IASB Inventory Cost Methods

Play an AI-generated podcast conversation about this lesson

When should a company record purchases of inventory in the Inventory account?

When it has control of the asset.

When it receives the goods. (correct)

When it obtains legal title to the goods and has control of the asset.

When it obtains legal title to the goods.

What is the primary consideration for a company to record inventory?

Receiving the goods.

Having control of the asset. (correct)

Obtaining legal title to the goods.

Preventing other companies from directing the use of the inventory purchased.

Why does a company generally record acquisitions when it receives the goods?

To prevent other companies from directing the use of the assets.

To obtain substantially all the remaining benefits from the inventory purchased.

Because legal title to the goods is difficult to determine.

Because it is difficult to determine the exact time of legal passage of title for every purchase. (correct)

What accounts for a company's ability to record inventory?

Directing the use of and obtaining benefits from the inventory purchased. Signup and view all the answers

Why is it acceptable for a company to record acquisitions when it receives goods?

To prevent material errors in accounting. Signup and view all the answers

What factor makes determining legal passage of title challenging for companies?

Time at which substantial benefits are obtained. Signup and view all the answers

What is one of the reasons companies use the retail inventory method?

To calculate net income without a physical count of inventory Signup and view all the answers

Which of the following is NOT required by accounting standards for inventory-related financial statement disclosure?

The quantity of merchandise sold in the period Signup and view all the answers

What is one purpose of disclosing the amount of any write-down of inventories recognized as an expense?

To indicate the impact of inventory losses on net income Signup and view all the answers

In the retail inventory method, what is a control measure achieved by companies?

Regulating quantities of merchandise on hand Signup and view all the answers

What is the purpose of disclosing the circumstances or events that led to the reversal of a write-down of inventories?

To show the factors that influenced the decision to reverse a write-down Signup and view all the answers

What does the carrying amount of inventories pledged as security for liabilities indicate?

The amount at which inventories are recorded on financial statements Signup and view all the answers

What method does the IASB require in cases where inventories are not ordinarily interchangeable?

Specific identification Signup and view all the answers

Under what circumstances are the specific identification criteria met for inventory costing?

All of the above Signup and view all the answers

Why do companies often use average-cost methods for inventory costing?

For practical reasons Signup and view all the answers

What is the basis for pricing items in the inventory under the average-cost method?

Average costs of all similar goods available during the period Signup and view all the answers

In computing the average cost per unit, what must companies include?

Beginning inventory and total units available costs Signup and view all the answers

Why do proponents of average-cost methods argue against measuring a specific physical flow of inventory?

It is often impossible to measure accurately Signup and view all the answers

What is the purpose of the retail inventory method?

To convert retail prices to cost Signup and view all the answers

In the retail inventory method, what does the retailer need to keep a record of?

Total cost and retail value of goods purchased Signup and view all the answers

What is the first step in determining the estimated inventory at retail using the retail inventory method?

Deducting sales for the period from goods available for sale Signup and view all the answers

Why is it necessary to compute the cost-to-retail ratio for all goods in the retail inventory method?

To divide total goods available at cost by total goods available at retail price Signup and view all the answers

Based on the hypothetical data provided, what is the ending inventory at retail (in birr)?

Birr 24,000 Signup and view all the answers

What is the final step in obtaining ending inventory at cost in the retail inventory method?

Multiplying the cost-to-retail ratio by ending inventory valued at retail Signup and view all the answers

What is the inventory amount at LCNRV when applying it to individual items?

Birr 384,000 Signup and view all the answers

Why does the total inventory amount at LCNRV increase when using major groups instead of individual items?

Due to an increase in net realizable values Signup and view all the answers

Which method records the income effect of valuing inventory at net realizable value by debiting cost of goods sold?

Cost-of-goods-sold method Signup and view all the answers

In ABC Foods' case, why does using the total-inventory approach offset the high net realizable value for spinach?

Because net realizable values higher than cost offset lower values Signup and view all the answers

What happens to the income statement when the cost-of-goods-sold method is used for inventory valuation?

It reports a loss Signup and view all the answers

How does ABC Foods prevent reporting a loss in their income statement when valuing inventory at net realizable value using the Cost-of-goods-sold method?

By debiting cost of goods sold for the write-down Signup and view all the answers