RobertA

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

RobertA

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) $177.

B) $4,680.

C) $1,540.

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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) $1,200.

B) $2,400.

C) $250.

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5 × $50 = $250

RobertA

Given the following data and assuming a periodic inventory system, what is the ending inventory using the average cost method?

Purchases	Sales
40 units at $60/unit	25 units at $65/unit
50 units at $55/unit	30 units at $60/unit
60 units at $45/unit	40 units at $50/unit

A) $2,878.

B) $2,933.

C) $3,141.

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Average cost per unit purchased:

40 units at $60/per unit = $2,400
50 units at $55/per unit = $2,750
60 units at $45/per unit = $2,700

Total = 150 units = $7,850
Average cost per unit = $7,850 /150 units = $52.33/unit
Purchased 40 + 50 + 60 = 150 units. Sold 25 + 30 + 40 = 95
Ending inventory = 150 − 95 = 55 units × $52.33/unit = $2,878

RobertA

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) LIFO.

C) FIFO.

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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.

RobertA

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) $1,800.

B) $2,400.

C) $3,100.

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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

bigredhockey55

JME had beginning inventory of $200 and ending inventory of $300. JME had COGS of $800. JME must have purchased inventory amounting to:

A) $700.

B) $1,100.

C) $900.

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beginning inv. + purchases - COGS = ending inv.

200 + purchases – 300 = 800

purchases = 900

bigredhockey55

Given the following data what is the ending inventory value using the LIFO method, assuming a periodic inventory system?

Purchases	Sales
50 units at $50/unit	25 units at $55/unit
60 units at $45/unit	30 units at $50/unit
70 units at $40/unit	45 units at $45/unit

A) $3,850.

B) $3,250.

C) $3,200.

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Purchased 50 + 60 + 70 = 180 units. Sold 25 + 30 + 45 = 100.
Ending inventory = 180 – 100 = 80 of the first units purchased.
(50 units)($50/unit) + (30 units)($45/unit) = $2,500 + $1,350 = $3,850.

bigredhockey55

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

A) LIFO.

B) Weighted average cost.

C) FIFO.

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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.

bigredhockey55

Which of the following is least likely to be a result of using last in, first out (LIFO) as the inventory method during periods of decreasing prices compared to using first in, first out (FIFO)?

A) Higher cash flows.

B) Higher taxes.

C) Lower COGS.

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Using LIFO during periods of declining prices will result in lower cash flows because net income will be higher than if FIFO is used leading to more taxes being paid out.

bigredhockey55

Jefferson Corp. decided to change its inventory valuation method from first in, first out (FIFO) to last in, first out (LIFO) in a period of rising prices. What was the result of the change for the ending inventory and net income?

Ending Inventory

Net Income

A) Increases Increases

B) Decreases Increases

C) Decreases Decreases

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LIFO provides the lowest inventory values and the lowest net income under rising prices because the least expensive purchases are left in inventory and the more expensive purchases flow to cost of goods sold (COGS) which lowers net income.