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Intacc 3 ans key
Business Finance (Cavite State University)
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1. Distinguish between the types of inventory accounts used for merchandising and
manufacturing companies.
Merchandising firms represent the products manufactured by manufacturers and
individuals in exchange for a payment or other financial transaction. Merchandising
businesses are categorized as retailing companies. These businesses use only one
type of inventory account because they buy items from suppliers or manufacturers and
sell to retailers without changing the form of the goods thus requiring the use of only
one type of inventory account. While, in manufacturing firms, the manufacturers have
stocks of raw materials which are direct materials and factory supplies needed for
production, goods in process (also known as work in process inventory), and unsold
finished goods. As a result, manufacturing companies purchase raw materials, process
and convert them into completed goods or finished goods inventory, and then sell them
to customers. As a result, these businesses will have three sorts of inventory accounts:
raw material inventory, work-in-process inventory, and finished goods inventory.
2. What is the general rule used to determine if an item should be included in
inventory? Consider the concept in accounting for goods in transit and goods on
consignment.
According to the general rule that governs whether a corporation includes a particular
items or inventory, all inventories that are under the company's economic control,
regardless of their location or legal ownership, are included in inventory. Control or
ownership is transferred at the shipment point for goods in transit that are shipped FOB
shipping point, when the seller delivers them to the buyer or a transportation firm acting
as an agent for the buyer. At that point, the inventories become the buyer's inventory,
and the seller records a sale of inventory. When items in transit are transported FOB
destination, control and ownership passes from the seller to the buyer when they arrive
at the buyer's destination. As a result, these items are part of the seller's inventory up
until the buyer receives them; at that point, the seller recognizes sales revenue and the
items are added to the buyer's inventory. And Lastly, Goods on consignment are
included at cost in the inventory of the consignor, since the consignor retains economic
control and ownership while Goods held for consignment are not included in
consignee's inventory.
3. Discuss the differences between the perpetual and periodic inventory systems. What
inventory system would you expect to find in each of the following situations?
An entity that uses a perpetual inventory system keeps a continuous record of its
physical quantities. Many perpetual systems additionally record the expenditures
associated with each unit. A company's cost of goods sold is calculated by adding net
purchases for the period to beginning inventory and subtracting ending inventory, thus
maintaining its account of costs of goods sold and inventory account. On the other
hand, under a periodic inventory system, a company periodically determines its
inventory quantity and cost by a physical count. Any purchase discounts, purchase
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returns and allowances are recorded in separate accounts. A company determines its
cost of goods sold by adding the net purchases for the period to beginning inventory
and deducting by the balance of ending inventory.
a. Diamond ring department of a jewelry store- Periodic Inventory System (high value
of products but lower in inventory counts)
b. Automobile dealership – new car department- Periodic Inventory System (high value
of products, lower production/inventory level)
c. Hardware and construction supplies store- Perpetual Inventory System (low value
products, high volume of inventory levels and sales)
d. Drugstore chain- Perpetual Inventory System (complexity in inventory levels, higher
sales but lower value of inventory)
e. School supplies and bookstore- Perpetual Inventory System (complexity in inventory
levels, higher sales but lower value of inventory)
4. What is the generally accepted measurement basis for inventory in the statement of
financial position?
In accordance with IAS 2 Inventory, the standard requires inventories to be
measured at the lower of cost and net realizable value (NRV) and outlines acceptable
methods of determining cost, including specific identification (in some cases), first-in
first-out (FIFO) and weighted average cost which is typically presented in statement of
financial position.
5. Describe briefly the proper presentation of inventories in the statement of financial
position.
In accordance with the IAS 1 Presentation of Financial statements, An entity
must normally present a classified statement of financial position, separating current
and non-current assets. Thus Inventory Account should be presented as current assets
in which this account is mainly for the purpose of trading and is generally consumed,
converted, or sold within the entity’s normal operating period or within 12 months
whichever is shorter.
6. Which of the following items would be included in the inventory account of a
manufacturing concern?
a. Goods in transit purchased FOB shipping point, invoice received.- Included, since
ownership and control passes when goods are in transit purchased FOB shipping point.
b. Goods held on consignment- Not Included, because goods held on consignment is
the inventory of consignee who held these inventory for sale.
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c. Goods out on consignment- Included, since it is inventory made by the manufacturing
company and being consigned with other agent or seller.
d. Goods out on approval by a customer-Included, because it is under approval and no
transferred of ownership is being exercised.
e. Goods in transit sold, Terms FOB shipping point – Not included, since ownership
passes to the buyer when goods in transit and sold FOB shipping point.
7. Enumerate and describe three cost formulas or inventory cost allocation methods.
Which method is used for items that are not interchangeable? What methods are used
for items that are interchangeable?
The three cost formulas which are mostly used by many business entity are (1) Specific
Identification Method, First-In, (2) First-Out Method, and (3) Weighted Average Method
(Periodic System) and /or Moving Average Method (Perpetual System). The cost of
inventories that are not ordinarily interchangeable should be measured by specifically
identifying their costs. This approach should also be followed for items that are
segregated for a specific project. On the other hand, cost of inventories that are
interchangeable and are not segregated for a specific project should be assigned using
FIFO (First-In, First-Out) or weighted average cost formula. The same cost formula
should be applied consistently for all inventories having a similar nature and use to the
entity.
8. In periods of rising costs, which inventory costing method would result in the highest
amount of profit?
FIFO assumes that inventories that were purchased or produced first are sold first and
consequently the items remaining in inventory are those most recently purchased or
produced, thus in a period of rising prices, first-in-first-out (FIFO) cost formula is
expected to have the highest net income. This is because FIFO assumes the oldest
inventory purchases are sold first. As a result of this, the lowest-priced inventory to be
recorded to the expense would increase the net income for the period.
9. What is net realizable value?
As stated in IAS 2 Inventory, the standard defines net realizable value as the estimated
selling price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale. Additionally, NRV is a conservative
method used by many accountants to ensure the value of an asset is not overstated.
And this measurement should be presented and use to measure Inventory in Statement
of Financial Position.
10. Briefly describe the accounting procedures for writing down inventory to its net
realizable value under both direct method and allowance method.
11. Name three situations in which the gross profit method of estimating inventory would
be useful.
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Fire
Flood
theft
12. What is the proper treatment of the following items when estimation of inventory is
made using the retail inventory method?
a. Freight-in – is an addition to purchases at cost
b. Purchase discount- are deductions from purchases at cost only.
c. Departmental transfers in- is an addition to both cost and retail amount of purchases
d. Normal spoilage- deducted from the goods available for sale at retail, after computing
the cost ratio.
e. Employee discounts- are deducted from goods available for sale at retail, after
computing the cost ratio (in effect, this is an addition to sales)
f. Net markups- included in the computation of the percentage that is applied to the
ending inventory at retail.
g. Markdown cancellations- an increase in the selling price which does not bring the
new selling price above the original retail.
13. Describe briefly the accounting and reporting of losses on purchase commitments
when –
a. the purchase contract is subject to revision and cancellation.
b. the purchase contract is non-cancelable and a loss is probable.
14. Indicate the effects of each of the following errors on the Statement of Financial
Position and Statement of Comprehensive Income of the current year and succeeding
year:
a. The ending inventory is understated.
b. Merchandise received was not recorded in the purchases account until the
succeeding year, although the item was included in inventory of the current year.
c. Merchandise purchases shipped FOB shipping point were not recorded in either the
purchases account or the ending inventory.
d. The ending inventory was overstated as a result of the inclusion of goods held on
consignment.
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