Inventory

Card Set: Inventory (US GAAP)

Card 1

Front: What are the four common inventory costing methods under US GAAP?

Back:

1. FIFO (First In, First Out)

2. LIFO (Last In, First Out)

3. Weighted Average

4. Specific Identification

Card 2

Front: What is the LIFO reserve?

Back:

The LIFO reserve is the difference between the inventory value under FIFO and LIFO.

Formula: LIFO Reserve = FIFO Inventory - LIFO Inventory

Card 3

Front: When is the lower of cost or market (LCM) rule applied under US GAAP?

Back:

LCM is applied when inventory cost exceeds its market value.

Market = Replacement Cost, subject to ceiling (NRV) and floor (NRV - Normal Profit Margin).

Card 4

Front: What is Net Realizable Value (NRV)?

Back:

NRV = Estimated Selling Price - Costs to Complete and Sell.

Card 5

Front: How does FIFO affect COGS and ending inventory during periods of rising prices?

Back:

• FIFO results in:

• Lower COGS (older, lower costs are matched with revenue).

• Higher Ending Inventory (newer, higher costs remain in inventory).

Card 6

Front: Can inventory write-downs be reversed under US GAAP?

Back:

No, inventory write-downs cannot be reversed under US GAAP.

Card 7

Front: What is the journal entry to record an inventory write-down under US GAAP?

Back:

Debit: Loss on Inventory Write-down

Credit: Inventory

Card 8

Front: What are the main differences between periodic and perpetual inventory systems?

Back:

• Periodic: Inventory is updated at the end of the period through a physical count.

• Perpetual: Inventory is continuously updated with each purchase and sale.

Card 9

Front: Which inventory method results in the same COGS under both periodic and perpetual systems?

Back:

FIFO (First In, First Out).

Card 10

Front: How are freight-in costs treated under US GAAP?

Back:

Freight-in costs are included in the cost of inventory.

Card 11

Front: What is abnormal spoilage, and how is it treated?

Back:

• Abnormal Spoilage: Losses that exceed normal expectations.

• Treatment: Expensed as a period cost.

Card 12

Front: How does LIFO affect taxable income during inflation?

Back:

• LIFO results in higher COGS, leading to lower taxable income during inflation.

Card 13

Front: What costs are included in inventory under US GAAP?

Back:

1. Direct materials

2. Direct labor

3. Factory overhead

4. Freight-in

Card 14

Front: What costs are excluded from inventory under US GAAP?

Back:

1. Selling expenses

2. Administrative expenses

3. Abnormal spoilage

4. Storage costs for finished goods

Card 15

Front: What is the cost-to-retail percentage in the retail inventory method?

Back:

Formula: (Cost of Goods Available for Sale / Retail Value of Goods Available for Sale) × 100

Card 16

Front: What happens if inventory is overstated in the financial statements?

Back:

• COGS is understated.

• Net income is overstated.

• Ending inventory is overstated.

Card 17

Front: Which inventory method is prohibited under IFRS but allowed under US GAAP?

Back:

LIFO (Last In, First Out).

Card 18

Front: What is the formula to calculate COGS under the periodic system?

Back:

COGS = Beginning Inventory + Purchases - Ending Inventory

Card 19

Front: What is the ceiling in the lower of cost or market (LCM) rule?

Back:

Ceiling = Net Realizable Value (NRV).

Card 20

Front: During periods of deflation, how does FIFO affect COGS compared to LIFO?

Back:

• FIFO results in higher COGS than LIFO during deflation.