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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
PPE asset has decreased in value
Assess for impairment (recoverability test)
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