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Sweet Milk Inc uses the last in, first out (LIFO) inventory method and had 5,000 units of beginning inventory on January 1, 2002, that was valued at $10.00 a unit. The company purchased 50,000 units at $12 a unit and sold 52,000 units at $15 a unit. Sweet Milk is considering an additional purchase of 10,000 units at $13 a unit. The company will make the purchase at the end of December or in the early part of year 2003. Which statement about the effect of the purchase decision on net income is most accurate?

A) Making the purchase in December will increase income by $16,000 in year 2002.

B) Income for year 2002 will not be affected no matter when the inventory is purchased.

C) Postponing the purchase until January will increase income for 2002 by $14,000.

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By postponing the purchase until January, cost of goods sold (COGS) would be $620,000. A purchase in December would increase COGS to $634,000.

COGS for January purchase = (50,000 × 12) + (2,000 × 10) = 620,000

COGS for December purchase = (10,000 × 13) + (42,000 × 12) = 634,000

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Given the following inventory data about a firm:

• Beginning inventory 20 units at $50/unit
• Purchased 10 units at $45/unit
• Purchased 35 units at $55/unit
• Purchased 20 units at $65/unit
• Sold 60 units at $80/unit

What is the inventory value at the end of the period using first in, first out (FIFO)?

A) $3,475.

B) $3,100.

C) $1,575.

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Ending inventory equals 20 + 10 + 35 + 20 ? 60 = 25 of last units purchased in inventory.

(20 units)($65/unit) + (5 units)($55/unit) = $1,300 + $275 = $1,575

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A company's beginning inventory was overstated by $3,000, now ending inventory is understated by $2,000. If purchases were properly reported, then earnings before taxes will be:

A) overstated by $1,000.

B) overstated by $5,000.

C) understated by $5,000.

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Cost of goods sold (COGS

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Which of the following is least likely part of the basic inventory equation?

A) Beginning inventory ? ending inventory ? cost of goods sold = purchases.

B) Beginning inventory + purchases = ending inventory + cost of goods sold.

C) Purchases ? ending inventory + beginning inventory = cost of goods sold.

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

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In 2004, Torrence Co. had a beginning inventory of $19,924 and made purchases of $15,923. If the ending inventory level was $19,204, what was the cost of goods sold (COGS) for year 2004?

A) $15,203.

B) $16,643.

C) $15,923.

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Beginning Inventory + Purchases ? Ending Inventory = COGS
$19,924 + $15,923 ? $19,204 = $16,643

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A firm uses the last in, first out (LIFO) accounting method and posts $100,000 as ending inventory. Last year's financial statements show inventory at $110,000. This period's income statement shows costs of goods sold at $90,000 with a LIFO reserve of $30,000. How much inventory was purchased this period, and what would the ending inventory balance be under first in, first out (FIFO)?

       Inventory purchases    Ending inventory (FIFO)

A) $80,000    $130,000

B) $90,000    $130,000

C) $80,000    $70,000

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EI = BI + P - COGS

100 = 110 + P - 90

P = $80,000

In order to convert ending inventory under FIFO to LIFO you have to add the LIFO reserve to the ending inventory under LIFO.
EI_FIFO = $100,000 + $30,000 = $130,000

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The Mountain Bike Supply Company had 500 units in its beginning inventory. Each of these units cost $5. During the period, Mountain Bike Supply first purchased 400 units at $6 each and then 200 units at $7 each. At the end of the period, Mountain Bike Supply had 600 units. What is the cost of goods sold and inventory for Mountain Bike Supply if it uses FIFO inventory valuation?

COGS

Inventory

A) $2,500 $3,100

B) $2,500 $3,800

C) $3,200 $3,100

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Under FIFO:

COGS	= 500 @ $5 = $2,500
Inventory	= 200 @ $7 + 400 @ $6 = $3,800

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	Units	Unit Price
Beginning Inventory	709	$2.00
Purchases	556	$6.00
Sales	959	$13.00
SGA Expenses	$2,649 per annum

What is the cost of goods sold using the weighted average method?

A) $3,423.82.

B) $3,604.02.

C) $2,918.00.

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Weighted average = cost of goods available / total units available. COGS = Units sold × weighted average = 959 × 3.7381 = $3,604.02.

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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.

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

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What is the ending inventory level in dollars using the FIFO method?

A) $4,142.00.

B) $1,744.20.

C) $1,836.00.

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

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Purchases	Sales
20 units at $50	15 units at $60
35 units at $40	35 units at $45
85 units at $30	85 units at $35

Assume beginning inventory was zero.

Inventory value at the end of the period using the average cost method is:

A) $4,680.

B) $1,540.

C) $177.

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Average Cost = Cost of Goods Available / Total Units Available

Average Cost = $4,950 / 140 = $35.36

EOP Inventory Value = $35.36 × 5 = $176.79

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Inventory value at the end of the period using FIFO is:

A) $1,200.

B) $175.

C) $150.

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(Units purchased minus units sold) times cost = EOP value

(140 – 135) × $30 = $150

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Inventory value at the end of the period using LIFO is:

A) $250.

B) $1,200.

C) $2,400.

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5 × $50 = $250

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While attending a local college, music major Anjolie Webster accepts a temporary position with a small manufacturing firm. Currently, the firm uses LIFO to account for inventory, but the owner is “just curious” about how the financial results would look if the company used FIFO. Before the owner leaves for her voice lesson, she hands Webster a photocopy of the inventory data for the current period (summarized below).

• Beginning inventory of 1,000 units at $30 cost.
• Ending inventory of 800 units.
• Sales of 1,100 units.
• Three inventory purchases (listed from earliest purchase to latest purchase): 400 units at $27 each, 300 units at $25 each, and an unreadable number of units at $22 each. (Unfortunately, when the owner copied the original document, she left a yellow sticky note covering some of the inventory information.)
• Current assets (less inventory) of $75,000.
• Current liabilities of $65,000.

Using the information provided, determine which of the following statements is least accurate? All else equal, compared to LIFO, using FIFO would result in:

A) a lower ending inventory balance.

B) a lower gross margin.

C) a current ratio of approximately 1.60.

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To calculate the current ratio (which includes the ending inventory balance) using FIFO, we first need to determine how many units were purchased in the third illegible purchase order.

Ending inventory = beginning inventory + units purchased – units sold, so
units purchased = units sold + ending inventory – beginning inventory
= 1,100 + 800 – 1,000 = 900
Third purchase units = 900 – 400 – 300 = 200

• FIFO ending inventory = [(300 × 27) + (300 × 25) + (200 × 22)] = $20,000

• FIFO current ratio (all else equal) = (75,000 + 20,000) / 65,000 = approximately 1.46

The other choices are correct. Since prices are decreasing, FIFO cost of goods sold is higher (and gross margin is lower) than LIFO. And, FIFO ending inventory is lower than LIFO ending inventory. No LIFO calculations are necessary.