Table of Contents
Chapter 1 - Overview of Inventory 1
The Definition of Inventory 1
Accounting for Inventory 2
Inventory Transactions 4
Inventory Flow in a Push Environment 5
Inventory Flow in a Pull Environment 6
Chapter 2 - Periodic and Perpetual Inventory Systems 9
The Periodic Inventory System 9
The Perpetual Inventory System 10
Summary 11
Chapter 3 - Inventory Record Accuracy 14
Inventory Record Errors 14
Environmental Factors Impacting Record Accuracy 15
Employee Factors Impacting Record Accuracy 16
Labeling Issues Impacting Record Accuracy 16
Inventory Naming Conventions Impacting Record Accuracy 17
Excessive Data Recordation 18
Inventory Data Collection Methods 18
The Data Entry Backlog Problem 20
Back Flushing 21
Controls over Record Accuracy 21
Inventory Review Reports 22
The Negative Inventory Balance 23
Inventory Auditing 23
The Corrective Action System 24
Chapter 4 - Inventory Counting and Reconciliation 27
How to Set Up Inventory Record Keeping 27
The Physical Inventory Count 28
Concerns about the Physical Inventory Count 29
Physical Count Improvements 30
Cycle Counting 31
Control Group Analysis 34
100% Count Analysis 35
Inventory Reconciliation 35
Chapter 5 - Estimating Ending Inventory 39
The Gross Profit Method 39
The Retail Inventory Method 40
The Effect of Overstated Ending Inventory 41
Chapter 6 - Inventory Cost Layering 44
Inventory Costing 44
The First in, First Out Method 45
The Last in, First Out Method 46
The Dollar-Value LIFO Method 48
The Link-Chain Method 50
The Weighted Average Method 52
The Specific Identification Method 53
Chapter 7 - Standard Costing of Inventory 56
Overview of Standard Costing 56
How to Create a Standard Cost 56
Historical, Attainable, and Theoretical Standards 57
How to Account for Standard Costs 57
Overview of Variances 59
The Purchase Price Variance 59
Material Yield Variance 60
Labor Rate Variance 61
Labor Efficiency Variance 61
Variable Overhead Spending Variance 62
Variable Overhead Efficiency Variance 63
Fixed Overhead Spending Variance 63
Problems with Variance Analysis 64
The Controllable Variance 65
The Favorable or Unfavorable Variance 65
Where to Record a Variance 65
Which Variances to Report 66
How to Report Variances 67
Chapter 8 - Job Costing 70
Overview of Job Costing 70
When Not to Use Job Costing 71
Accounting for Direct Materials in Job Costing 71
Accounting for Labor in Job Costing 72
Accounting for Actual Overhead Costs in Job Costing 73
Accounting for Standard Overhead Costs in Job Costing 74
The Importance of Closing a Job 76
The Role of the Subsidiary Ledger in Job Costing 76
Chapter 9 - Process Costing 79
Overview of Process Costing 79
The Weighted Average Method 80
The Standard Costing Method 81
The First In, First Out Method 83
The Hybrid Costing System 84
Process Costing Journal Entries 85
Problems With Process Costing 86
Chapter 10 - Overhead Allocation 89
Overhead Allocation 89
Averaging of Overhead Rates 92
Chapter 11 - Obsolete Inventory 94
Expected Dispositions Method 94
Reserve Method 96
Expensing Method 97
Issues with Obsolete Inventory Recognition 98
Chapter 12 - Lower of Cost or Market Rule 101
Lower of Cost or Market Rule 101
Inventory Translation Adjustment 103
Practical Application 104
Chapter 13 - Inventory Spoilage, Rework, and Scrap 106
Definition of Spoilage 106
Accounting for Normal Spoilage 106
Accounting for Abnormal Spoilage 108
Accounting for the Sale of Spoilage 108
Cost Allocation to Spoilage 109
Definition of Rework 109
Reporting Rework 109
Accounting for Rework 110
Definition of Scrap 110
Accounting for Scrap 110
Chapter 14 - Joint and By-Product Costing 114
Split-Off Points and By-Products 114
Why We Allocate Joint Costs 115
Joint Cost Allocation 115
Joint Product and By-Product Pricing 116
Special Concerns With By-Product Costing 117
Chapter 15 - Inventory Disclosures 119
Inventory Disclosures 119
Chapter 16 - Inventory Transactions 122
Initial Cost Recognition 122
Acquired Inventory Transactions 123
