Inventory

Cost of shipping goods to customers is a...

selling expense and not included in either inventory or cost of sales.

There are two costing methods used to estimate ending inventory: retail inventory and gross profit

(1) The retail inventory method uses the current cost of inventory and revenue (ie, sales) to estimate ending inventory. (2) The gross profit method uses the company's historical gross profit percentage (derived from prior periods financial data) to determine COGS and estimate ending inventory.

Per the Codification, what is considered the normal capacity of production facilities?

A range that may vary based on business and industry-specific factors. Normal capacity refers to a range in production levels that will vary based on business and industry-specific factors. Normal capacity is the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.

Dollar-value LIFO (DVL) focuses on the dollar value of ending inventory (EI) rather than units. By using a price index, the effect of inflation is removed before the change in inventory value is considered. The year DVL is adopted (ie, the base year) always has a price index of 1.00.

Applying DVL involves: converting the current EI into equivalent base-year dollars by dividing by the current price index comparing the "deflated" EI with the prior-year base cost to determine whether a new layer is created or part of an older layer is used. If a new layer is needed, it is restated (ie, inflated) from base-year dollars back to current-year dollars.

If LIFO, what is valuation method?

LCM

The retail inventory method is a means of estimating ending inventory by relying on the relationship between the cost of inventory and the sales price.

At the end of each period, companies convert ending inventory from retail dollars back to cost dollars by using a cost-to-retail percentage. Allowed for interim reporting but not allowed for year end reporting

A company manufactures and distributes replacement parts for various industries. As of December 31, year 1, the following amounts pertain to the company's inventory: (look at the graphic for the details) What is the total carrying value of the company's inventory as of December 31, year 1, under IFRS? A. $178,000 B. $191,000 C. $193,000 D. $207,000

B. $191,000 Under IFRS, inventory is valued at the lower of cost or net realizable value (NRV), applied on an item by item basis. NRV is the estimated selling price less estimated costs of completion and sale.

The initial cost of inventory includes the acquisition cost plus any ordinary and necessary costs incurred for preparation for sale to customers.

Common examples include warehousing prior to sale, insurance, repackaging, freight-in paid (ie, shipping costs from overseas) and costs incurred to bring the inventory to a saleable condition.

true or false, LIFO method produces the same result in both periodic and perpetual

False. When using the periodic method under LIFO, it is assumed that all sales occur at the end of the period and are taken from the latest purchases. Since goods cannot be sold before they are purchased, the perpetual method will require that early sales be charged against the most recent purchases as of the date of sale and will lead to a different ending inventory balance.

To determine whether an item is included in inventory, legal title to the goods must be considered.

For goods in transit, if shipped FOB destination point, the title passes to the buyer when the goods are received. If shipped FOB shipping point, the title passes to the buyer when the goods are shipped. Goods on consignment are owned by the consignor.

The retail inventory method is a means of estimating ending inventory by relying on the relationship between the cost of inventory and the sales price. This method allows retailers to avoid the time and cost of taking physical inventory counts for interim reporting periods during the year.

However, it is not allowed at year end, at which time an actual physical count is required

IFRS allows for recoveries of previously written down inventory, limited by the amount required to restore the inventory to its current value or the extent of the previously recorded loss, whichever is lower.

IFRS and most GAAP inventories are valued at the lower of cost or NRV.

Dollar-value LIFO (DVL) focuses on the dollar value of ending inventory (EI) rather than units. It applies a current-year price index to remove the effect of inflation before any change in inventory is considered.

If a new LIFO layer is needed, it is restated from base-year dollars back to current-year dollars. The sum of the restated layers equals ending inventory

In calculating cost of goods manufactured, what is included in cost pool?

It includes direct materials, direct labor, and allocated manufacturing overhead. Overhead costs include indirect labor and materials (eg, production supervisor's salary, cleaning supplies) and other costs related to the manufacturing (eg, insurance, depreciation, utilities)

The cost of goods manufactured is the accumulation of the production costs for goods that were completed during a period.

It includes direct materials, direct labor, and allocated manufacturing overhead. The cost of the ending inventory is beginning inventory + cost of goods manufactured − cost of goods sold

In calculating cost of inventory, when a supplier ships free on board destination point, how is this treated?

Items shipped free on board destination are a selling cost for the seller.

The lower of cost or market (LCM) rule applies to inventory accounted for under LIFO. Under LIFO, the last items purchased are the first items sold.

LCM compares the historical cost to the current market value. Although market value is usually replacement cost, it is subject to a ceiling (NRV) and floor (NRV − profit margin) limitation.

If IFRS, what is valuation method?

LCNRV

If anything other than LIFO, what is valuation method?

LCNRV

Unless LIFO or the retail inventory method is used, the lower of cost or net realizable value (LCNRV) rule applies (eg, FIFO, average cost).

LCNRV compares cost with the NRV (sales prices less costs required to complete the inventory and disposal costs).

which of the following inventory-costing methods will produce a higher inventory turnover ratio in an inflationary economy? FIFO (first in, first out). LIFO (last in, first out). Moving average. Weighted average.

