RobertA

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.

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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.

RobertA

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

A) the same for both LIFO and FIFO.

B) higher under LIFO than FIFO or average cost.

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

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

RobertA

During inflationary periods, which of the following statements is CORRECT?

A) LIFO will generate higher earnings, but lower after tax cash flows.

B) LIFO will generate lower earnings, but lower after tax cash flows.

C) FIFO will generate higher earnings, but lower after tax cash flows.

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During inflation, FIFO will generate higher earnings because cost of goods will be lower than if LIFO was used. However, LIFO will generate higher cash flows since cash outflows for taxes will be lower for LIFO.

RobertA

Which is the preferred inventory method for purposes of analysis and which is the preferred method for reporting cost of goods sold?

Inventory Analysis

COGS

A) LIFO FIFO

B) FIFO LIFO

C) LIFO LIFO

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FIFO is the preferred inventory method for purposes of analysis and LIFO is the preferred method for reporting cost of goods sold.

RobertA

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

C) LIFO because it allocates current 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.

RobertA

For balance sheet purposes, inventories based on:

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

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

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

RobertA

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.

RobertA

An analyst provided the following information about a company:

• Purchases throughout the year
  $55,000

• COGS
  $60,000

• 
  Ending inventory
  $35,000

The beginning inventory was:

A) $45,000.

B) $40,000.

C) $55,000.

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COGS of $60,000 + ending inventory of $35,000, less purchases of $55,000.

RobertA

	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 average cost method and using the first in first out (FIFO) method?

Average Cost

FIFO

A) $3,604.02 $2,918.00

B) $4,142.02 $2,918.00

C) $3,604.02 $3,423.82

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Average cost = cost of goods available/total units available. COGS = Units sold × avg. cost = 959 × 3.7581 = $3,604.02.

FIFO 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) $1,744.20.

C) $3,604.02.

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

RobertA

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 LIFO?

A) $1,575.

B) $3,450.

C) $1,225.

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Ending inventory equals 20 + 10 + 35 + 20 − 60 = 25 of the first units purchased equals:
(20 units)($50/unit) + (5 units)($45/unit) =
$1,000 + $225 = $1,225