Chapter 5

Question 1

What are 4 methods of determining how much inventory was sold?

Answer 1

(1) Specific identification
(2) First in, first out
(3) Last in, first out
(4) Weighted average

Question 2

Why is specific identification much different than the other ways of determining inventory costs?

Answer 2

It requires that you’re able to distinctly tell the difference between each piece of inventory. Think of the VIN on a car, for example.

This works better for smaller inventories with higher priced items.

Question 3

What are the three cost flow methods of determining inventory cost?

Answer 3

(1) First in, first out
(2) Last in, first out
(3) Weighted average

Question 4

Describe the first in, first out inventory method?

Answer 4

It assumes that the first goods purchased are the first goods sold

Question 5

What is the last in, first out inventory method?

Answer 5

It assumes that the last good purchased is the first sold.

Question 6

How does the weighted average inventory system differ from FIFO or LIFO?

Answer 6

It falls in between them by averaging the cost of inventory items and then using that amount to determine how much inventory cost and how much is left over after sales.

Question 7

T or F: The cost flow method a company uses can significantly affect the gross margin reported on their income statement.

Answer 7

True

Question 8

How does increasing amounts of cost of goods sold affect gross margin and eventually, the business’s gross profits?

Answer 8

The higher the cost of goods sold, the lower the business’s gross profits will be, which in turn, means the company will pay less in taxes.

Question 9

Can companies change their inventory method each year?

Answer 9

No they cannot. GAAP requires that companies remain consistent in their inventory methods.

Question 10

T or F: LIFO can be used under IFRS.

Answer 10

False