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ACCT 351 (ch.6)
Inventory
| Question | Answer |
|---|---|
| what are the three criteria for the definition of inventory by IFRS? (must meet one of three) | - held for sale in ordinaty course of business - in the process of production for such sale, or - in the form of materials/supplies to be consumed in production process or in rendering of services |
| is freight included in the cost of inventory? | yes it is |
| what are the three questions to be asked with respect to goods in transit? | 1. who pays the shipping cost? 2. who is responsible for loss if goods are damaged in transit? 3. when should transfer of ownership be recorded in accounting records? |
| what does FOB stand for? | free on board |
| what does FOB shipping mean? | purchaser assumes ownership when goods leave the sellers warehouse |
| what does FOB destination mean? | purchaser doesn't assume ownership until the goods are received |
| what are the 4 other costs to do with inventory that should be expenses (not included in cost of inventory) | - abnormal amounts of wasted materials, labor, other production costs - storage costs (unless necessary in production process before another production stage) - administrative overheads that don't contribute to production process - selling costs |
| what is the perpetual inventory system? | tracks all inventory additions and subtractions directly (used by merchandising businesses using tech like barcodes) |
| what is a periodic inventory system? | doesn't track purchases/sales directly. purchases tracked through purchases account. COGS determined at end of period after a physical inventory count |
| what are the three cost flow assumptions? | - specific identification - weighted average cost - first in, first out |
| what is the specific identification cost flow assumption? | most accurate way to allocate costs. each unit specifically identified and cost for unit allocated to COGS |
| what is the average cost cost flow assumption? | average of all goods available for sale, and allocate average to both quantity of goods sold, and quantity of goods in nventory |
| what is the first in first out cost flow assumption? | allocates oldest cost to goods sold first, with newer costs remaining in inventory balance |
| is last in first out an acceptable cost flow assumption? | no, it is not allowed under IFRS and ASPE in Canada (still used in the USA) |
| what does LCNRV stand for? | lower of cost and net realizable value (used to prevent overvaluation when cost of inventory is no longer recoverable) |
| what is net realizable value? | estimate based on expected selling price of goods in ordinary business, less estimated costs to complete and sell goods |
| should separate categories on inventory be disclosed separately? | yes they should (raw materials, WIP, etc.) |
| what is the formula for determining cost of goods sold? | opening inventory + purchases = goods available for sale - ending inventory = COGS |
| what is the gross profit method of estimating inventory? | a method used to estimate inventory based on gross profit margin. can be used in times when an inventory count is impracticable or impossible |
| what does COGA stand for? | cost of goods available for sale |
| how do you apply the gross profit method? | cost of goods available for sale + (sales - GP%) |
| how do you calculate COGA? | beginning inventory + purchases + freight in - purchase returns - purchase discounts |
| what is gross profit margin? | the difference between sales revenue and cost of sales |
| how do you calculate gross profit margin? | (gross profit/sales revenue) * 100% |
| what is inventory turnover period? | a ratio to help us understand how quickly the company moves inventory through various processes that eventually end in a sale |
| how do you calculate inventory turnover period? | (average inventories held/cost of sales) * 365 |
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