ACTG 330 Final

Goods in transit

often included in inventory as shipped FOB shipping point

Goods in consignment

consignor keeps inventory on books until final sale

Returned goods

includes actual and estimated inventory returns in inventory

Inventory flow

Beginning Inventory

+Purchases/MfG

=Goods available for sale

-Ending Inventory

=Cost of Goods Sold

What are the different inventory cost flow assumptions?

specific identification, FIFO, LIFO, average cost

What is the journal entry to change from FIFO to LIFO?

Dr. COGS

Cr. LIFO Reserve (Inventory) (XA)

What are the different ways to calculate LIFO?

item basis, pooled basis, dollar value LIFO

Item basis

lots of work and susceptible to LIFO liquidation

Pooled basis

group inventory and calculate LIFO based on groups/pools

Dollar value LIFO

• track inventory costs at start of using LIFO (base year) and current period

• isolate quantity changes by calculating all inventory at base year prices to determine if quantity goes up or down

  • if quantity goes up, add a layer at current year prices

  • if quantity goes down, eat away at old layers

What are the characteristics of PPE?

• for use in business/operations, not for resale

• long term in nature

• physical substance

Journal entry of acquisition through debt

Dr. PPE Asset

Dr./Cr. Discount Premium on note payable

Cr. Note payable

Lump sum purchase

allocate purchase price to each asset based on their relative fair values

Purchase PPE with stock

fair value of the stock will dictate the cost of the asset

What is the first question to ask about exchanges?

Does it have commercial substance?

What do you do if there is commercial substance on exchanges?

record gains/losses immediately

What do you do if there is no commercial substance on exchanges?

record losses immediately, but defer recognition of gains

Depreciation

cost allocation, not so much a decrease in value

How do you calculate using straight-line?

cost - residual value / useful life

How do you calculate using double declining balance?

net book value * 2 * (1/useful life)

How do you calculate using sum of years digits?

(cost - residual value) * (# of years remaining in asset life / sum of years digits)

How do you calculate using units of production?

(cost - residual value / total expected usage) * # of units used/produced

Steps to take for impairment

1. PPE asset has decreased in value

2. Assess for impairment (recoverability test)

3. Calculate the impairment amount

What are the indicators of a PPE asset decreasing in value?

• change in production/productivity

• decrease in market price

• more costly than expected

• changes in economy and demand for products

• losses in current year or expected losses

How do you assess for impairment?

does the net book value of the asset exceed its future cash flows?

• if yes, there is an impairment (move to step 3)

• if no, no impairment exists (stop here)

How do you calculate the impairment amount?

Net Book Value

- Fair Value

= Impairment Amount

What is the journal entry for the impairment amount?

Dr. Impairment Loss

Cr. Asset

In a period of rising prices, the inventory method which tends to give the highest reported COGS is

LIFO

How do you find the approximate value of the inventory that was destroyed using the gross profit method?

Beginning Inventory

+ Purchases

- Purchase Returns

= Goods Available for Sale

Sales Revenue

- Sales Returns

= Net Sales

- Profit on Sales

= COGS

Goods Available for Sale

- COGS

= Ending Inventory