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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
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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
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Goods are stored in a public warehouse. Who includes the goods in inventory, the entity or the warehouse?
The entity
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Goods are placed on consignment in a retail venue. Who includes the goods in inventory, the entity or the retail venue?
The entity
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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.
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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
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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.
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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.
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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.
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Precious metals and farm products are unique and GAAP allows inventory to be valued using [cost, market, net realizable value].
Net Realizable Value
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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.
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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
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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
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Which type of inventory tracking method is not allowed by IFRS?
LIFO
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Which type of inventory adjustment (valuation) method is used by IFRS?
The lower of cost and net realizable value
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How is net realizable value determined?
The item’s net selling price less the costs to complete and dispose of the inventory.
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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
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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.
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What are the two systems used to count inventory?
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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
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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
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- Advantage: Identifies when inventory is affected by lost, destroyed, or stolen
- Disadvantage: Complex tracking and reporting system
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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
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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)
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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.
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