Exam 4 Intermediate Accounting

Inventory represents an asset purchased or produced for re-sale in the ordinary course of business, or goods that will be consumed in the production of assets held for re-sale

Raw MaterialsWork-In-ProcessFinished Goods

When goods are shipped FOB shopping point, title transfers to buyer when the goods leave seller's place of business. When goods are shipped FOB destination, legal title to the goods stays with the sellers until the goods are delivered to the buyer's place of business. This becomes an important consideration when counting inventory at year-end.

No. Belong to consignor until sold. Title then transfers to buyer.

Company AZ wants to borrow money without having to record a liability. AZ sells merchandise on credit to BZ with an agreement to repurchase the merchandise at a later date. BZ, using the merchandise as collateral, obtains a loan and uses the proceeds to pay AZ for the merchandise. As the loan payments come due, AZ repurchases the merchandise from BZ for cash. BZ uses the cash to repay the loan.
In substance, no sale of merchandise occurred. AZ must account for the transaction as a borrowing. The merchandise should remain on AZ's books even though title passed to BZ.

Generally, as long as a reasonable estimate can be made of the amount of merchandise that will be returned, revenue should be recognized at time of sale, inventory should be reduced, and an allowance made for returns, if material.

An installment sale should be accounted for as a typical sale on credit, unless it is not possible to reasonably estimate the expense of uncollectible accounts. Hence, reduce inventory at time of sale.

Conceptually, product costs are all costs incurred in getting the product ready for sale to customers. These costs include direct materials, direct labor, and manufacturing overhead. Product costs are included in the cost of inventory until the goods are sold, at which time the cost is expensed as cost of goods sold.

No. Interest cost may not be capitalized for inventory items routinely manufactured.

The net method records purchases net of the purchase discount, whether taken or not. If the discount is not taken, an expense is recorded for discounts lost.
The gross method records purchases at the gross amount and recognizes the purchase discount when taken (paid within the discount period).

Direct material used+direct labor+factory overhead+beginning work in process-ending work in process= cost of goods manufactured

Absorption costing is GAAP. Under absorption costing, all normal fixed and variable manufacturing costs are considered product costs, while non-manufacturing costs such as selling and administrative expenses are treated as period costs and expensed as incurred.Variable costing, only variable manufacturing costs are treated as product costs while fixed manufacturing costs are treated as period costs and expensed immediately along with the selling and administrative expenses.

Specific identification of costs is used when an inventory is comprised of a limited number of high cost items. When its use is not practical, a cost flow assumption is used. Three available are FIFO, LIFO, and weighted average.

Using FIFO cost flow assumption, the ending inventory is valued using the per unit costs of the most recently purchased units.

Under the unit LIFO cost flow assumption, the ending inventory is valued using the per unit costs of the beginning inventory plus, if the inventory has increased during the year, the per unit costs of the earliest purchases during the year.