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Which of the following statements is least accurate?
A)
In a period of rising prices, LIFO gives the best COGS, whereas FIFO gives the best inventory balance on the balance sheet.
B)
LIFO produces a tax benefit in a period of rising prices, therefore results in higher cash flows than FIFO.
C)
In a period of rising prices, FIFO gives the best COGS, whereas LIFO gives the best inventory balance on the balance sheet.



If prices are rising steadily, FIFO inventory is valued at the more recent purchase prices which are higher and provide a better estimate of the replacement value of the inventory. LIFO costing will produce a cost of goods sold much closer to replacement cost which provides a better estimate than using FIFO.

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In a period of rising prices and stable or increasing inventory quantities, use of the first in, first out (FIFO) inventory cost flow assumption results in all of the following EXCEPT:
A)
higher earnings after taxes than under last in, first out (LIFO).
B)
lower inventory balances than under last in, first out (LIFO).
C)
higher earnings before taxes than under last in, first out (LIFO).



Ending Inventory under FIFO includes more recently purchased higher cost goods than under LIFO. The LIFO inventory consists of older, cheaper goods. Both before and after tax earnings under FIFO will be higher because less expensive goods are used for the cost of goods sold (COGS). Working capital, which is equal to current assets – current liabilities will also be higher under FIFO due the higher inventory balance causing a higher level of current assets.

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In an inflationary environment, a company’s:
A)
assets will be lower if it uses last in, first out (LIFO) as opposed to FIFO.
B)
net income will be larger if it uses LIFO than if it uses FIFO.
C)
COGS sold will be lower if it uses LIFO as opposed to FIFO.



In an inflationary period, assets will be lower under LIFO since the last, higher priced items are charged to the income statement

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Which of the following statements regarding inventory methods used during periods of rising prices is least accurate?
A)
FIFO results in higher inventory balances than LIFO.
B)
FIFO results in higher taxes than LIFO.
C)
LIFO results in lower cost of goods sold than FIFO.



LIFO results in higher cost of goods sold during periods of rising prices because the last items bought, which are the most expensive, are the first items sold resulting in a higher cost of goods sold.

TOP

An analyst acquires the following information regarding a company:
UnitsUnit Price
Beginning Inventory559$1.00
Purchases785$5.00
Sales848$15.00
SGA Expenses$3,191 per annum
What are the Earnings Before taxes using the Weighted Average Method?
A)
$6,700.
B)
$5,500.
C)
$6,200.



EBT = Sales − (COGS + SGA)COGS = Beginning inventory + Purchases − Ending inventory Ending inventory in units = 559 + 785 − 848 = 496 units
Average cost = (559 × $1 + $785 × $5) / (559 + 785)
= ($559 + $3,925) / 1,344 = $3.3363
Ending inventory = 496 × $3.3363 = $1,654.81 COGS = $559 + $3,925 − $1,654.81 = $2,829.19
EBT = 12,720 − (2,829.19 + 3,191) = $6,699.81.

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Given the following information and assuming beginning inventory was zero and a periodic inventory system was used, what is the gross profit at the end of the period using the FIFO, LIFO, and average cost methods?

Purchases

Sales
20 units at $5015 units at $60
35 units at $4035 units at $45
85 units at $3085 units at $35
FIFOLIFOCost Average
A)
$650$750$677
B)
$650$750$990
C)
$677$650$677



Sales = (15 * 60) + (35 * 45) + (85 * 35) = 5,450
COGSFIFO = (20 * 50) + (35 * 40) + (80 * 30) = 4,800
GMFIFO: $5,450 − 4,800 = $650
COGSLIFO = (15 * 50) + (35 * 40) + (85 * 30) = 4,700
GMLIFO: $5,450 − $4,700 = $750
COGSAverage = (20 * 50) + (35 * 40) + (85 * 30) = 4,950
4,950*135 / 140 = 4,773.21
GMCost Average: $5,450 − $4,773.21 = $676.79

TOP

In periods of falling prices, which of the following statements is CORRECT? Compared to FIFO, LIFO results in:
A)
lower COGS, lower taxes and higher net income.
B)
higher inventory balances and higher working capital.
C)
higher inventory balances and lower working capital.



In periods of falling prices, LIFO results in lower COGS, higher taxes, higher net income, higher inventory balances, higher working capital, and lower cash flows compared to FIFO.

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UnitsUnit Price
Beginning Inventory709$2.00
Purchases556$6.00
Sales959$13.00
SGA Expenses$2,649 per annum
What is the cost of goods sold using the weighted average method?
A)
$3,604.02.
B)
$3,423.82.
C)
$2,918.00.



Weighted average = cost of goods available / total units available. COGS = Units sold × weighted average = 959 × 3.7581 = $3,604.02.

What is the cost of goods sold using the first in, first out (FIFO) method?
A)
$2,918.00.
B)
$8,325.00.
C)
$2,772.10.



COGS = (709 × 2) + (250 × 6) = $2,918.00.

What is the ending inventory level in dollars using the FIFO method?
A)
$4,142.00.
B)
$1,744.20.
C)
$1,836.00.



Ending Inventory = 306 × 6 = $1,836.00.

TOP

Which of the following is least likely part of the basic inventory equation?
A)
Beginning inventory + purchases = ending inventory + cost of goods sold.
B)
Beginning inventory − ending inventory − cost of goods sold = purchases.
C)
Purchases − ending inventory + beginning inventory = cost of goods sold.



To solve for purchases the basic inventory equation would then be: ending inventory + COGS − beginning inventory = purchases.

TOP

UnitsUnit Price
Beginning Inventory699$5.00
Purchases710$8.00
Sales806$15.00
SGA Expenses$3,141 per annum
Determine the cost of goods sold using the weighted average method and also using the first in, first out (FIFO) method.
Weighted AverageFIFO
A)
$4,986.02$4,133.45
B)
$4,351.00$5,248.44
C)
$5,248.44$4,351.00



Weighted average = cost of goods available / total units available.
[(699 x 5) + (710 x 8)] / (699 + 710) = 6.51171
COGS = Units sold × Weighted average = 806 × 6.51171 = $5,248.44.
FIFO COGS = (699 × 5) + (107 × 8) = $4,351.00


What is the ending inventory level in dollars using the FIFO method?
A)
$6,160.00.
B)
$4,824.00.
C)
$4,582.80.



There are (699 + 710 – 806) = 603 items left in inventory. Ending Inventory = 603 × 8 = $4,824.00.

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