Inventory Costing Methods

Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the periodic LIFO method, cost of goods sold will be

$1,760 Reason: (($1,980/900) x 800) = $1,760

Smith Company has 150 units costing $450 in beginning inventory. During the year, the company purchases 1,000 units for a total cost of $3,300. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, cost of goods sold will be

$3,090 Reason: 950 units have been sold. 150 units from beginning inventory at $450 plus 800 units from the units purchased. ($3,300/1000) = $3.30 x 800 = $2640 + 450 = $3090

Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the periodic LIFO method, ending inventory will be

$420 Reason: (($1,980/900) x 100) +$200 = $420

Adam Company has 100 units costing $300 in beginning inventory. During the year, the company purchases 900 units for a total cost of $2,880. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, the cost of ending inventory will be

$640 Reason: $2,880/900 x 200 = $640

Which of the following statements is correct?

A company can apply more than one inventory cost flow assumption.

Which inventory costing method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale?

Average cost

True or false: The LIFO inventory cost flow method most often mirrors the physical flow of inventory.

False Reason: FIFO typically approximates the physical flow of inventory.

Because of the _____ _____ _____, companies that obtain tax advantages of using LIFO must also report lower net income to shareholders and other external parties

LIFO conformity rule

On January 1, Gerhard Company has 100 units in beginning inventory. On January 3, the company purchases 500 units; on February 23, 800 units; and on March 19, 1,000 units. If the company sells 100 units on January 4, which units would be assumed to have been sold in a periodic FIFO system?

The units in beginning inventory.

Which of the following is correct?

There is no requirement to choose a cost flow assumption that approximates actual physical flow of units.

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

In a _____ system, each time inventory is purchased or sold the layers are adjusted.

perpetual LIFO

Weighted-average unit cost is determined by dividing cost of goods available for sale by

total quantity available for sale.

On January 1, Gerhard Company has 100 units in beginning inventory. On January 3, the company purchases 500 units; on February 23, 800 units; and on March 19, 1,000 units. If the company sells 100 units on March 18, which units would be assumed to have been sold in a perpetual LIFO system?

100 of the units purchased on February 23

Suppose that Michale Company operates in an environment of rising prices and utilizes the periodic inventory system. If the company were to use the LIFO inventory method, its cost of goods would be $500,000; if it were to use the FIFO method, its cost of goods sold would be $400,000. Based on this information, which of the following predictions would be correct with respect to the weighted-average cost method?

Cost of goods sold would be between $400,000 and $500,000.

On January 1, Bern Company has 100 units costing $100 in beginning inventory. On January 2, Bern purchases an additional 400 units for $1.50 per unit, and sells 300 units. On January 3, the company sells an additional 100 units. On January 4, Bern purchases 200 additional units for $1.60 per unit. If Bern utilizes a perpetual LIFO system, per unit cost of goods sold for the January 3 sale will be

$1.50 Reason: The remaining 100 from the January 2 purchase at $1.50 per unit are the last units in so they will be sold

Which inventory costing method assumes that items sold are those that were acquired first?

FIFO

Which set of accounting standards permits the use of LIFO?

US GAAP

Over the total life of a company, total cost of goods sold

is the same under each cost flow assumption.

Ruy Company typically tries to sell its oldest inventory items first. Ruy Company

may choose any of the three accepted inventory methods.

In a period of rising prices, LIFO produces a higher cost of goods sold, lower net income and therefore, lower ______ liability

tax liability

The LIFO inventory method assumes that the units that remain in ending inventory are

the oldest units in inventory.

Different inventory methods can produce significantly different amounts for cost of goods sold in a given year. Across the life of a company, cost of goods sold will be

the same under each cost assumption.

A company is most likely to utilize the specific identification method if its inventory consists of

unique products. very expensive products.

The specific identification method

would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost

What may offset the income tax motivation for using LIFO in periods of rising prices?

Desire to report higher net income.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

True or false: The impact on reported income numbers is an important consideration when choosing an inventory cost flow method.

True Reason: Inventory cost method can have an impact on how well costs are matched with associated revenues and impact the timing of income and income tax expense.

Which factors may influence a company's choice of inventory cost flow assumption?

actual physical flow of inventory tax implications of choice financial statement effect

Palmer Company's beginning inventory consists of 1,000 units at $1.00 per unit. During the year, the company purchases 5,000 units costing a total of $5,800. At the end of the accounting period, Palmer still has 1,000 units on hand. If Palmer uses the weighted average cost method, its cost of goods sold (rounded to the nearest dollar) will be

$5,667. Reason: 5,000 x [(1,000 + 5,800)/6,000] = $5,667

The ______ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

FIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold?

LIFO

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO Reason: In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold and lower income.

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

Inventory cost flow assumptions can be used to assign dollar amounts to

ending inventory. goods sold.

Smith Company has 150 units costing $450 in beginning inventory. During the year, the company purchases 1,000 units for a total cost of $3,300. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, ending inventory will be

$660. Reason: 200 units remain. ($3,300/1000) = $3.30 x 200 = $660

Which of the following companies would be most likely to utilize the specific identification method? Adams Company produces one-of-a-kind products. Carmen Company produces its products in 100,000-unit batches. Barny Company purchases and sells a large quantity of interchangeable units.

Adams Company produces one-of-a-kind products.