CPA PEP Prep Q&A

Quiz 3 Question 16 - Inventory Valuation

 
Picture of Lawrence Tan
Quiz 3 Question 16 - Inventory Valuation
by Lawrence Tan Send a message - 8 Mar 2017, 12:57 AM
 

Can someone please tell me if something is not right in the office answer in this question?

A public company, Taylor Inc. has in stock 10,000 identical copies of the latest CD by recording artist Trey Scott. Since its release earlier this year, these CDs have cost an average cost of $7.50 each. Due to fluctuating plastic costs, the last 20,000 of Trey Scott's CDs that Taylor purchased cost $8.50 each, and ordering a new shipment today would cost Taylor $7.00 each. London has recently fallen out of favour in the public eye, and as a result his CDs are now selling for $8.00. What is the appropriate value in Taylor's inventory of its Trey Scott CDs?
Select one:
1. 70000 Incorrect
2. 75000
3. 80000
4. 85000

Feedback

Your answer is incorrect.
According to IAS 2 paragraph 25, the cost of inventories, other than items that are not ordinarily interchangeable or segregated for specific projects, shall be assigned using the First-In, First-Out (FIFO) or the weighted average cost formula. Therefore, the inventory should be costed at the weighted average cost (response 2). The Last-In, First-Out method (option d) is not an acceptable method of the determination of cost. According to IAS 2 paragraph 9, inventories shall be measured at the lower of cost and net realizable value (NRV). Replacement cost (option 1) is not an acceptable measure of NRV. In this case, the current sales price (option 3), which is an acceptable measure of NRV, is greater than the cost. Therefore, the inventory cannot be written up.
The correct answer is: 75000

How can the correct answer be 75000? Isn't this LIFO since whatever the items of inventory received most recently (newest) are assumed to be sold first, leaving the oldest inventory items in stock. Should the correct answer be # 4 $85,000 since whatever the items of inventory are received first are assumed to be sold first, leaving the newest inventory items in stock?

Picture of Cindy Liu
Re: Quiz 3 Question 16 - Inventory Valuation
by Cindy Liu Send a message - 8 Mar 2017, 2:55 AM
 

1. decide whether company is using IFRS or ASPE 

since the company is a public company we assume it's using IFRS to value inventory

 

2. go to IFRS inventory, notice that inventory should be recognized at the LOWER OF NRV and cost (VERY IMPORTANT RULE)

  • NRV = net realizable value which is the market price = 8.00 --> answer 3
  • Cost = according to IAS 2 para. 25, it should be either valued at FIFO or Weighted average cost (7.5 as mentioned - answer 2)

Value @ FIFO =85 k

Value @ LIFO = do not know


However as we need to write down the inventory value to the LOWER OF NRV AND COST, we have to choose the lower amount, which is 7.5 *10k Units, so we choose asnwer number 2



Cindy


Picture of Lawrence Tan
Re: Quiz 3 Question 16 - Inventory Valuation
by Lawrence Tan Send a message - 8 Mar 2017, 11:58 AM
 

Thanks Cindy for your clear explanation. I was just confused that the explanation of the response seems to indicate that the $85,000 was based on LIFO.

Picture of Jennifer Silva
Re: Quiz 3 Question 16 - Inventory Valuation
by Jennifer Silva Send a message - 8 Mar 2017, 6:57 AM
 

Hi Lawrence,

You can't use LIFO under IFRS, it's not allowed. The cds are very interchangeable and would not spoil (it does not matter if they sell the first or last cds purchased because they would not have serial numbers or expiry dates), so the most appropriate costing method is average cost. Since the average cost of all cds purchased was 7.5 x 10,000 = 75,000

Also, since NRV>avg cost you wouldn't need to write up/down the inventory.

The question didn't say they bought or sold any cds after the 10,000, so those are still in inventory at avg cost.

Picture of Lawrence Tan
Re: Quiz 3 Question 16 - Inventory Valuation
by Lawrence Tan Send a message - 8 Mar 2017, 11:59 AM
 

Thanks Jennifer. The $85,000 was actually the FIFO valuation. I was just confused as the explanation seems to indicate that this amount was based on LIFO which is not.