kim226

In a decreasing price environment, the first-in first-out (FIFO) inventory cost method results in:

A) lower gross profit compared to last-in first-out.

B) higher inventory compared to last-in first-out.

C) lower cost of goods sold compared to last-in first-out.

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If prices are decreasing, FIFO assumes the higher-cost earliest purchases are the first items sold. This results in higher COGS, lower inventory, and lower gross profit compared to LIFO.

kim226

If prices are increasing, the weighted average cost method most likely results in inventory values that are higher than the inventory values using:

A) first-in first-out (FIFO).

B) last-in first-out (LIFO).

C) specific identification.

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In a increasing price environment, inventory values reported under LIFO are lower than the values reported under FIFO, and the values that result from weighted average cost are between the LIFO and FIFO values. Thus, the value of inventory using weighted average cost is higher than inventory using LIFO. The value of inventory using specific identification depends on which particular items from inventory are sold, and thus can be higher or lower than the inventory values that result from the other methods.

kim226

Lincoln Corporation and Continental Incorporated are identical companies except that Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental complies with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize each firm’s pre-tax financial income?

Lincoln Corporation

Continental Incorporated

A) Last-in, first-out Last-in, first-out

B) Last-in, first-out Average cost

C) First-in, first-out First-in, first-out

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LIFO will result in the lowest pre-tax financial income and FIFO will result in the highest pre-tax income. Average cost pre-tax financial income will fall in the middle. LIFO is allowed under U.S. GAAP but is not allowed under IFRS. Thus, Lincoln should choose LIFO and Continental should choose average cost in order to minimize pre-tax financial income.

kim226

A company that uses the LIFO inventory cost method records the following purchases and sales for an accounting period:
Beginning inventory, July 1: $5,000, 10 units
July 8: Purchase of $2,600 (5 units)
July 12: Sale of $2,200 (4 units)
July 15: Purchase of $2,800 (5 units)
July 21: Sale of $1,680 (3 units)
The company’s cost of goods sold using a perpetual inventory system is:

A) $3,780.

B) $3,760.

C) $3,500.

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With a perpetual inventory system, units purchased and sold are recorded in inventory in the order that the purchases and sales occur. Cost of goods sold for the July 12 sale uses 4 of the units purchased on July 8: 4 × ($2,600 / 5) = $2,080. Cost of goods sold for the July 21 sale uses 3 of the units purchased on July 15: 3 × ($2,800 / 5) = $1,680. COGS = $2,080 + $1,680 = $3,760.

kim226

Inventory, cost of sales, and gross profit can be different under periodic and perpetual inventory systems if a firm uses which inventory cost method?

A) FIFO or weighted average cost, but not LIFO.

B) LIFO or weighted average cost, but not FIFO.

C) LIFO or FIFO, but not weighted average cost.

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The LIFO and weighted average cost methods can provide different values for inventory, cost of sales, and gross profit depending on whether the firm uses a periodic or perpetual inventory system. FIFO produces the same values from either a periodic or perpetual inventory system.

kim226

During periods of rising prices, which of the following is most likely to occur?

A) LIFO COGS > FIFO COGS, therefore LIFO net income < FIFO net income.

B) LIFO COGS > FIFO COGS, therefore LIFO net income > FIFO net income.

C) LIFO COGS < FIFO COGS, therefore LIFO net income < FIFO net income.

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Under the assumptions of this question and using LIFO, the most expensive units go to COGS, resulting in lower net income.

kim226

Which accounting methods are preferable for income statements and balance sheets?

A) Last in, first out (LIFO) for the balance sheet and first in, first out (FIFO) for the income statement.

B) First in, first out (FIFO) for both income statements and balance sheets.

C) Last in, first out (LIFO) for income statements and first in, first out (FIFO) for the balance sheet.

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LIFO allocates the most recent prices to the cost of goods sold and provides a better measure of current income. For balance sheet purposes, inventories based on FIFO are preferable since these values most closely resemble current cost and economic value.

kim226

For balance sheet purposes, inventories based on:

A) LIFO are preferable to those based on FIFO, as they more closely reflect the current costs.

B) LIFO are preferable to those based on average cost, as they more closely reflect the current costs.

C) FIFO are preferable to those based on LIFO, as they more closely reflect current costs.

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The inventories based on FIFO are preferable to those presented under LIFO or average cost for balance sheet purposes. Under FIFO, the older inventories are taken out first, and the ending inventory balance consists of the recent purchases and thus most closely reflect the current (economic) value.

kim226

During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:

A) weighted average because it allocates average prices to cost of good sold (COGS) and provides a better measure of current income.

B) LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income.

C) FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income.

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LIFO is the most informative inventory accounting method for income statement purposes in periods of rising prices and stable or growing inventories. It allocates the most recent purchase prices to COGS, and thus provides a better measure of current income and future profitability.

kim226

Assuming inventory levels remain constant during the year and prices have been stable over time, COGS would be:

A) higher under LIFO than FIFO or average cost.

B) higher under the average cost than LIFO or FIFO.

C) the same for both LIFO and FIFO.

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During stable prices inventory levels are the same for both LIFO and FIFO.