Inventory

Question 1

Does FIFO assume the most recent purchases are the last to be sold?

Answer 1

Yes. Because the first (oldest) purchases must be sold first, before the most recent purchases.

Question 2

Does LIFO assume the most recent purchases are the first to be sold?

Answer 2

Yes

Question 3

Does LIFO or FIFO approximate current cost?

Answer 3

LIFO. Because it assumes the most recent purchases (last in) are the first sold. So it matches current cost.

Question 4

Clarify measurement of subsequent inventory to initial recognition

Answer 4

Replacement cost cannot exceed the NRV (ceiling) or be less than the NRV-npm (floor). If problem says replacement cost is above NRV-npm it’s good and market equals replacement cost. Then you can compare market to the original cost to determine inventory value under LCM.

Question 5

Further explanation of floor

Answer 5

Market (replacement cost) cannot be LESS THAN a floor equal to NRV reduced by a normal profit margin

Question 6

True or False. Weighted average method can be used for the perpetual inventory system.

Answer 6

False. It is used for the periodic inventory system. Because it determines an average cost only once at period end.

Question 7

True or False. Moving average method can be used for the periodic inventory system.

Answer 7

False. It is used for the perpetual inventory system because it determines a new weighted average after each purchase. Thats why it’s “moving.”

Question 8

Is FIFO ending inventory higher than LIFO during rising prices?

Answer 8

Yes. Because FIFO assumes the last purchased goods are still in inventory. LIFO assumes that these higher priced goods are the first sold.

Question 9

What are total goods available for sale minus net purchases?

Answer 9

The beginning inventory in a periodic system that uses the weighted average cost flow method.

Question 10

T or F. Freight out is a selling cost.

Answer 10

True. It is not part of inventorial cost.

Question 11

What’s the inventory turnover ratio?

Answer 11

COGS divided by Average of beginning and ending inventory.

Question 12

T or F. In times of inflation, FIFO has the lowest COGS and highest ending or average inventory.

Answer 12

True. The oldest First in purchases have the lower COGS. And the higher priced last in or most recent purchases are left in inventory.

Question 13

Fun fact inventory

Answer 13

Overstated ending inventory means understated Cogs which means overstated NI. And overstated RE.

Question 14

What’s the formula for dollar value life price index?

Answer 14

End of year cost divided by base year cost.

Question 15

Moving average method fact:

Answer 15

Only used with perpetual system. Calculates new weighted average after every purchase.

Question 16

Weighted Average formula

Answer 16

Used under the periodic system. Its cost of beginning inventory plus cost of purchases during the period divided by units in beginning inventory plus units purchased during the period.

Question 17

Fun fact

Answer 17

Under FIFO year end inventory and COGS are the same regardless of whether the periodic or perpetual systems are used.

Question 18

Highest ending inventory during inflation, lifo or fifo?

Answer 18

FIFO because the latest, higher priced purchases are left in n inventory.

Question 19

During inflation, COGS is lowest with fifo or lifo?

Answer 19

FIFO.

Question 20

During inflation, net income is highest with lifo or fifo?

Answer 20

FIFO, since it has the lowest COGS.

Question 21

Fun fact

Answer 21

A disadvantage of LIFO is that current revenues are matched with older purchases.

Question 22

Price index for dollar value lifo

Answer 22

Ending inventory at current year cost divided by ending inventory at base year cost

Question 23

Fun fact COGS

Answer 23

Understating inventory, overstates the cost associated with the goods or COGS

Question 24

COGS journal entry

Answer 24

When making a journal entry, COGS should be debited and purchases and inventory accounts should be credited, showing the assets have been sold and their costs moved to COGS

Question 25

Fun fact

Answer 25

An advantage of the perpetual system is that it debits the actual cogs and credits inventory for each transaction.

A disadvantage of the periodic system is that it hides inventory shortages