Inventory

Question 1

Under FIFO, what does ending inventory and cost of goods sold reflect?

Answer 1

Ending inventory reflects latest costs; COGS reflects earliest costs.

Question 2

Under LIFO, what does ending inventory and cost of goods sold reflect?

Answer 2

Ending inventory reflects earliest costs; COGS reflects latest costs.

Question 3

What affect does FIFO have on current income?

Answer 3

Maximizes income. Firms often choose FIFO to maximize their reported income.

Question 4

What affect does LIFO have on current income?

Answer 4

Minimizes income. The main reason for choosing LIFO is to minimize income tax.

Question 5

What affect does rising prices have on LIFO?

Answer 5

if inventory costs have been rising, LIFO shows lower ending inventory, higher cost of goods sold, and lower income.

Question 6

What affect does rising prices have on FIFO?

Answer 6

If inventory costs have been rising, FIFO shows higher ending inventory, lower cost of goods sold, and higher income.

Question 7

What are the advantages of Dollar value LIFO over regular LIFO?

Answer 7

1. Reduces the effect of the liquidation problem
2. Allows companies to use FIFO internally
3. Reduces clerical costs

Question 8

What is the objective of Dollar Value LIFO?

Answer 8

To convert FIFO ending inventory to LIFO ending inventory

Question 9

What is conversion index?

Answer 9

Used to determine price increase;

Ending inv in current year dollars/Ending inv in base year dollars

Question 10

Under Dollar Value LIFO, what is ending DV LIFO inventory?

Answer 10

Beginning DV LIFO plus the current layer