2.3 Inventory — Cost Flow Methods

Question 1

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

Answer 1

A. First-in, first-out

Question 2

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.

Answer 2

C. The most recently incurred costs should be allocated to the cost of goods sold.

Question 3

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

Answer 3

D. Last-in, first-out

Question 4

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

Answer 4

B. Last-in, first-out

Question 5

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 <List> if the <List> method of inventory valuation is used.</List></List>

A. $88,000, LIFO
B. $92,000, Weighted-average
C. $88,000, FIFO
D. $84,000, FIFO

Answer 5

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].