Periodic Inventory System and Cost-Flow Assumption

Question 1

List the formula for calculating cost of goods sold

Answer 1

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold.

Question 2

What account holds inventory acquisition cost during the period under a periodic system?

Answer 2

Purchases.

Question 3

Is the inventory account used to record purchases if using the “Periodic Inventory System”?

Answer 3

No

Question 4

When using the periodic inventory system, what accounts are purchases closed to at the end of the period?

Answer 4

Ending Inventory and COGS

Question 5

What is a way of computing Net Purchases for COGS?

Answer 5

Gross Purchases+Transportation(Freight In) - Purchases returns and allowances - purchases discounts

COGS=Beginning Inventory+Net Purchases-Ending Inventory

Question 6

Are COGS directly observable in a Periodic Inventory System?

Answer 6

No, rather the value recorded for COGS is derived from the other amounts recorded throughout the year in the purchases accounts

Question 7

What are the 4 cost flow assumptions that can be used when assigning a value to ending inventory and COGS using the periodic inventory method?

Answer 7

1. ) Specific Identification
2. ) Weighted Average cost-flow assumption
3. ) FIFO
4. ) LIFO

Question 8

List the Last In First Out (LIFO) cost flow assumptions.

Answer 8

1. )Ending inventory composed of oldest inventory;
2. )Cost of Goods Sold (COGS) composed of newest inventory;
3. )Produces lower net income and ending inventory valuation in periods of rising prices.

Question 9

Is ending inventory more reliable under LIFO or FIFO?

Answer 9

FIFO. Under LIFO ending inventory may reflect very old irwma

Question 10

Does the term “Weighted Average” always apply to the periodic inventory system or can it apply to others?

Answer 10

Always implies the periodic inventory system

Question 11

How is the weighted average cost per unit calculated when using this Cost-Flow assumption?

Answer 11

Cost of goods available for sale/number of units available for sale

Question 12

List the weighted average (WA) cost flow assumptions.

Answer 12

1. ) Weighted average cost per unit is the average cost of all units held during period;
2. ) Each item is treated as if costed at WA cost

Question 13

How is ending inventory valued when using the Weighted Average cost-flow assumption for inventory?

Answer 13

By multiplying the number of units in ending inventory by the weighted average cost per unit. COGS is number of units sold multiplied by Weighted Average cost per unit.

Question 14

What are the First in First Out (FIFO) Cost Flow assumptions?

Answer 14

1. ) Ending Inventory is made up of units most recently purchased
2. ) COGS is made up of the oldest merchandise.
3. ) Reflects the way most firms actually move their inventory.
4. ) Produces higher net income and ending inventory in times of rising pricers

Question 15

List the characteristics for the specific identification cost flow assumption.

Answer 15

1. )Specifically identifies cost of each item;

2. )Appropriate for large, costly, distinguishable products.

Question 16

How is Cost of Goods available for sale computed?

Answer 16

Cost in Beginning Inventory + Total Purchases cost

Question 17

How are net purchases calculated?

Answer 17

Purchases + Transportation (Freight in) - Purchase allowances - purchase returns

Question 18

Which cost flow assumption produces a higher COGS during times of rising prices?

Answer 18

LIFO

Question 19

Which cost flow assumption produces a higher ending Inventory?

Answer 19

FIFO