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Apply Inventory Costing Methods - CPA Far

  1. Which of the following correctly describes the LIFO conformity rule?
    Answer: A company using LIFO for income tax purposes must also use LIFO for financial reporting. The LIFO conformity rule requires that if a company uses LIFO for federal income tax, it must also use LIFO for financial reporting. Answer D is correct. Answer A extends the rule to segment reporting. Answer B reverses the direction of the rule. Answer C describes a pools requirement, not the conformity rule.
  2. Under FIFO (periodic), beginning inventory is 200 units at $8. Purchases: 400 units at $10 and 300 units at $12. Sales: 700 units. What is ending inventory?
    Answer: $2,400 Total units = 900. Ending units = 200. Under FIFO, ending inventory uses the most recent layers: 200 units at $12 = $2,400. Answer A is correct. Answer B uses the beginning inventory cost. Answer C blends layers. Answer D applies $12 to an incorrect quantity.
  3. At year-end, a company (not using LIFO or retail method) has inventory with a historical cost of $85,000 and a net realizable value of $78,000. At what amount should inventory be reported under ASC 330?
    Answer: $78,000 Under ASC 330, companies not using LIFO or the retail method write down inventory to NRV when NRV is below cost. NRV $78,000 < cost $85,000, so inventory is reported at $78,000. Answer A is correct. Answer B deducts a normal profit margin, which was the old 'market floor' approach under the LIFO/retail NRV rules. Answer C uses cost without write-down. Answer D is an unsupported amount.
  4. Meridian Industries uses the weighted average cost method for inventory valuation. At the beginning of May, they had 800 units costing $12,000. During May, they made two purchases: 600 units for $8,400 on May 10, and 400 units for $6,800 on May 25. On May 20, they sold 900 units. What is the cost of goods sold for the units sold on May 20?
    Answer: $12,857 (weighted average cost of $14.29 per unit) Under weighted average in a perpetual system, the average cost is recalculated after each purchase. Beginning: 800 units × $15 per unit = $12,000. After May 10 purchase: Total cost = $12,000 + $8,400 = $20,400; Total units = 800 + 600 = 1,400; Weighted average = $20,400 ÷ 1,400 = $14.286 per unit. Since the sale on May 20 occurs before the May 25 purchase, COGS = 900 × $14.286 = $12,857.
  5. Apex Manufacturing uses specific identification for its inventory costing. During the current period, the company sold Item #A47 (purchased for $1,200) and Item #B23 (purchased for $850). However, due to a data entry error, the accounting system recorded the sale of Item #A47 at the cost of Item #C15 (purchased for $975) and Item #B23 at the correct cost. The company uses a perpetual inventory system. What adjusting entry is needed to correct this error?
    Answer: Debit Cost of Goods Sold $225; Credit Inventory $225 to increase COGS for the understated amount Under specific identification, each item's actual cost must be matched to its sale. Item #A47 should have been recorded at $1,200 cost, but was recorded at $975 (Item #C15's cost). This means COGS was understated by $225 ($1,200 - $975). The correcting entry requires increasing COGS by $225 and reducing inventory by $225. Choice A reverses the correction. Choice C attempts to adjust both items simultaneously but is incorrect as Item #B23 was recorded correctly. Choice D is unnecessarily complex and doesn't achieve the proper correction.
  6. Under the moving average cost method (perpetual), a company has 100 units at $10 each. It purchases 200 units at $13 each. What is the new moving average cost per unit?
    Answer: $12.00 After purchase: total cost = (100 x $10) + (200 x $13) = $1,000 + $2,600 = $3,600. Total units = 300. Moving average = $3,600 / 300 = $12.00. Answer A is correct. Answer B is the simple average of $10 and $13 (unweighted). Answer C uses only the purchase price. Answer D uses only the beginning cost.
  7. A company has the following data: beginning inventory $40,000; purchases $160,000; ending inventory $35,000. What is cost of goods sold?
    Answer: $165,000 COGS = Beginning inventory + Purchases - Ending inventory = $40,000 + $160,000 - $35,000 = $165,000. Answer B is correct. Answer A subtracts too much. Answer C adds ending inventory. Answer D subtracts purchases.
  8. During a period of rising prices, which inventory method produces ending inventory that most closely approximates current replacement cost?
    Answer: FIFO Under FIFO, ending inventory consists of the most recently purchased units, which are priced closest to current market prices. Answer C is correct. LIFO leaves the oldest, lowest-cost layers in ending inventory. Weighted average blends costs. The base stock method is not accepted under U.S. GAAP.
  9. What adjusting entry should Vortex record to reconcile the perpetual inventory records to the physical count results?
    Answer: Debit Cost of Goods Sold $575; Credit Inventory $575 to record the net effect of all discrepancies The adjustments needed are: Product X shortage of 25 units × $85 = $2,125 (debit COGS, credit Inventory); Product Y overage of 25 units × $62 = $1,550 (debit Inventory, credit COGS); Product Z requires no adjustment. Net effect: $2,125 - $1,550 = $575 net debit to COGS and net credit to Inventory. This reflects that the physical count shows $575 less inventory value than the perpetual records indicated. Choice A has the wrong direction for the net effect. Choice B only addresses Product X. Choice C attempts to show gross adjustments but uses incorrect account relationships.
