honeycfa

An analyst notes the following about a company:

• Beginning inventory was reported as $5,000.
• Costs of goods sold were reported as $8,000.
• Ending inventory is $7,000 (the analyst has physically verified this amount).

Which of the following statements is most accurate?

A) If the analyst discovered that beginning inventory was overstated by $1,000, then cost of goods sold must have been understated by $1,000.

B) If the analyst discovered that beginning inventory was understated by $2,000, then earnings before taxes must have been overstated by $2,000.

C) Purchases must have been $6,000.

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If inventory is overstated then COGS must also be overstated or purchases were understated, since you are told that ending inventory is ok.

honeycfa

JME purchased 400 units of inventory that cost $4.00 each. Later the firm purchased an additional 500 units that cost $5.00 each. JME sold 700 units of inventory for $7.00 each. If JME uses a first in, first out (FIFO) cost flow method, the amount of gross profit appearing on the income statement is:

A) $2,400.

B) $3,100.

C) $1,800.

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(700 × 7.00) – [(400 × 4.00) + (300 × 5.00)] = 1,800

honeycfa

Which of the following inventory accounting methods must be used for financial reporting purposes if a U.S. firm uses last in, first out (LIFO) for tax purposes?

A) The firm may use any of the above methods.

B) FIFO.

C) LIFO.

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If a U.S. firm uses LIFO for tax purposes, it must also use LIFO for financial reporting purposes, according to U.S. tax law.