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My CPA-FARmodule10

Notecards I made from Wiley's 2012 CPA Exam Review

QuestionAnswer
GENERALLY, What are the costs included in determining inventory? All costs necessary to prepare the goods for sale. (freight-in, handling, normal spoilage)
What are the inventory costs for a manufacturing entity? 1. direct materials 2. direct labor 3. direct & indirect factory overhead
How is variable production overhead allocated? to each unit of production based on use of the machine (variably)
How is fixed production overhead allocated? based on the production expected to be achieved over a number of periods (fixed).. Take into account loss of capacity resulting from planned maintenance
How are abnormal costs for freight-in, handling, and spoilage treated? Current expense. Not allocated to inventory
If an inventory routinely produces interest, is it capitalized as a part of inventory cost? Subsequently if interest is paid to vendors is that included in the inventory cost? 1. No 2. No
What are the inventory costs for a merchandising entity? 1. Purchase Price 2. Freight-In 3. Insurance 4. Warehousing 5. Other costs incurred in preparation of the goods for sale
If the gross method is used to record the purchase price of a good, what happens if there is a discount? Discount is shown as purchase discount and netted against the purchase account to determine COGS
If the net method is used to record the purchase price of good, what happens to the purchase account? Seeing as its assumed the discount is taken, the purchase account shows the net price
If using the net method the discount opportunity is missed, what happens? Does it matter in determining COGS? Hows the balance treated? 1. Purchase Discounts Account is Debited 2. No 3. As a period expense
In both the gross and net method, how are purchases treated with allowable trade discounts? Always recorded net of allowable trade discounts
Define allowable trade discounts. Allowed to entity based on its being a wholesaler, good customer, or item is simply on sale
Define the periodic system of recording inventory. How is the COGS determined? Give an example of the ending entry 1. inventory is counted periodically and then priced 2. COGS=Purchases- Change in Inventory 3. Debit: Ending Inventory & COGS Credit: Beg. Inventory & Purchases
Define the perpetual system of recording inventory. Give the entry for purchased inventory and sold inventory. 1. running total of inventory is kept by recording increases/decreases as they occur 2. Debit: Inventory Credit: COGS 3. Debit: COGS Credit: Inventory
When the shipping terms are FOB destination who pays for the cost of transporting the goods? The seller pays for all costs
If a % discount is given and credit terms are 2/15 n/40 and the buyer paid within 15 days how is the payment determined? Paid in over 15? Take off the % discount either way 1. Take off an additional 2% 2. Do nothing with the additional 2%
Inventory Valuation: Define Specific Identification Items are the same; seller chooses which item is sold.. (think of car dealership).. can manipulate income by selling higher/lower costing identical item
Inventory Valuation: Define Weighted Average take the average cost of the items (Cost/Units). -not applicable to perpetual inventory system
Inventory Valuation: Define Simple Average Only the costs per unit is averaged.
Inventory Valuation: Define Moving Average Every time units are purchased at a different unit cost than previously calculated average, recalculate average cost of goods on hand (Cost of Units on hand/ Units on hand=Unit cost)
Inventory Valuation: Define Lower of Cost or Market (steps) 1. Determine Market: Ceiling (NRV=selling price- selling costs+costs to complete). Floor (NRV-profit) 2. Determine cost 3. Select lower of cost or market -done on individual basis or inventory as whole
Inventory Valuation: Lower of Cost or Market, what happens when the replacement cost is between markets ceiling and floor? Market is replacement cost
Inventory Valuation: Lower of Cost or Market, if market is less than cost at then end of a period, what are the two methods of recording the write-down? 1. Use market number to establish ending inventory. Loss is put in COGS, meaning overstatement of COGS by loss amount 2. Debit Inventory- By actual cost of goods on hand - show market decline by Debit: Loss due to Market decline Credit: Inventory
Inventory Valuation: Lower of Cost or Market, if Replacement cost and NRV are higher than Original Cost, which itself is higher than NRV- profit, what should the inventory be valued at? Original Cost
Inventory Valuation: Define Losses on Purchase Commitments Market declines after committed to purchasing inventory. - Show loss by Debit:Estimated loss on PC Credit: Accrued Loss on PC -When goods received Debit: Purchases & Accrued Loss on PC Credit: Cash
Inventory Valuation: Define First-In, First-Out Earliest goods bought are the first ones sold - When rising prices COGS is made up of earlier lower priced goods giving larger revenue - Ending inventory made up of more recent purchases, represents a more current value
Inventory Valuation: Define Last-In, First-Out Most recent purchases are first sold -COGS contains current costs, matches well with sales. Smoothes income stream
Inventory Valuation: What is the Last-In, First-Out conformity rule? If use Lifo for tax purposes, must use Lifo for financial reporting
Inventory Valuation: When a company uses Last-In, First-Out for external purposes and another method for internal purposes, what must be done? LIFO Reserve account is used to internal valuation to LIFO valuation - contra account to inventory adjusted up or down at year-end, and a corresponding up or down to COGS
Inventory Valuation: Name two disadvantages of Last-In, First-Out 1. if inventory decreases larger profits are shown, as earlier cheaper goods are now being sold (LIFO Liquidation) 2. high cost to maintain separate LIFO records for each item
Inventory Valuation: Define Dollar-Value LIFO LIFO is applied to pools of inventory items rather than to individual ones - cost of inventory records less than regular LIFO
Inventory Valuation: Dollar-Value Lifo, how are the individual layers calculated? Inventory at base-year price*Conversion Price Index Conversion Price Index=(Ending Inventory end of year prices/ Ending inventory base year prices) Index calculated by manufacturers only
