2.3 Inventory — Cost Flow Methods Flashcards
The inventory method yielding the same inventory measurement and cost of goods sold whether a perpetual or periodic system is used is
A. First-in, First-out
B. Last-in, Last-out
C. Average cost
D. Either first-in, first-out or last-in, first-out
A. First-in, first-out
A perpetual inventory system will result in the same dollar amount of ending inventory as a periodic inventory system assuming a FIFO cost flow. Under both perpetual and periodic systems, the same units are deemed to be in ending inventory.
The advantage of the last-in, first-out inventory method is based on the assumption that
A. Costs should be charged to revenue in the order in which they are incurred
B. Costs should be charged to cost of goods sold at average cost.
C. The most recently incurred cost should be allocated to the cost of goods sold.
D. Current costs should be based on representative of normal conditions of efficiency and volume of operations.
C. The most recently incurred costs should be allocated to the cost of goods sold.
In a period of rising prices, which one of the following inventory methods usually provides the best matching of expense against revenues?
A. Specific identification
B. Weighted average
C. First-in, first-out
D. Last-in, fist-out
D. Last-in, first-out
In periods of rising costs, which one of the following inventory cost flow assumptions will result in higher cost of sales?
A. First-in, first-out
B. Last-in, first-out
C. Weighted average
D. Moving average
B. Last-in, first-out
A company had 2,000 units of opening inventory that cost $20 per unit. On May 1, 2,000 units were purchased at a cost of $22 each, and on September 1, another 2,000 units were purchased at a cost of $24 each. If 4,000 units were sold during the year, the company will report cost of goods sold of A if the B method of inventory valuation is used.
A. $88,000, LIFO
B. $92,000, Weighted-average
C. $88,000, FIFO
D. $84,000, FIFO
D. $84,000, FIFO
Under FIFO, the first items purchased are presumed to be the first sold. Furthermore, under FIFO, perpetual and periodic systems produce the same ending inventory and cost of goods sold. If 6,000 units were available and 4,000 units were sold, FIFO cost of goods sold equals $84,000 [(2,000 × $20) BI + (2,000 × $22) May 1 purchase].
Carver Co., a retailer, uses the perpetual inventory method. Carver uses the moving-average method to determine the value of its inventory. The following information relates to inventory transactions that took place during the month of March:
3/1 Beginning inventory 30,000 units at $10
3/5 Purchase 10,000 units at $12
3/10 Sales at $20 per unit 20,000 units
3/20 Purchase 20,000 units at $13
What amount should Carver report as cost of goods sold on its income statement at the end of March?
A. $200,000
B. $240,000
C. $210,000
D. $260,000
C. $210,000
The moving-average method requires the determination of new weighted average cost after each purchase and thus is used only in a perpetual system. Since the only sale in March was on 3.10, the cost of goods sold is $210,000 (20,000 units sold x $10.50)
Beg balance 3/1: 30,000 units x $10 = $300,000
Purchase 3/5: 10,000 units x $12 = $120,000
Total units: 40,000 units, $420,000. Cost per unit = $10.50
Flex Co. uses a periodic inventory system. The following are inventory transactions for the month of January:
1/1 Beginning inventory 10,000 units at $3
1/5 Purchase 5,000 units at $4
1/15 Purchase 5,000 units at $5
1/20 Sales at $10 per unit 10,000 units
Flex uses the average pricing method to determine the value of its inventory. What amount should Flex report as cost of goods sold on its income statement for the month of January?
A. $40,000
B. $100,000
C. $30,000
D. $37,500
D. $37,500
The total cost of beginning inventory and purchases is $75,000 ($30,000 + $20,000 + $25,000), and the total number units of beginning inventory and purchases is 20,000. The average price of the beginning inventory and purchases is $3.75 ($75,000 cost ÷ 20,000 units). The total cost of goods sold equals $37,500 (10,000 units sold × $3.75).
The cost of materials has risen steadily over the year. Which of the following methods of estimating the ending balance of the materials inventory account will result in the highest profit, assuming all other variables remain constant?
A. First-in, first-out (FIFO).
B. Specific identification.
C. Weighted average.
D. Last-in, first-out (LIFO).
A. First-in, first-out (FIFO).
Profit will be higher when cost of goods sold is lower, other factors held constant. Cost of goods sold equals beginning inventory, plus purchases, minus ending inventory. Accordingly, cost of goods sold will be lowest when the ending inventory is highest. In an inflationary environment, ending inventory is highest under FIFO because the older, less expensive items are deemed to have been sold, leaving the more expensive items in the ending inventory.
Toulouse Co. began the month of November with 150 baubles on hand at a cost of $4.00 each. These baubles sell for $7.00 each. The following schedule presents the sales and purchases of this item during the month of November.
November 5: Units sold 100
November 7: Quantity received 200 @ 4.20
November 9: Units sold 150
November 11: Quantity received 200 @ 4.40
November 17: Units sold 220
November 22: Quantity received 250 @ 4.80
November 29: Units sold100
If Toulouse uses weighted-average inventory pricing, the gross profit for November will be
A. $1,482
B. $1,528
C. $1,516
D. $1,046
A. $1,482
The total goods available for sale is determined as follows:
Beginning inventory 150 × $4.00 = $ 600.00
Nov. 7 purchase 200 × $4.20 = 840.00
Nov. 11 purchase 200 × $4.40 = 880.00
Nov. 22 purchase 250 × $4.80 =1,200.00
Total available 800 units, total $3,520.00
The weighted-average unit cost is $4.40 ($3,520 ÷ 800 units available). The cost of goods sold and total sales are therefore $2,508 (570 units sold × $4.40) and $3,990 (570 units × $7), respectively. Consequently, gross profit is $1,482 ($3,990 – $2,508).
When a right of return exists, an entity may recognize revenue from a sale of goods at the time of sale only if
A. The seller believes returns will not be material.
B. The seller retains the risks and rewards of ownership.
C. The buyer resells the goods.
D. The amount of future returns can be reliably estimated.
D. The amount of future returns can be reliably estimated.
One condition for recognition of revenue from the sale of goods is the transfer of the significant risks and rewards of ownership. Retention of significant risk may occur when, for example, the buyer may rescind the purchase for a reason stipulated in the contract, and the buyer is uncertain about the probability of return. However, if the entity can reliably estimate future returns and recognizes a liability for returns based on experience and other pertinent information, revenue may be recognized at the time of sale if the other conditions for revenue recognition also are met.
