ACCT 327 Chapter 10 - Additional Inventory Errors

Effects fo Inventory Errors

Ending Inventory and Purchases » COGS

In the absence of information, if the inventory is not in hand/warehouse at the time of count, we assume…

The inventory was not included

To identify the problem, we should ask…

1. Should a purchase have been recorded in that period?

2. Was a purchase recorded in that period?

3. Should the inventory have been included in the count for this period?

4. Was the inventory included in the count for this period?

Recording errors effect what?

Puchases

Count Errors Effect what?

Ending Inventory

What should you always use when assessing inventory errors?

Beg Inv

+Purch

=COGAS

<End Inv>

= COGS

and the JEs for what did happen and what should have happened!

Lower of Cost or NRV

When the market value of a company’s inventory declines below it’s historical cost, CONSERVATISM, dictates that we should use the lower of the two values

Cost

The price at which the inventory was acquired (historical cost) - FIFO, LIFO, avg cost

Net realizable value (NRV)

the net amount a company expects to realize from the sale of inventory

NRV formula

Est. Selling Price - costs of completion, disposal, and transportation (ie, selling costs)

COGS/Loss Method

Record the expense, literally use whichever she tells you (Debit)

Allowance account/Inventory

Records a decrease to inventory via allowance or directly (Credit), use whichever she tells you

An allowance account is a

contra-asset/permanent account

What allowance value do you put into your JE

The plug for ending allowance balance, NOT the ending value

Lower of Cost or Market

Rule was recently changed to LCNRV to fit with the LCNRV, companies using LIFO put up a fight, so the FASB allows them to still use LCM

Market cost replaces inventory at current price if lower. Subject to upper bound (NRV) and lower bound (NRV-normal profit margin)

Purchase Commitments

Occurs when a company agrees to buy inventory from a seller in advance (similar to repurchase agreements)

Optional Purchase Commitment

Subject to cancellation, no JE needs to be recorded by either party

Firm Purchase Commitment

Disclosures should be made in financials, some JE may be necessary, riskier

Expense recognition principle dictates

The loss should be recorded during the period of the decline

JE for loss on firm purchase commitments

Unrealized Loss on PC - NI xx

Est. Liability xx

Estimated Liability is what type of account?

Permanent Credit account, needs to be removed when contract is fufilled

Unrealized loss is what type of account?

Temporary for that period? Needs to be adjusted when the contract is fufilled with a realized G/L to NI

Inventory is always debited at

LOWER OF COST, NEVER GAIN

Cash paid is always credited at

Contractual agreement