A company determined the following information for its inventory at the end of an interim period on June 30, Year 2:
Historical cost......................... $80,000
Net realizable value (NRV).......... 77,000
Current replacement cost ...........76,000
Normal profit margin................. 2,000
The company expects that on December 31, Year 2, the inventory’s NRV reduced by a normal profit margin will be at least $81,000. What amount of inventory should the company report in its interim financial statements under IFRS and under U.S. GAAP on June 30, Year
Answer (A) is correct.
Under U.S. GAAP, inventory is reported at its historical cost of $80,000
because no write-down of inventory is reasonably anticipated for the
year. Under IFRS, the inventory is measured at the lower of cost
($80,000) and NRV ($77,000) for each interim reporting period. Whether
a market decline is expected to be reversed by the end of the annual
period is not considered. Thus, the inventory is not reported at its NRV
All of the following would appear on a projected schedule of cost of goods
manufactured except for
Answer (B) is correct.
Beginning finished goods inventory is a component of cost of goods
sold, not cost of goods manufactured.
A manufacturer of men’s t-shirts had the following information for last year.
Number of shirts sold and produced.. 125,000
Sale price per shirt.. $40
Direct manufacturing.. $10/shirt
Setup cost.. $100/setup hour
Setup hours.. 10,000
Shipping costs.. $200/shipment
Number of shipments.. 4,000
Administrative cost.. $8/shirt
The company’s operating profit last year was
Answer (A) is correct.
Total income is $5,000,000. Total expenses are $4,050,000 [($10 ×
125,000) + ($100 × 10,000) + ($200 × 4,000) + ($8 × 125,000)].
A retail company analyst is comparing North Company to South Company. The analyst notes that receivables for both companies’ private label credit cards have significantly increased
balances in the current year. North’s customers’ monthly payment averaged 15% of their balances, while South’s customers’ monthly payment averaged 22% of their balances. What should the analyst conclude?
Answer (A) is correct. North’s customers are paying back 7% less of their balances on average. Thus, it seems they are having a harder time paying it off.
The optimal level of inventory is affected by all of the following except the
Answer (C) is correct. The optimal level of inventory is affected by the factors in the economic order quantity (EOQ) model and delivery or production lead times. These factors are the annual demand for inventory, the carrying cost, which includes the interest on funds invested in inventory, the usage rate, and the cost of placing an order or making a production run. The current level of inventory has nothing to do with the optimal inventory level.
Which one of the following would not be considered a carrying cost associated with inventory?
Answer (D) is correct. Carrying costs are incurred to hold inventory. Examples include such costs as warehousing, insurance, the cost of capital invested in inventories, inventory taxes, and the cost of obsolescence and spoilage. Neither shipping costs nor the initial cost
of the inventory are carrying costs.
An example of a carrying cost is
Answer (D) is correct. Inventory costs consist of four categories: purchase costs, order or set-up costs, carrying (holding) costs, and stockout costs. Carrying costs include storage costs for inventory items plus opportunity cost (i.e., the cost incurred by investing in inventory rather than making an income-earning investment). Examples are insurance, spoilage, interest on invested capital, obsolescence, and warehousing costs.
The carrying costs associated with inventory management include
Answer (B) is correct. Carrying costs include storage costs, handling costs, insurance costs, interest on capital invested, and obsolescence.
The ordering costs associated with inventory management include
Answer (C) is correct.
Ordering costs are costs incurred when placing and receiving orders. Ordering costs include purchasing costs, shipping costs, setup costs for a production run, and quantity discounts lost.
A major supplier has offered Alpha Corporation a year-end special purchase whereby Alpha could purchase 180,000 cases of sport drink at $10 per case. Alpha normally orders 30,000 cases per month at $12 per case. Alpha’s cost of capital is 9 . In calculating the overall opportunity cost of this offer, the cost of carrying the increased inventory would be
Answer (A) is correct. If Alpha makes the special purchase of 6 months of inventory (180,000 cases ÷ 30,000 cases per month), the average inventory for the 6-month period will be $900,000 [(180,000 × $10) ÷ 2]. If the special purchase is not made, the average inventory for the same period will be the average monthly inventory of $180,000 [(30,000 × $12) ÷ 2]. Accordingly, the incremental average inventory is $720,000 ($900,000 – $180,000), and the interest cost of the incremental 6-month investment is $32,400 [($720,000 × 9%) ÷ 2].