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36 Cards in this Set
- Front
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Inventory must be written down to market subsquent to acquisition if its utility is no longer as great as its cost. The difference should be recognized as a
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LOSS of the current period. The loss should be recognized whenever the utility of goods is impaired by damage, deterioration, obsolecence, changes in price levels, changes in demand, style changes, etc
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Market price is the current cost to replace inventory. Market should not Exceed____ or be less than______ |
1) Exceed a ceiling equal to NRV 2) Be less than a floor equal to NRV reduced by an allowance for an approximately normal profit margin |
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Historic cost 100,000
CRC 82,000
NRV 90,000
Profit Margin 5,000
What are the journal entries to write down inventory?
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Loss from inventory write down 15,000 Inventory 15,000 |
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Under IFRS Inventories are measured at the |
lower of cost and NRV. NRV is the estimated selling price less costs. |
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In accounting for inventories, generally accepted accounting principles require departure from the historical cost principle when the utility of inventory has fallen below cost. This rule is known as the “lower-of-cost-or-market” rule. The term “market” as defined here means |
Replacement cost of the inventory. |
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The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value minus normal profit margin is below the original cost. Under the lower of cost or market method, the inventory item should be valued at |
Original cost. |
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The replacement cost of an inventory item is below the net realizable value and above the net realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable value less the normal profit margin. Under the lower-of-cost-or-market (LCM) method, the inventory item should be valued at |
Original cost. |
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Under IFRS, measurement of inventory subsequent to initial recognition compares cost with |
Net realizable value (NRV). |
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Historical cost $80,000 Net realizable value (NRV) 77,000 Current replacement cost 76,000 Normal profit margin 2,000 The company expects that on December 31, Year 2, the inventory’s NRV reduced by a normal profit margin will be at least $81,000. What amount of inventory should the company report in its interim financial statements under IFRS and under U.S. GAAP on June 30, Year 2?
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Under U.S. GAAP, inventory is reported at its historical cost of $80,000 because no write-down of inventory is reasonably anticipated for the year. Under IFRS, the inventory is measured at the lower of cost ($80,000) and NRV ($77,000) for each interim reporting period. |
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Net losses on firm purchase commitments to acquire goods for inventory result from a contract price that exceeds the current market price. If a firm expects that losses will occur when the purchase occurs, expected losses, if material, |
Should be recognized in the accounts and separately disclosed as losses on the income statement of the period during which the decline in price takes place. |
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Calculate inventory cost using Gross profit method of estimating inventory |
Beginning inventory 60 Purchases + 20 Goods available =80 sales 50 Gross Profit @ 20% -10 COGS -40 Approximate inv cost =40
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The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale? Net Mark Ups Freight in Purchase Returns Sales Returns
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Purchase Returns
In the retail inventory method, records are kept of beginning inventory and net purchases at both cost and retail. Purchase returns are deducted in the calculation of net purchases at both cost and retail because the return of goods reduces both total cost and the total sales price of the purchased goods
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The following information is available for Sweden Company for its most recent year:
Net sales $1,800,000 Freight-in 45,000 Purchase discounts 25,000 Ending inventory 120,000
The gross margin is 40% of net sales. What is the cost of goods available for sale?
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Ending inventory $ 120,000
Cost of goods sold + 1,080,000
Goods available for sale* $1,200,000
(BI + PUR = GAFS* = COGS + EI).
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Under the retail inventory method, freight-in would be included in the calculation of the goods available for sale for which of the following? Cost and/or Retail |
Cost-Yes Retail-No
In the retail inventory method, records of the components of net purchases (purchases, freight-in, and purchase returns and allowances) are kept at cost and are included with beginning inventory in the calculation of the goods available for sale at cost. Records are kept at retail only for net purchases, not its components, because retail prices are usually set to cover a variety of costs, such as freight-in. Consequently, freight-in, a component of net purchases, is explicitly and directly included only in the calculation of goods available for sale at cost.
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Which inventory cost flow assumption is the best match for:
The measurement will be the same regardless of whether the inventory is recorded at the end of the period (a periodic system) or on a perpetual basis
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FIFO |
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Which inventory cost flow assumption is the best match for:
Reflects the actual physical flow of goods |
Specific identification requires determining which specific items are sold and thus reflects the actual physical flow of goods. It can be used for blocks of investment securities or special inventory items, such as automobiles or heavy equipment. |
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Which inventory cost flow assumption is the best match for:
Determines an average cost only once (at the end of the period) and is therefore applicable in a periodic system. It may be used in a perpetual system that records only inventory quantities. |
The assumption in an average cost system is that goods are indistinguishable and are therefore measured at an average of the costs incurred. The moving-average method requires determination of a new weighted-average cost after each purchase and thus is used only in a perpetual system. The weighted-average method determines an average cost only once (at the end of the period) and is therefore applicable in a periodic system. It may be used in a perpetual system that records only inventory quantities.
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Which inventory cost flow assumption is the best match for:
Ending inventory consists of the latest purchases and approximates current replacement cost. |
The FIFO method assumes that the first goods purchased are the first sold. |
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Which inventory cost flow assumption is the best match for:
Requires an estimate of price level changes for specific inventories.
