Lecture 12

Question 1

perpetual method

Answer 1

both purchases and sales of inventory recorded as they occur

inventory balance and COGS balance are always up to date

Question 2

periodic method

Answer 2

purchases recorded as they occur, COGS recorded only @end of period

inventory and COGS balances up to date only @END of period after adjusting entry to record COGS

Question 3

cost of goods available for sale =

Answer 3

beg balance + purchases

Question 4

COGS =

Answer 4

beg bal + purchases - end bal

Question 5

FIFO

Answer 5

COGS derived using older costs

cost of remaining inventory = more current relative to the end of the period

Question 6

LIFO

Answer 6

COGS derived using newer costs

cost of remaining inventory = less current relative to end of period

Question 7

with increasing costs & with inventory levels not declining, ____ COGS will always exceed ____ COGS

Answer 7

LIFO, FIFO

Question 8

with increasing costs & with inventory levels not declining, ____ ending inventory will always exceed ____ ending inventory

Answer 8

FIFO, LIFO

Question 9

LIFO Reserve =

Answer 9

= FIFO inventory - LIFO inventory

diff b/w company’s inventory valued at LIFO and what it would be under FIFO

CUMULATIVE effect on COGS and gross profit over the time the firm has been applying LIFO

Question 10

Δ LIFO Reserve =

Answer 10

LIFO COGS - FIFO COGS
(for that period)

effect on COGS and gross profit for a given year

Question 11

FIFO Inventory =

Answer 11

LIFO inventory + LIFO Reserve

Question 12

FIFO COGS =

Answer 12

LIFO COGS - ΔLIFO Reserve

Question 13

FIFO Gross profit =

Answer 13

LIFO Gross profit + ΔLIFO Reserve

Question 14

with inflation, NI ____ > NI ____ in almost every year

Answer 14

FIFO, LIFO

Question 15

LIFO Liquidation:

___ COGS > ___ COGS

Answer 15

FIFO, LIFO; bc you start going into inventory and use those costs; the costs for LIFO are older and lower

Question 16

LIFO liquidation

Answer 16

when there is a decline in inventory quantities

decline in inventories w/LIFO results in older costs being matched with current sales dollar –> inflates profit margins

Question 17

LIFO liquidation profit =

Answer 17

(current cost - LIFO layer cost) * Q liquidated

Question 18

weighted average cost

Answer 18

in between LIFO and FIFO

take weighted average cost and apply to COGS etc

Question 19

if you were faced with rising costs and you are a manager, you’d want to use….

Answer 19

LIFO, to minimize taxes

Question 20

if you were an investor creditor, you’d want the firm to use…

Answer 20

FIFO, to report highest NI

Question 21

LIFO Reserve = (describe using COGS)

Answer 21

Σ(LIFO COGS – FIFO COGS)

Question 22

LIFO Reserve = (describe using gross profit)

Answer 22

Σ(Gross Profit FIFO – Gross Profit LIFO)

Question 23

FIFO net earnings, LIFO net earnings

Answer 23

(1 - t) FIFO Gross Profit, (1 - t) LIFO Gross Profit

Question 24

FIFO net earnings =

Answer 24

(1 - t) FIFO Gross Profit = (1 - t) LIFO Gross Profit + (1 - t) ΔReserve

FIFO net earnings = LIFO net earnings + (1 - t) ΔReserve