Inventory

Question 1

under the perpetual method how is cost of goods sold determined using LIFO

Answer 1

perpetual system recognizes cost of goods sold based on the cost of goods acquired just prior to each sale

Question 2

under the periodic method how is cost of goods sold determined using LIFO

Answer 2

whereas the periodic system recognizes cost of goods sold based on cost of goods acquired prior to the end of each period.

Question 3

under the periodic/perpetual method how is cost of goods sold determined using LIFO

Answer 3

cost of goods sold for the period would be the same under both perpetual and periodic FIFO, using earliest goods acquired.

Question 4

Does the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.

Answer 4

YES

Question 5

which method is more complex

Answer 5

perpetual system.The cost and quantity of each sale must be maintained so that the inventory and cost of goods sold accounts are “perpetually” current and correct.

Question 6

List the attributes of First In First Out (FIFO).

Answer 6

• Most closely approximates actual physical flow of goods for most companies;
• Balance sheet valuation of inventory is at more desired current cost;
• Matching of revenues and expenses on income statement is not ideal.

Question 7

List some reasons to avoid Last In First Out (LIFO) liquidation.

Answer 7

• Increases taxes;

* Does not match current period expenses and revenues.

Question 8

List the reasons for a Last In First Out (LIFO) liquidation

Answer 8

• Poor planning;

* Lack of supply.

Question 9

List the attributes of Last In First Out (LIFO)

Answer 9

• Matching of revenues and expenses is significantly improved over FIFO;
• Income tax advantages associated with LIFO;
• Balance sheet presentation is less than ideal.

Question 10

What is the main reason for using Last In First Out (LIFO) in periods of rising costs?

Answer 10

Tax minimization.

Question 11

What effect does using Last In First Out (LIFO) have on the income statement?

Answer 11

Matching of revenues and expenses on the income statement become significantly improved.

Question 12

what does end inv reflect for FIFO

Answer 12

Reflects lastest costs

Question 13

what does end inv reflect for LIFO

Answer 13

Reflects earliest costs

Question 14

what does COGS reflect for LIFO

Answer 14

Reflects latest costs

Question 15

what does COGS reflect for FIFO

Answer 15

Reflects earliest costs

Reflects latest costs

Question 16

What does FIFO favor: BS or IS

Answer 16

favors balance sheet. But cost of goods sold (including income and gross margin) are less relevant and current. Most firms chose to maximize their profits.

Question 17

What does LIFO favor: BS or IS

Answer 17

favors income statement. Cost of goods sold more relevant. But balance sheet non current.

Question 18

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?

Answer 18

Decrease ending inv and decrease net income.
Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.
The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

Question 19

Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

Answer 19

FIFO assumes the sale of the earliest goods first. With rising prices, the earliest goods reflect the lowest prices. Therefore, cost of goods sold under FIFO is the lowest of the cost flow assumptions. With the lowest cost of goods sold, gross margin and income are the highest among the available cost flow assumptions (LIFO and average being the others).

Question 20

When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is

Answer 20

FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.
Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.

Question 21

List the Dollar Valued (DV) Last In First Out (LIFO) conversion index formula.

Answer 21

Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars.

Question 22

List the advantages of Dollar Valued (DV) Last In First Out (LIFO).

Answer 22

• Reduces the effect of the liquidation;
• Allows companies to use FIFO internally;
• Reduces clerical costs.

Question 23

List the steps in applying Dollar Valued (DV) Last In First Out (LIFO retail method.

Answer 23

• DV LIFO is applied to inventory at retail;
• FIFO retail method cost/retail ratio is applied to retail layer;
• Cost layer is added to beginning inventory at DV LIFO cost.

Question 24

Define “base-year dollars”.

Answer 24

Price level for the pool at the beginning of the year Dollar Valued (DV) Last In First Out (LIFO) adopted.

Question 25

Why would an entity utilize Dollar Valued (DV) Last In First Out (LIFO)?

Answer 25

Reduces the effect of the LIFO liquidation.

Question 26

How does the double-extension method affect ending inventory?

Answer 26

The ending inventory is extended at both base year cost and ending current year cost.

Question 27

Estimates of price-level changes for specific inventories are required for which inventory method?

Answer 27

DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO.
Thus, price-level changes are used throughout this method.
Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.

Question 28

Generally, what is replacement cost?

Answer 28

Market cost.

Question 29

How is the cost of ending inventory determined?

Answer 29

Determined by applying one of the four cost flow assumptions .

Question 30

List the methods of recording Lower of Cost or Market.

Answer 30

Direct method or Allowance method.

Question 31

How is the ceiling value of inventory calculated?

Answer 31

By reducing the sales price by the estimated cost to complete and sell the inventory.

Question 32

How is holding loss reported under the allowance method?

Answer 32

Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.

Question 33

How is holding loss reported under the direct method?

Answer 33

Any holding loss related to inventory is simply included in cost of goods sold.

Question 34

What is the basis on which Lower of Cost or Market (LCM) can be applied?

Answer 34

• Individual Item, Category, Total Inventory;

* But must be consistent from year to year.

Question 35

Define “market cost”.

Answer 35

Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.

Question 36

List the formula to arrive at net realizable value

Answer 36

Sales price - estimated cost to complete and sell the inventory.

Question 37

List the steps in Lower of Cost or Market (LCM) analysis.

Answer 37

• Compute market value;

* Value inventory at lower of cost or market.