CFA Practice Question

CFA Practice Question

The following information applies to Fendi Inc. for 2015:

Merchandise purchased for resale: $400,000
Freight-in: $10,000
Freight-out: $5,000
Purchase returns: $2,000

Fendi's 2015 inventory cost is ______.
A. $400,000
B. $408,000
C. $398,000
Explanation: Inventory cost is the sum of the applicable costs directly or indirectly incurred in bringing inventory items to their existing condition and location. Thus, to calculate inventory cost we add merchandise purchases and freight in, and subtract purchase returns. The answer is $408,000 ($400,000 + $10,000 - $2,000). Freight-out covers transportation cost to ship to the customer and is treated as a sales and administrative expense.

User Contributed Comments 8

User Comment
Rguerra The "Purchase returns" is a little misleading. I interpreted it as of something a client bought and returned, not as something the firm purchased and returned. My bad, I guess...
eddeb When your talking about inventories, and therefore relations with suppliers.

A return on purchase has to be deducted from merchandise purchased
JalaniN doesnt Freight out means return of the merchandise by company?
poojacfa The company has returned physical goods worth $2000 to its suppliers.
Birdy101 freight out means costs for delivery to customers
Munyoli Freight out costs should be part of S&D costs and should never be capitalised to inventory.
JHeld logic can lead us to the right answer once the possible answers are looked at.
santibanez Rguerra, that would be sales returns
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