(R25) Inventories

Question 1

Product vs. Period Costs

Answer 1

Product: All costs until the inventory hits the finished goods warehouse (costs of purchase and conversion costs) Period costs: Abnormal costs from wastage/labor; storage costs not part of normal production; admin overhead and selling expenses (non-inventory items)

Question 2

What costs are included in inventory?

Answer 2

All costs until the inventory hits the finished goods warehouse

Question 3

What costs are non included in inventory?

Answer 3

Abnormal costs from wastage/labor; storage costs not part of normal production; admin overhead and selling expenses (these costs are expensed)

Question 4

Ending COGS =

Answer 4

Beg. inventory + Purchases - ending inventory

Question 5

FIFO inventory valuation method

Answer 5

The cost of the first item purchased is the cost of the first item sold. Ending inventory is based on the cost of the most recent purchases, thereby approximating current cost.

Question 6

LIFO inventory valuation method

Answer 6

The cost of the last item purchased is the cost of the first item sold. Ending inventory is based on the cost of the earliest items purchased. LIFO is for GAAP only

Question 7

When prices are rising, how do COGS, gross profit, and ending inventory compare under LIFO and FIFO?

Answer 7

FIFO: Lower COGS, higher GP, and Higher ending inventory LIFO: Higher COGS, lower GP, and lower ending inventory

Question 8

In what areas does LIFO represent a better economic reality? Where does FIFO represent a better economic reality?

Answer 8

In either case, LIFO cost of sales and FIFO inventory values better represent economic reality (replacement costs).

Question 9

Periodic vs. perpetual inventory system

Answer 9

Periodic: Inventory values and COGS are determined at the end of the accounting period. Perpetual: inventory and COGS are updated continuously

Question 10

How does periodic and perpetual systems valued inventory compare under each inventory valuation method?

Answer 10

FIFO and specific identification: EI and COGS will be the same under each system LIFO and average cost: EI and COGS will be difference under each system

Question 11

If you use LIFO for tax purposes you must also use LIFO for reporting purposes

Answer 11

True

Question 12

LIFO Reserve

Answer 12

Difference between reported LIFO carrying amount and the carrying amount if FIFO was used (must be disclosed in the notes)

Question 13

LIFO reserve formula (calculating FIFO ending inventory)

Answer 13

FIFO_EI = LIFO_EI + LIFO reserve

Question 14

LIFO Reserve formula (calculating FIFO COGS)

Answer 14

COGS_FIFO = COGS_LIFO - (LR_end - LR_beg)

Question 15

LIFO Liquidation

Answer 15

This occurs when the # of units sold is greater than the number of units purchased/made during the year