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Dollar- Value LIFO
Dollar-value LIFO determines changes in ending inventory in terms of constant purchasing power rather than units of physical inventory. This calculation uses a specific price index for each year. |
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On April 27, Year 1, Hamilton purchased $75,000 of inventory on account. Periodic Method JE
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Debit Credit Purchases $75,000 Accounts Payables $75,000 |
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On April 27, Year 1, Hamilton purchased $75,000 of inventory on account. Perpetual Method JE |
Inventory $75,000 Accounts Payable $75,000 |
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On September 14, Year 1, Hamilton sold $85,000 of inventory for $110,000. Periodic Method JE |
Accounts Receivable $110,000 Sales $110,000 |
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On September 14, Year 1, Hamilton sold $85,000 of inventory for $110,000. Perpetual Method JE |
Accounts Receivable $110,000 Cost of Goods Sold 85,000 Sales $110,000 Inventory 85,000 |
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On December 31, Year 1, Hamilton must close its books for the end of its reporting period. Periodic Method JE |
Cost of Goods Sold $85,000 Purchases $75,000 Inventory 10,000
At the end of the period, the inventory and cost of goods sold accounts must be adjusted for users of the periodic method. Cost of goods sold is simply the original cost of all the units sold throughout the period. Purchases must be closed out to the inventory account as well. |
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On December 31, Year 1, Hamilton must close its books for the end of its reporting period. Perpetual Method JE |
No Adjustment No Adjustment |
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On December 28, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows: Packaging for shipment $1,000 Shipping 1,500 Special handling charges 2,000 These goods were received on December 31. In Kerr’s December 31 balance sheet, what amount of cost for these goods should be included in inventory? |
$50,000 FOB destination means that title passes upon delivery at the destination, the seller bears the risk of loss during transit, and the seller is responsible for the expense of delivering the goods to the designated point. Consequently, the packaging, shipping, and handling costs are not included in the buyer’s inventory. The amount that Kerr should include is therefore the purchase price of $50,000. |
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What is the formula for calculating the index number for the LIFO- Dollar Value? |
In the numerator, the ending inventory at current-year cost and in the denominator, the ending inventory at base-year cost. |
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Walt Co. adopted the dollar-value LIFO inventory method as of January 1, when its inventory was valued at $500,000. Its December 31 inventory was $577,500 at current-year cost and $525,000 at base-year cost. What was Walt’s dollar-value LIFO inventory at December 31? |
The index is 1.10 ($577,500 ÷ $525,000), and the dollar-value LIFO cost at December 31 is $527,500 {$500,000 base layer + [($525,000 – $500,000) × 1.10]}. |
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Cobb’s ending inventory had a base-year cost and an end-of-year cost of $300,000. In Year 2, the ending inventory had a $400,000 base-year cost and a $440,000 end-of-year cost. What dollar-value LIFO inventory cost would be reported in Cobb’s December 31, Year 2, balance sheet? |
The index for Year 2 is 1.1 ($440,000 ÷ $400,000), and the dollar-value LIFO cost at December 31, Year 2, is $410,000 [$300,000 base layer + 1.1 ($400,000 – $300,000) Year 2 layer]. |
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Holly Company’s inventory is overstated at December 31 of this year. The result will be |
Cost of goods sold equals beginning finished goods, plus cost of goods manufactured for a manufacturer or purchases for a retailer, minus ending Inventory. Overstated ending inventory therefore results in understated cost of goods sold, overstated net income, and overstated retained earnings in the period of the error. When these errors reverse in the following period, beginning inventory and cost of goods sold will be overstated, and net income will be understated. Retained earnings will be correct. |
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Retail Method What is the Cost-retail ratio |
Goods available for sale at cost/GAS retail |
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Retail Method Ending inventory at cost |
Ending inventory at retail x Cost-retail ratio |
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The following information was obtained from Smith Co.: Sales $275,000 Beginning inventory 30,000 Ending inventory 18,000 Smith’s gross margin is 20%. What amount represents Smith purchases? |
Gross margin equals sales minus cost of goods sold. If it is 20% of sales, cost of goods sold equals $220,000 [$275,000 × (1.0 – .20)]. Cost of goods sold equals beginning inventory, plus purchases, minus ending inventory. Thus, purchases equals $208,000 ($220,000 COGS – $30,000 BI + $18,000 EI). |
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FIFO Cost Retail Method calculation of Cost retail ratio |
The cost retail ratio is computed for adjusted purchases instead of Goods available for sale. Cost Retail Ratio= (Cost measure of net purchases)/(Retail measures of net purchases +markups-Markdowns) |
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Union Corp. uses the first-in, first-out retail method of inventory valuation. The following information is available:
Cost Retail Beginning inventory $12,000 $ 30,000 Purchases 60,000 110,000 Net additional markups 10,000 Net markdowns 20,000 Sales revenue 90,000
If the lower-of-cost-or-market rule is disregarded, what would be the estimated cost of the ending inventory? |
Purchases $60,000 $110,000 Markups 10,000 Markdowns (20,000) Adjusted purchases $60,000 $100,000 Beg. inv. 1/1 12,000 30,000 Goods available $72,000 $130,000 Sales (90,000) Ending inv --retail $ 40,000 Cost-retail ratio ($60,000 ÷ $100,000) × .6 Ending inventory -- FIFO $ 24,000 |
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Which of the following methods of inventory valuation is allowable at interim dates but not at year end? A.Estimated gross profit. B.Weighted average. C.Retail method. D.Specific identification. |
The estimated gross profit method may be used to determine inventory for interim statements provided that adequate disclosure is made of reconciliations with the annual physical inventory at year end. Any other method allowable at year end is also allowable at an interim date. |
