FAR 3_03A

  1. When goods are shipped FOB shipping point, who pays the shipping cost and to which account is it assigned?
    The buyer pays and it gets assigned to COGS
  2. When goods are shipped FOB destination, who pays the shipping cost and to which account is it assigned?
    The seller pays the cost and it gets assigned to Sales Expense
  3. Goods are stored in a public warehouse. Who includes the goods in inventory, the entity or the warehouse?
    The entity
  4. Goods are placed on consignment in a retail venue. Who includes the goods in inventory, the entity or the retail venue?
    The entity
  5. Goods are sold to a customer with the right to return any goods for 6 months. The return rate cannot be estimated. Who includes the goods in inventory, the entity or the customer? When can it be recognized as revenue?
    • The entity recognizes in inventory
    • It cannot be recognized until the return period has lapsed.
  6. What are the rules for being able to recognize revenue with a right of return before the return period has lapsed?
    • The sales price is substantially fixed at the date of sale
    • The buyer assumes all risk of loss b/c the goods are in the buyer’s possession
    • The buyer has paid some form of consideration
    • The product sold is substantially complete, and
    • The amount of future returns can be reasonably estimated
  7. A sale is made with a mandatory buyback. Who includes this in inventory, the entity or the customer?
    The entity because they never gave up title; the customer doesn’t have the right to sell it to someone else.
  8. A sale is made on an installment agreement. The goods are used as collateral for the agreement. Who includes the goods in inventory, the entity or the customer?
    • IF the percentage of uncollectible debt cannot be estimated, the inventory remains with the seller.
    • IF the percentage of uncollectible debt can be estimated, the goods are considered sold and an allowance for doubtful accts established.
  9. US GAAP requires inventory to be stated at [cost, market, net realizable value].
    Cost is the default. A company who expects to make a normal profit on sale must account for inventory at cost even if market or net realizable value (as applicable) is lower.
  10. Precious metals and farm products are unique and GAAP allows inventory to be valued using [cost, market, net realizable value].
    Net Realizable Value
  11. The company does not expect to make a normal profit on the sale of inventory and must adjust its value. The write-down should be applied to which accounts?
    COGS unless the loss is material and then it must be separately stated in the Income Statement.
  12. How are reversals of inventory write-downs handled by US GAAP and IFRS?
    • US GAAP: Reversals are prohibited
    • IFRS: Reversals are allowed up to the original amount of the write-down and is adjusted using COGS
  13. The company does not expect to make a normal profit on the sale of inventory that is tracked using FIFO or Wt Avg. Which valuation adjustment method is used?
    The lower of cost and net realizable value
  14. Which type of inventory tracking method is not allowed by IFRS?
    LIFO
  15. Which type of inventory adjustment (valuation) method is used by IFRS?
    The lower of cost and net realizable value
  16. How is net realizable value determined?
    The item’s net selling price less the costs to complete and dispose of the inventory.
  17. The company does not expect to make a normal profit on the sale of inventory that is tracked using LIFO or the Retail Inventory Method. Which valuation adjustment method is used?
    The lower of cost or market
  18. When using the lower of cost or market valuation method, how is the “market” value determined?
    • Select the middle value among the following
    • Replacement Cost: The cost to purchase the item of inventory as of the valuation date
    • The Market Ceiling (net realizable value): Net selling price less the costs to complete and dispose
    • The Market Floor: The net realizable value (market ceiling) less a normal profit margin.
  19. What are the two systems used to count inventory?
    • Periodic
    • Perpetual
  20. When using the periodic method to count inventory, how is COGS determined. What are the advantages / disadvantages of this system?
    • Inventory and thus COGS is only determined based on physical count.
    • The COGS for the period is determined after the physical count, and then “squeezing” the calculation
    • Beginning inventory
    • + Purchases
    • = Cost of Goods Available for Sale
    • - Ending Physical Count
    • = COGS
    • -------------------
    • Advantage: Simple
    • Disadvantage: Doesn’t isolate inventory lost, destroyed, or stolen that should not count toward a sale
  21. When using the perpetual method to count inventory, how is COGS determined. What are the advantages / disadvantages of this system?
    • Inventory and COGS are adjusted after each sale
    • -----------------------------
    • Advantage: Identifies when inventory is affected by lost, destroyed, or stolen
    • Disadvantage: Complex tracking and reporting system
  22. When an item is sold, what are the journal entry accts when using the (1) periodic system, (2) perpetual system.
    • (1) Periodic:
    • [DR] Cash
    •    [CR] Sales (Revenue)
    • (2) Perpetual
    • [DR] Cash
    •    [CR] Sales (Revenue)
    • [DR] COGS
    •    [CR] Inventory
  23. An entity purchases more inventory from a supplier. What journal entries are used by the entity for the purchase when using the (1) periodic vs (2) perpetual system
    • (1) Periodic
    • [DR] Purchases
    •    [CR] A/P (or Cash or N/P)
    • (2) Perpetual
    • [DR] Inventory
    •    [CR] A/P (or Cash or N/P)
  24. Inventory at a cost of $100,000 is shipped to a public warehouse for storage. The shipping cost is $6,000. The rent is $10,000 per month. How much of these amounts is included in inventory?
    • The $100,000 cost of the inventory, plus the $6,000 shipping cost. (Costs to ship back to the entity would also be included.) 
    • The rent is considered a periodic expense.
Author
BethM
ID
338006
Card Set
FAR 3_03A
Description
Becker Review 2018
Updated