Backflushing Transactions 123
Bill and Hold Transactions 123
Consignment Transactions 124
Cross Docking Transactions 124
Drop Shipping Transactions 124
Engineering Change Order Transactions 125
Goods in Transit Transactions 125
Kitting Transactions 125
Lower of Cost or Market Adjustments 126
Obsolete Inventory Adjustments 126
Overhead Allocation Transactions 127
Physical Count Adjustments 127
Receiving Transactions 127
Sale Transactions 128
Scrap and Spoilage Adjustments 128
Chapter 17 - Internal Revenue Code for Inventory 131
IRC Section 471 – General Rule for Inventories 131
IRC Section 472 – Last In, First Out Inventories 131
IRC Section 473 – Qualified Liquidations of LIFO Inventories 133
IRC Section 474 – Simplified Dollar-Value LIFO Method 136
IRC Section 1504(a) – Affiliated Group 138
Chapter 18 - Inventory Transfer Pricing 141
Overview of Transfer Pricing 141
Market Price Basis for Transfer Pricing 142
Adjusted Market Price Basis for Transfer Pricing 143
Negotiated Basis for Transfer Pricing 143
Contribution Margin Basis for Transfer Pricing 144
Cost Plus Basis for Transfer Pricing 144
Cost Anomalies in a Cost-Based Transfer Price 145
Pricing Problems Caused by Transfer Pricing 145
The Tax Impact of Transfer Prices 146
Chapter 19 - Inventory Controls 150
Purchasing Process Overview 150
In-Process Purchasing Controls 151
Additional Purchasing Controls – Fraud Related 153
Additional Purchasing Controls – Periodic Actions 154
Receiving Process Overview 154
In-Process Receiving Controls 156
Additional Receiving Controls – Fraud Related 158
Additional Receiving Controls – Periodic Actions 158
Shipping Process Overview 159
In-Process Shipping Controls 161
Additional Shipping Controls – Fraud Related 162
Additional Shipping Controls – Periodic Actions 163
Intercompany Controls 164
Inventory Valuation Controls 164
Warehouse Controls 166
Production Controls 166
Chapter 20 - Fraudulent Inventory Transactions 169
Those Who Commit Fraud 169
Financial Statement Fraud – Labor Component 169
Financial Statement Fraud – Materials Component 170
Financial Statement Fraud – Overhead Component 172
Revenue Fraud 173
Inventory Theft 174
Common Fraud Risk Factors 175
Fraud Prevention Tactics 176
Chapter 21 - Inventory Policies 180
Inventory Policies 180
Receiving Policy 180
Point of Ownership Policy 180
Responsibility for Inventory Policy 181
Inventory Access Policy 181
Inventory Owned by Third Parties Policy 181
Consigned Inventory Identification Policy 182
Physical Count Policy 182
Cycle Counting Policy 182
Inventory Record Access Policy 182
Bill of Material Updates Policy 182
Standard Costing Updates Policy 183
Lower of Cost or Market Updates 183
Obsolete Inventory Updates 183
Bill and Hold Policy 183
Collections Take-Back Policy 183
Chapter 22 - Inventory Budgeting 186
The Production Budget 186
Other Production Budget Issues 187
Budgeting for Multiple Products 188
Ending Inventory Concepts 189
Impact of Changes in Ending Inventory 190
The Ending Finished Goods Inventory Budget 191
Direct Materials Budgeting Overview 192
The Direct Materials Budget (Roll up Method) 193
The Direct Materials Budget (Historical Method) 195
The Direct Materials Budget (80/20 Method) 196
Anomalies in the Direct Materials Budget 197
The Role of the Direct Materials Budget 198
Chapter 23 - Inventory Measurements 200
Overview of Inventory Measurements 200
Average Inventory Calculation 200
Inventory Turnover Measurements 202
Inventory Turnover Ratio 202
Raw Materials Turnover 202
Work-in-Process Turnover 203
Finished Goods Turnover 204
Inventory Accuracy Percentage 205
Excess Inventory Measurements 206
Obsolete Inventory Percentage 206
Percent of Inventory Greater than XX Days 207
Returnable Inventory Valuation 208
Opportunity Cost of Excess Inventory 208
Answers to Chapter Questions 212
Glossary 235
Index 239
Exam Score Sheet……………………………………………………………………………………….242
CPE Exam……………………………………………………………………………………………….243
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