Table of Contents

Chapter 1 - Overview of Inventory. 1

The Definition of Inventory. 1

Accounting for Inventory. 3

Inventory Transactions. 5

Inventory Flow in a Push Environment 6

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. 12

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. 62

Variable Overhead Spending Variance. 62

Variable Overhead Efficiency Variance. 63

Fixed Overhead Spending Variance. 64

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. 73

Accounting for Actual Overhead Costs in Job Costing. 74

Accounting for Standard Overhead Costs in Job Costing. 75

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. 95

Expected Dispositions Method. 95

Reserve Method. 97

Expensing Method. 98

Issues with Obsolete Inventory Recognition. 99

Chapter 12 - Lower of Cost or Market Rule. 102

Lower of Cost or Market Rule. 102

Inventory Translation Adjustment 104

Practical Application. 105

Chapter 13 - Inventory Spoilage, Rework, and Scrap. 107

Definition of Spoilage. 107

Accounting for Normal Spoilage. 107

Accounting for Abnormal Spoilage. 109

Accounting for the Sale of Spoilage. 109

Cost Allocation to Spoilage. 110

Definition of Rework. 110

Reporting Rework. 110

Accounting for Rework. 111

Definition of Scrap. 111

Accounting for Scrap. 111

Chapter 14 - Joint and By-Product Costing. 115

Split-Off Points and By-Products. 115

Why We Allocate Joint Costs. 116

Joint Cost Allocation. 116

Joint Product and By-Product Pricing. 117

Special Concerns With By-Product Costing. 118

Chapter 15 - Inventory Disclosures. 120

Inventory Disclosures. 120

Chapter 16 - Inventory Transactions. 123

Initial Cost Recognition. 123

Acquired Inventory Transactions. 124

Backflushing Transactions. 124

Bill and Hold Transactions. 125

Consignment Transactions. 125

Cross Docking Transactions. 126

Drop Shipping Transactions. 126

Engineering Change Order Transactions. 126

Goods in Transit Transactions. 126

Kitting Transactions. 127

Lower of Cost or Market Adjustments. 127

Obsolete Inventory Adjustments. 128

Overhead Allocation Transactions. 128

Physical Count Adjustments. 129

Receiving Transactions. 129

Sale Transactions. 130

Scrap and Spoilage Adjustments. 130

Chapter 17 - Internal Revenue Code for Inventory. 132

IRC Section 471  General Rule for Inventories. 132

IRC Section 472  Last In, First Out Inventories. 132

IRC Section 473  Qualified Liquidations of LIFO Inventories. 134

IRC Section 474  Simplified Dollar-Value LIFO Method. 137

IRC Section 1504(a)  Affiliated Group. 139

Chapter 18 - Inventory Transfer Pricing. 142

Overview of Transfer Pricing. 142

Market Price Basis for Transfer Pricing. 143

Adjusted Market Price Basis for Transfer Pricing. 144

Negotiated Basis for Transfer Pricing. 144

Contribution Margin Basis for Transfer Pricing. 145

Cost Plus Basis for Transfer Pricing. 145

Cost Anomalies in a Cost-Based Transfer Price. 146

Pricing Problems Caused by Transfer Pricing. 146

The Tax Impact of Transfer Prices. 147

Chapter 19 - Inventory Controls. 151

Purchasing Process Overview.. 151

In-Process Purchasing Controls. 152

Additional Purchasing Controls  Fraud Related. 154

Additional Purchasing Controls  Periodic Actions. 155

Receiving Process Overview.. 156

In-Process Receiving Controls. 158

Additional Receiving Controls  Fraud Related. 159

Additional Receiving Controls  Periodic Actions. 160

Shipping Process Overview.. 160

In-Process Shipping Controls. 163

Additional Shipping Controls  Fraud Related. 164

Additional Shipping Controls  Periodic Actions. 164

Intercompany Controls. 165

Inventory Valuation Controls. 166

Warehouse Controls. 167

Production Controls. 168

Chapter 20 - Fraudulent Inventory Transactions. 171

Those Who Commit Fraud. 171

Financial Statement Fraud  Labor Component 171

Financial Statement Fraud  Materials Component 172

Financial Statement Fraud  Overhead Component 174

Revenue Fraud. 176

Inventory Theft 176

Common Fraud Risk Factors. 177

Fraud Prevention Tactics. 178

Chapter 21 - Inventory Policies. 182

Inventory Policies. 182

Receiving Policy. 182

Point of Ownership Policy. 183

Responsibility for Inventory Policy. 183

Inventory Access Policy. 183

Inventory Owned by Third Parties Policy. 184

Consigned Inventory Identification Policy. 184

Physical Count Policy. 184

Cycle Counting Policy. 184

Inventory Record Access Policy. 184

Bill of Material Updates Policy. 185

Standard Costing Updates Policy. 185

Lower of Cost or Market Updates. 185

Obsolete Inventory Updates. 185

Bill and Hold Policy. 185

Collections Take-Back Policy. 186

Chapter 22 - Inventory Budgeting. 188

The Production Budget 188

Other Production Budget Issues. 189

Budgeting for Multiple Products. 191

Ending Inventory Concepts. 191

Impact of Changes in Ending Inventory. 192

The Ending Finished Goods Inventory Budget 193

Direct Materials Budgeting Overview.. 195

The Direct Materials Budget (Roll up Method) 195

The Direct Materials Budget (Historical Method) 197

The Direct Materials Budget (80/20 Method) 198

Anomalies in the Direct Materials Budget 200

The Role of the Direct Materials Budget 200

Chapter 23 - Inventory Measurements. 203

Overview of Inventory Measurements. 203

Average Inventory Calculation. 203

Inventory Turnover Measurements. 205

Inventory Turnover Ratio. 205

Raw Materials Turnover 205

Work-in-Process Turnover 206

Finished Goods Turnover 207

Inventory Accuracy Percentage. 208

Excess Inventory Measurements. 209

Obsolete Inventory Percentage. 209

Percent of Inventory Greater than XX Days. 210

Returnable Inventory Valuation. 211

Opportunity Cost of Excess Inventory. 212

Answers to Chapter Questions. 215

Glossary. 238

Index. 242

Final Examination.....................................................................................................................................................247