FAR 4 - Inventories

Question 1

When do you use specific identification method?

When do you not use specific identification method?

Answer 1

You use specific identification method if it is for large or high value items (cars)

You don’t use specific identification method when items are identical.

Question 2

In periods of rising prices, what happens to FIFO ending inventory, cogs, and net income?

Answer 2

• Under FIFO, you are selling the oldest items you have.
• If prices are rising, the oldest items you had are the cheapest.
• If prices are rising, the most expensive items you have are in ending inventory.

If you are selling the cheapest items first, then your ending inventory price is high, your COGs price is low, and your net income is high.

Rising prices FIFO = HIGH EI, LOW COGS, HIGH NI

Question 3

Under FIFO, how is EI, NI, and COGS different from perpetual and periodic?

Answer 3

Under FIFO perpetual and FIFO periodic, EI, NI, and COGS will be SAME.

Question 4

Under FIFO, how do you find COGS?

Answer 4

COGS under FIFO is:

units sold x oldest price.

Question 5

Under FIFO, how do you find Ending Inventory?

Answer 5

Ending Inventory under FIFO is:
The COGAFS - COGS

OR

The units left in your inventory x the price you bought units.

Question 6

When do you use weighted average method and how do you calculate weighted average method?

Answer 6

You use periodic inventory system for weighted average system.

You calculate weighted average method by:

Step 1) Find Average price of inventory (Total Inventory Balance / Total Units)

COGS = total units sold x (step 1)

Ending Inventory = total units on hand x (step 1)

Question 7

When do you use moving average method and how do you calculate moving average method?

Answer 7

You use perpetual inventory system for weighted average system.

You calculate moving average method by:

Step 1) AFTER EACH PURCHASE - (total inventory balance + total amount purchased) / quantity in inventory balance

Question 8

Can you use LIFO for Tax and not for GAAP?

Answer 8

No, LIFO conformity rule states that if you use LIFO for tax purposes you also need to use LIFO for GAAP.

Question 9

In periods of rising prices, what happens to LIFO ending inventory, cogs, and net income?

Answer 9

• Under LIFO, you are selling the newest items you have.
• If prices are rising, the newest items you had are the expensive.
• If prices are rising, the most cheapest items you have are in ending inventory.

If you are selling the expensive items first, then your ending inventory price is low, your COGs price is high, and your net income is low.

Rising prices LIFO= LOW EI, HIGH COGS, LOW NI

Question 10

How do you calculate COGS and EI in periodic LIFO?

Answer 10

COGS - IF 4,000 units sold you use the newest prices multiplied by how much sold

Ending Inventory - What is left in inventory multiplied by oldest prices left

Question 11

How do you calculate layers in dollar value LIFO?

Answer 11

Multiply the current base year cost layer x ( ending inventory at current year cost / ending inventory at base year cost?