D, E e. compare cost of sales, ending inventory, and gross profit using different inventory valuation methods;

Question 1

Perpetual Inventory Systems (“changes in the inventory account are continuously updated”)(“Purchases and sales of goods are recorded directly in inventory as they occur.”)

Answer 1

Cost of Sales

Gross Profit

EI

Question 2

Periodic Inventory Systems (“a company determines the quantity of inventory on hand periodically”)(“Purchases are recorded in a purchases account”
)

Answer 2

Amount of goods available for sale - Purchases + Beginning Inventory

Cost of Sales = COGAS - EI

Gross Profit

EI

Question 3

Periodic and Perpetual arrive at the same values for costs of sales and EI using specific ID and FIFO but LIFO and WAC may affect…

Answer 3

LIFO and WAC may effect EI and Cost of Sales

Question 4

The Impact of the Choice of System Under LIFO

Answer 4

LIFO Carrying Amount of EI differs under perpetual because the changes in inventory account are continuously updated

Question 5

EI, Cost of Sales, GP under perpetual and LIFO

Answer 5

EI - Lower than periodic, GP - Lower than periodic, Cost of Sales- higher than periodic

Question 6

EI, Cost of Sales, GP under periodic and LIFO

Answer 6

Cost of Sales, LIFO and Periodic: Lower than Perpetual

Gross Profit, LIFO and Periodic: Higher than Perpetual

EI, LIFO and Periodic: Higher than perpetual

Question 7

Comparison of Inventory Evaluation Methods (idea)

Answer 7

idea is that…“the allocation of the total cost of goods available for sale to cost of sales on the income statement and to ending inventory on the balance sheet varies under the different inventory valuation methods.”

Environment:
Declining Inventory Unit Costs and constant or increasing inventory quantities

FIFO - will allocate a higher amount of total COGAS to —> IS as ‘Cost of Sales’ and Lower Qei to —>BS as EI
*Higher amount COGAS = higher Cost of Sales = lower GP, Op. Prof., and Income before Taxes

Environment:
Rising inventory costs and constant or increasing inventory quantities
FIFO: “will allocate a lower amount of the total cost of goods available for sale to cost of sales on the income statement and a higher amount to ending inventory on the balance sheet. Accordingly, because cost of sales will be lower under FIFO, a company’s gross profit, operating profit, and income before taxes will be higher.”

FIFO Inventory Carrying Amounts more closely reflect current replacement values because under FIFO, first inventory is OUT (which means, inventory consists of the most recently purchased items)

Cost of Sales under LIFO
“The cost of sales under LIFO will more closely reflect current replacement value. LIFO ending inventory amounts are typically not reflective of current replacement value because the ending inventory is assumed to be the oldest inventory and costs are allocated accordingly.”

Question 8

Cost of Sales under LIFO

Answer 8

“The cost of sales under LIFO will more closely reflect current replacement value. LIFO ending inventory amounts are typically not reflective of current replacement value because the ending inventory is assumed to be the oldest inventory and costs are allocated accordingly.”