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

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

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

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

Arlington, Inc. uses the first in, first out (FIFO) inventory cost flow assumption. Beginning inventory and purchases of refrigerated containers for Arlington were as follows:

	Units	Unit Cost	Total Cost
Beginning Inventory	20	$10,000	$200,000
Purchases, April	10	12,000	120,000
Purchases, July	10	12,500	125,000
Purchases, October	20	15,000	300,000

In November, Arlington sold 35 refrigerated containers to Johnson Company. What is the cost of goods sold assigned to the 35 sold containers?

A) $485,000.

B) $434,583.

C) $382,500.

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Under FIFO, cost of goods sold is the value of the first units purchased. The 35 units sold consist of the 20 units in beginning inventory, the 10 units purchased in April, and 5 of the units purchased in July. COGS = $200,000 + $120,000 + (5 × $12,500) = $382,500.

kim226

Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory:

• Depreciation: straight-line; double-declining balance (DDB)
• Inventory: first in, first out (FIFO); last in, first out (LIFO)

Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1?

A) DDB; FIFO.

B) Straight-line; FIFO.

C) Straight-line; LIFO.

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For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

kim226

	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) $3,604.02.

B) $3,423.82.

C) $2,918.00.

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

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What is the cost of goods sold using the first in, first out (FIFO) method?

A) $8,325.00.

B) $2,918.00.

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) $1,836.00.

B) $4,142.00.

C) $1,744.20.

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

kim226

Which inventory method will provide the largest net income during periods of falling prices?

A) Weighted average cost.

B) FIFO.

C) LIFO.

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During periods of falling prices last in, first out (LIFO) provides a higher net income than first in, first out (FIFO) or the average cost methods because the items most recently purchased are the ones being sold first and these costs are continually falling increasing net income. Using FIFO during periods of falling prices would cause net income to be lower than LIFO or average cost methods because the first inventory purchased is the first sold but during periods of falling prices this is the most expensive inventory causing net income to be lower.

kim226

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) $1,575.

B) $3,475.

C) $3,100.

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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

kim226

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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(units sold × sales price) – [(inventory cost × unit cost) + (inventory cost × unit cost)] = sales – COGS = gross profit
(700 × 7.00) – [(400 × 4.00) + (300 × 5.00)] = 1,800