LIFO (last in, first out). The inventory turnover ratio is calculated by dividing Cost of Goods Sold by Average Inventory. In an inflationary economy, inventory valued under LIFO will be lower and cost of goods sold higher than inventory valued under FIFO. These attributes result in a higher numerator, Cost of Goods Sold, and lower denominator, Average Inventory, resulting in a higher inventory turnover ratio. Either average method will fall somewhere between FIFO and LIFO.

In periods of rising prices, FIFO produces the lowest cost of goods sold, resulting in the highest net income, thus maximizing profits.

LIFO produces the opposite result. The average cost methods generally fall between FIFO and LIFO.

What is the definition of NRV?

NRV is the estimated selling price less estimated costs of completion and sale.

Definition of Floor

NRV − Profit margin

Is LIFO an acceptable method under IFRS?

No

On July 1, year 1, Link Development Company purchased a tract of land for $900,000. Additional costs of $150,000 were incurred in subdividing the land during July through December year 1. Of the tract acreage, 70% was subdivided into residential lots as shown below and 30% was conveyed to the city for roads and a park.

Per ASC 970, real estate donated to municipalities or other governmental agencies for uses that will benefit the project shall be allocated as a common cost of the project. None of the cost should be allocated to land donated to the city, since that land will not directly generate revenue (and therefore has no sales value). Therefore, the total cost of acquiring the land ($900,000 + $150,000 = $1,050,000) should be allocated to the lots which will generate revenue.

Among FIFO, LIFO, and weighted average, in periods of rising prices, FIFO will result in the highest value of inventory, LIFO the lowest, with average somewhere between. When goods are sold in the order they are acquired, specific identification will give the same results as FIFO.

Since LIFO is not an acceptable method under IFRS, weighted average will result in the lowest inventory value.

A consignment arrangement is when one party (the consignor) places goods with another party (the consignee) who then holds them for sale to a third party.

The consignor reports the goods as inventory, including any costs incurred to ship the goods to the consignee.

Under a consignment arrangement, the consignee sells the merchandise on behalf of the consignor for a commission, plus reimbursable costs.

The consignor retains ownership of merchandise and reports the consigned inventory on its balance sheet until sold. When the goods are sold, the consignor recognizes sales revenue, cost of goods sold, commission expense, and selling expenses (if any).

True or False, Under IFRS, inventory is valued at the lower of cost or net realizable value (NRV), applied on an item by item basis

True

When goods are sold in the order they are acquired, specific identification will give the same results as FIFO.

True

True or False, Perpetual LIFO will provide different results than periodic LIFO?

True Under periodic LIFO, the evaluation is made at the end of the period. As a result, ending inventory would consist of goods on hand at the beginning of the year with any increases in quantities coming from the most recent purchases. Under perpetual LIFO, however, the evaluation is made at the time of each sale. As a result, when goods were sold between or before purchases, inventory on hand at the beginning of the year may have been used for sales that occurred before additional inventory was purchased.

true or false, FIFO leads to the same ending inventory balance under both the perpetual and periodic systems.

True Since FIFO assumes that ending inventory consists of the most recent purchases, the FIFO cost flow assumption leads to the same ending inventory balance under both the perpetual and periodic systems

The periodic system makes adjustments to inventory only at the end of the period; therefore, inventory must be estimated during the year. The gross profit method relies on the company's historical gross profit percentage when estimating inventory.

Under a perpetual system, inventory is updated continuously, so there is no need to estimate ending inventory.

Are insurance costs incurred during transit of purchased goods including in inventory valuation?

Yes

Does inventory include indirect labor and indirect materials?

Yes The cost of goods manufactured is the accumulation of the production costs for goods that were completed during a period. It includes direct materials, direct labor, and allocated manufacturing overhead. The cost of the ending inventory is beginning inventory + cost of goods manufactured − cost of goods sold.

If LIFO or the retail inventory method is used by the company, the lower of cost or market (LCM) rule is applied. For all other inventory methods (eg, FIFO, average cost), what method is used?

a simplified lower of cost or NRV (LCNRV) rule is used. The LCNRV rule compares cost (ie, purchase price) with NRV (sales price less costs required to complete the inventory and disposal costs).

The gross profit method subtracts the estimated gross profit (in dollars) from net sales to produce an estimated COGS. Deducting COGS from the goods available for sale results in an estimated ending inventory. To determine inventory loss,

any salvage value and insurance proceeds must be deducted from the ending inventory.

Under IFRS, specific identification accounting for inventory is required for a. all inventory b. inventory that is not interchangeable c. retail inventory d. it is not required for inventory; specific identification is not allowed

b. Inventory that is not interchangeable. This answer is correct because specific identification is required for inventory that is not interchangeable or goods that are produced and segregated for specific projects.

The gross profit method uses the company's

historical gross profit percentage (derived from prior periods financial data) to determine COGS and estimate ending inventory.

The retail inventory method uses the

current cost of inventory and revenue (ie, sales) to estimate ending inventory.

The average cost method used in a perpetual inventory system is known as the

moving average method. A new average unit cost is calculated each time goods are purchased and used to value the cost of goods sold and ending inventory. It is calculated as [(Cost of purchased units + Cost of units in inventory) / New total number of units].

Under conventional retail, the percentage calculation includes

net markups but excludes net markdowns.

Other expenses not directly tied to the production process (eg, advertising, staff salaries, credit losses) are classified as

period costs and are charged to the period they are incurred.

A disadvantage of the periodic inventory system is that

the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages