The cost of the 8 units sold on Aug 8 are $20 each. 8 x $20 = $160. To determine the weighted-average cost of the units sold on Aug 20, compute a new weighted-average cost per unit as follows: 7 units remaining x $20 each = $140 25 units x $30 each = 750 32 units available at a cost of: $890 Therefore, the cost per unit (rounded to the nearest penny) is $890/32 = $27.81 The cost of the 20 units sold on Aug 20 is calculated as follows: 20 x $27.81 = $556.20 Therefore, total CGS for August is: $160 + $556.20 = $716.20

Washington Inc. adopted the dollar-value LIFO method on December 31, 20X3 (the base year). Its inventory on that date was $40,000 and the relevant price index was 100%. Information regarding inventory for the subsequent years of 20X4, 20X5, and 20X6 is as follows: Date Inventory at Current Prices Price Index December 31, 20X4 $75,000 110% December 31, 20X5 $90,000 115% December 31, 20X6 $100,000 120% Question: What is the cost of ending inventory at 12/31/X6 using the Dollar-Value-LIFO (DVL) method?

88677

A manufacturing company has which of the following types of inventory accounts? (check all that apply) Select one or more: a. Work-in-process inventory b. Raw materials inventory c. Finished goods inventory

A, B, & C (ALL)

When company pays for freight charges as a BUYER, it is called _______. When SELLERS pay freight, those are known as ________.

BUYER = freight-in SELLER = freight-out

What is the equation for COGS? What does NP include?

COGS = BI + NP - EI where NP includes: purchases, freight-in, purchase discounts (if gross method is used), & purchase R&A

What is the year end entry to record COGS (i.e. the JE):

Debit - inventory (for ending balance), purchase R&A, purchase discount & COGS (plug it) Credit - Inventory (for beg. balance), freight-in, & purchases.

Brannon Corp. uses the FIFO cost flow assumption during the year but converts its FIFO ending inventory to LIFO costs using the dollar-value-LIFO (DVL) method at the end of the year. It had the following account balances at 12/31/X6 before the year-end entry to adjust inventory costs to LIFO using the DVL method: debit credit Inventory $450,000 Allowance to Reduce Inventory to LIFO $30,000 After performing its DVL calculations at the end of 20X6, the company has determined the cost of its inventory using the DVL method to be $413,000. Required: Prepare the year-end adjusting entry to adjust inventory to LIFO cost using the DVL method.

Debit: COGS - 7000 Credit: Allowance to Reduce Inventory to LIFO - 7000

Which company (seller or buyer) is responsible for freight charges?

Depends on if it is FOB ship or FOB destination point

When is EI computed?

EI is computed when the company takes a physical count of their EI.

Thurman Corp. consigns a portion of its inventory to various stores along the east coast. Any unsold inventory items at year-end should be reported as part of the consignee's inventory cost rather than Thurman's own.

False

True or False: IFRS encourages companies to use LIFO for financial reporting.

False

Under the periodic system, when is COGS recorded?

NOT at the time of sale, rather AT the end of the period.

If we are the SELLER and goods are shipped at FOB Shipping point vs. FOB destination point, who owns the legal title of the inventory while in transit? Who gets charged for freight and how is it accounted for?

SELLER & FOB Ship point - seller doesn't pay or own legal title, therefore no freight charges and no buyer account. SELLER & FOB destination point - seller pays & owns legal title, therefore freight charges incurred, hence debit to freight-out or shipping expense account.

True or False: If the LIFO method is used for income tax purposes, it must be used for financial statement purposes as well. Select one: True False

True

Which inventory system(s) require(s) a company to take a physical count of inventory on hand at least once a year? (check all that apply) Select one or more: a. perpetual system b. periodic system

a & b

Which inventory system allows a company's managers to know the cost of inventory on hand at any time? a. perpetual system b. periodic system

a - Perpetual

Hammond Inc. has the following inventory information available for the month of November: Nov 1 Beg. Inv. 25 units @ $50 each = $1,250 Nov. 5 Sales 15 units Nov. 12 Purchase 35 units @ $60 each = 2,100 Nov. 25 Sales 25 units Calculate cost of goods sold under each of the following three assumptions: a. If the company uses the perpetual FIFO method, cost of goods sold for November is: b. If the company uses the periodic LIFO method, cost of goods sold for November is: c. If the company uses the perpetual LIFO method, cost of goods sold for November is:

a. 2150 b. 2850 c. 2250

When a company is the buyer of inventory, under which condition should freight charges typically become part of the inventory's cost? a. When the inventory purchase has shipping terms of F.O.B. destination point. b. When the inventory purchase has shipping terms of F.O.B. shipping point.

a. When the inventory purchase has shipping terms of F.O.B. destination point.

A company's cost of goods available for sale is equal to: a. beginning inventory + net purchases. b. cost of goods sold. c. beginning inventory - net purchases. d. net purchases + ending inventory. e. beginning inventory + ending inventory.

a. beginning inventory + net purchases.

For each of the following statements, indicate whether the correct answer is FIFO, LIFO, or Neither. The "neither" choice means the inventory cost flow assumption doesn't affect the item referenced in the question. a. All else being equal, which method yields the lowest cost of goods sold? b. All else being equal, which method yields the lowest gross margin? c. All else being equal, which method yields the highest income tax expense? d. All else being equal, which method yields the lowest sales revenue? e. All else being equal, which method yields the highest cost of ending inventory?

a. lowest COGS = FIFO b. lowest GM = LIFO c. highest income tax = FIFO d. lowest sales revenue = neither e. highest cost of EI = FIFO

Which of the following does IFRS not allow? a. the LIFO method b. the periodic inventory system c. the net method for recording purchase discounts d. the average cost method e. the FIFO method f. the perpetual inventory system

a. the LIFO method

Assuming a company uses the perpetual inventory system, which of the following occurrences would cause the inventory account balance to decrease? (Check all that apply) a. the recording of cost of goods sold b. the recording of purchase returns and allowances c. the recording of freight-in d. the recording of sales discounts e. the recording of purchase discounts f. the recording of freight-out

a: recording COGS - when CGS is debited, the inventory account is credited. B: recording Purchase R&A - when AP (or Cash) is debited, the Inventory account would be credited. C: the recording of purchase discounts

When a LIFO liquidation occurs, which of the following statements is true? (Check all that apply) Select one: a. Cost of goods sold will better reflect current costs. b. The number of units in ending inventory is lower than its beginning inventory. c. The FIFO method is being used.

b. The number of units in ending inventory is lower than its beginning inventory.

The LIFO conformity rule requires: a. a company which uses the LIFO method for income tax purposes to use the FIFO method for financial reporting purposes. b. a company which uses the LIFO method for income tax purposes to also use the LIFO method for financial reporting purposes. c. a company which uses the LIFO method for financial reporting purposes to actually sell its inventory in a LIFO pattern. d. a company which uses the LIFO method for financial reporting purposes to also use the LIFO method for income tax purposes.

b. a company which uses the LIFO method for income tax purposes to also use the LIFO method for financial reporting purposes.

Which of the following methods requires a company to keep more detailed inventory records with respect to physical quantities on hand and their respective costs? a. Dollar-Value LIFO Method b. LIFO Method

b; LIFO method

To sum it up, the "cost" of inventory to buyer impacts which FOUR accounts and how?

base purchase - increase cost effect purchase discount - decrease cost effect purchase R&A - decrease cost effect freight-in - increase cost effect

Which inventory system(s) require(s) a company to take a physical count of inventory on hand at least once a year? (check all that apply) Select one or more: a. periodic system b. perpetual system

both - perpetual & periodic

What is commonly referred to as the LIFO conformity rule was established by: Select one: a. the International Accounting Standards Board. b. the Financial Accounting Standards Board. c. the Internal Revenue Code. d. the Securities and Exchange Commission.

c. IRS

At the end of the year, unsold inventory still being held on consignment should be included in the inventory of: Select one: a. both the consignor and the consignee. b. neither the consignor nor the consignee. c. the consignor but not the consignee. d. the consignee but not the consignor.

c. the consignor but not the consignee.

The dollar difference between ending inventory's cost using the LIFO and FIFO methods is commonly referred to as the: a. Cost of goods sold reserve. b. Cost reserve. c. Profit reserve. d. LIFO reserve. e. FIFO reserve.

c; FIFO - EI LIFO = LIFO Reserve

ABC Inc. uses the perpetual inventory method along with the net method of recording purchase discounts. They had the following transactions occur in February: Feb 1: Purchased inventory costing $4,000 on account with terms 2/10, n/45. The inventory was shipped F.O.B shipping point and shipping charges were $800 paid in cash. Feb 11: Paid for inventory in full. The Feb. 11 journal entry should include a: (check all that apply) Select one or more: a. credit to "Purchase Discounts" for $80 b. debit to "Accounts Payable" for $4,000 c. credit to "Inventory" for $80 d. credit to "Cash" for $3,920 e. debit to "Accounts Payable" for $3,920 f. credit to "Cash" for $4,000

d & e; Feb 1 Inventory 3,920 _____Accounts Payable 3,920 Feb 11 Accounts Payable 3,920 _____Cash 3,920

he cost of beginning inventory plus the cost of net purchases is commonly referred to as: a. cost of goods sold. b. sales revenue. c. gross profit. d. cost of goods available for sale. e. ending inventory.

d. cost of goods available for sale.

True or False: A company is required to use the same cost flow assumption for all of its inventory.

false

What does FOB ship point stand for? Who between buyer and seller pays for freight? What account takes freight charges under its belt?

if title passes from seller to buyer at shipping point, the buyer holds legal title while in transit. Therefore, buyer pays for freight, which are part of inventory cost.

What does FOB destination point stand for? Who between buyer and seller pays for freight? What account takes freight charges under its belt?

if title passes from seller to buyer at shipping point, the seller holds legal title while in transit. Therefore, seller pays for freight, which are part of operating expense.