Inventory Valuation: What are the steps to Dollar-Value Lifo? 1. Manufacturers compute conversion price index Retailers find index, divide ending inventory by index= restate to base year prices 2. Compare Beg Inv to End Inv find New Inv Layer added or old removed 3. new multiply by index (use base price); old ur
Inventory Valuation: Dollar-Value Lifo, How is the link-chain technique calculated? Who uses it? 1. Find index number for current period (end period prices/ beg period prices) and multiply by cumulative index number at beg of period 2. entities who have substantial change in product lines over time
Inventory Valuation: Define Gross Profit Convert sales to cost of goods presumed sold by using the gross profit percentage - ending inventory is only estimated no acceptable for tax or annual financial purposes -used for internal reasons, estimate amount of loss due to destruction (fire, flood
Inventory Valuation: Gross Profit, how is inventory calculated? Beg Inv + Purchases= Goods Available Goods Available- COGS= Inventory COGS= Sales*(1-Gross Profit Percentage)
Inventory Valuation: Define Standard Costs predetermined costs in a cost accounting system -used for control purposes, variances must be reasonable
Inventory Valuation: Define Direct (variable) Costing No I will not, because it is not an acceptable method for valuing inventory
Inventory Valuation: Define Market Valued at the market level, when market is less then cost - Cost>Market still valued at market if 1. Precious metals with fixed market value 2. Costs cannot be allocated (meatpacking industry) and quoted prices exist, goods are interchangeable
Inventory Valuation: Define Cost Apportionment by Relative Sales Value Basket purchases (buy land with house, etc on it) and similar require cost allocation based on relative value
When does title pass with FOB Destination? When the goods are received by the buyer
When does title pass with FOB Shipping? When the goods are in the carriers possession
When a consignors consigns goods to a consignees, who has rights to the property? the consignor until property is sold -unsold goods and a proportionate amount of freight costs are included in the consignors inventory
In consignment, when is revenue recognized? What happens if there is a sales commission? 1. Not until the consignee sells the goods to the customer 2. reported as a selling expense by the consignor and not netted against sales revenue
Define Inventory Turnover Measures number of times inventory was sold Cost of Goods Sold/Average inventory: (Beg Inv+end Inv)/2
Define Number of days' supply in average inventory Gives number of days inventory is held before sale 365/ Inventory Turnover
When determining what goods to count in your inventory at the end of the year, what do you do with goods returned before the period, memo issued after? shipped before memo after? Billed before shipped after? 1. On Year returned 2. On Year shipped 3. On Year shipped
What are the two methods long-term construction contracts can be accounted for? 1. Completed-contract 2. Percentage-of-Completion
Define Completed-Contract method. Advantage, Disadvantage? Recognize revenue/profit at completion, all costs are deferred until completion then matched against revenue Adv: based on results not estimates DisAdv: current performance not reflected and income recognition may be irregular
Define Percentage-of-Completion method. Advantage, Disadvantage? Recognize revenue and profit during construction (ADV) based on expected total profit and estimated (DISADV) completion during period. All costs are recognized as they occur -presume entities who contract offer can make reasonable estimates
When is the percentage-of-completion method preferred? 1. reasonable estimates can be made 2. contracts between parties specify rights to services/goods provided/received by parties, consideration to be exchanged, and manner of settlement 2. buyer expected to satisfy contract 3. contractor expected to pref
Under percentage-of-completion method, what is the cost-to-cost formula? Revenue= [(Cost to date/Total Estimated cost)x Contract Price] - Revenue recognized in previous periods - can substitute Revenues with profit and contract price with expected profit too
What happens in regards to losses when a percentage-of-completion contract has an expected loss on the entire contract? the amount of loss reported in the year is total expected loss on the entire contract + all profit previously recognized
Under completed-contract method, in regards to losses, what happens when a loss is expected on the entire contract? recognized as soon as it is estimated, the amount recognized is for the expected loss on the entire contract
What are the 2 accounting literature for inventory and describe each. 1. Topic 330: defines inventory, the significance, the basis of accounting, cost flows, and application of LCM 2. Topic 605: long-term construction contracts, both forms
What are the three areas IFRS differs from US GAAP inventory treatment? cost flow assumption, valuation of inventory at year end, and capitalization of interest
IFRS, cost flow assumption. Describe 1. LIFO is not allowed 2. Specific ID required for goods that are not interchangeable or gods segregated for specific projects goods 3. Gross profit may be used if a physical count may not be conducted
IFRS, valuation of inventories at year-end. Describe Carried at the lower of cost or net realizable value. Exception for agricultural inventories, carried at fair value less costs to sell at the point of harvest
IFRS, Lower of Cost or Net Realizable Value. Describe Net Realizable Value=estimated selling price- estimated costs of completion and sale - generally on item by item basis, if groups of items have similar characteristics, may be grouped
IFRS, rules for capitalization of interest. Describe like gaap, no interest capitalized as an inventory cost if paid under normal credit terms - BUT interest costs capitalized if there is a lengthy production period
Under the percentage-of-completion method in a long term construction contract, what type of an account is the progress billings on contracts account? Contra Current Asset Account
IFRS, Lower of Cost or Net Realizable Value, does replacement cost play a part? No
Created by: Bsantoro