  10. What is the impact of this error on the current year's gross profit and the following year's gross profit, assuming the error is not corrected?
    Answer: Current year gross profit understated by $5,000; following year gross profit overstated by $5,000 When ending inventory is understated by $5,000, cost of goods sold is overstated by $5,000 (since COGS = Beginning Inventory + Purchases - Ending Inventory). Overstated COGS reduces gross profit, so current year gross profit is understated by $5,000. The understated ending inventory becomes understated beginning inventory for the following year, which causes COGS to be understated by $5,000 in the following year, thus overstating gross profit by $5,000. Choice A reverses the current year impact. Choices C and D incorrectly suggest the same directional impact both years.
  11. A LIFO liquidation occurs when units sold exceed units purchased. During a period of historically rising prices, what is the income statement effect of a LIFO liquidation?
    Answer: COGS decreases and net income increases, because low-cost older LIFO layers are matched against current revenues. A LIFO liquidation dips into old, low-cost inventory layers. Matching low historical costs to current revenues reduces COGS and artificially inflates net income. Answer C is correct. Answer A reverses the effect. Answer B is incorrect - there is a direct income statement impact. Answer D describes future replenishment at higher costs, not the current liquidation effect.
  12. A company uses the weighted average cost method (periodic). Beginning inventory: 200 units at $5. Purchases: 300 units at $8. Sales: 400 units. What is the weighted average cost per unit?
    Answer: $6.80 Total cost = (200 x $5) + (300 x $8) = $1,000 + $2,400 = $3,400. Total units = 500. Weighted average = $3,400 / 500 = $6.80. Answer B is correct. Answer A is a simple (unweighted) average. Answer C uses only beginning inventory cost. Answer D uses only the purchase price.
  13. A LIFO company reports a LIFO reserve of $60,000 at year-end and $40,000 at the beginning of the year. How does current-year COGS under LIFO compare to FIFO?
    Answer: LIFO COGS is $20,000 higher than FIFO. The change in LIFO reserve equals the current-year COGS difference: $60,000 - $40,000 = $20,000 increase. LIFO COGS exceeded FIFO COGS by $20,000. Answer D is correct. Answer A uses the ending reserve balance. Answer B uses the beginning balance. Answer C reverses the direction.
  14. A company's ending inventory is overstated by $20,000 in Year 1. Assuming no correction, what is the effect on Year 2 net income?
    Answer: Year 2 net income is understated by $20,000. An overstated Year 1 ending inventory becomes an overstated Year 2 beginning inventory, which overstates COGS and understates Year 2 net income by $20,000. The error self-corrects over two years. Answer B is correct. Answer A states the Year 1 effect. Answer C ignores the carry-forward. Answer D doubles the error.
  15. With rising costs, a LIFO company sells more units than it purchases. Compared with no liquidation, gross profit is:
    Answer: Higher than no liquidation When units sold exceed purchases under LIFO, you dip into older inventory layers carried at lower costs. With rising costs, those older costs are below current replacement cost, so cost of goods sold is lower than it would be without liquidation. Lower COGS means higher gross profit. 'Cannot be determined' is tempting because price changes can vary, but the rising-cost assumption fixes the result.
  16. A company uses the gross profit method to estimate ending inventory. Net sales: $500,000. Beginning inventory: $60,000. Purchases: $320,000. Historical gross profit rate: 35%. What is estimated ending inventory?
    Answer: $55,000 Estimated COGS = $500,000 x 65% = $325,000. Goods available = $60,000 + $320,000 = $380,000. Ending inventory = $380,000 - $325,000 = $55,000. Answer B is correct. Answer A reverses the subtraction. Answer C uses only gross profit dollars. Answer D is COGS, not ending inventory.
  17. Beginning 100 @ $10; buy 200 @ $12; buy 150 @ $14; ending 180 units. FIFO ending inventory?
    Answer: $2,460 With FIFO, the 180 units left are the most recently purchased. You have 150 units at $14, and need 30 more, which come from the $12 purchase: (150 x 14) + (30 x 12) = 2,100 + 360 = 2,460. A tempting error is 180 x 14 = 2,520, but that treats all ending units as $14 when only 150 exist at that cost.
  18. A retailer uses the conventional retail inventory method. Beginning inventory: cost $30,000, retail $50,000. Purchases: cost $120,000, retail $190,000. Net markups: $10,000. Net markdowns: $15,000. Sales: $180,000. What is the cost-to-retail ratio?
    Answer: 60.0% Conventional retail includes markups but excludes markdowns from the ratio denominator (to approximate LCNRV). Retail base = $50,000 + $190,000 + $10,000 = $250,000. Cost = $30,000 + $120,000 = $150,000. Ratio = $150,000 / $250,000 = 60.0%. Answer B is correct. Answer A includes markdowns, lowering the denominator. Answer C uses an incorrect retail base. Answer D reverses numerator and denominator.
  19. Under U.S. GAAP, once inventory has been written down to net realizable value, which of the following is correct?
    Answer: The written-down value becomes the new cost basis; subsequent recoveries are not recognized. Under ASC 330, once written down, the reduced value is the new cost basis. Unlike IFRS, U.S. GAAP prohibits reversal of inventory write-downs. Answer C is correct. Answers A and B describe IFRS (IAS 2) treatment. Answer D is incorrect - extraordinary items were eliminated by ASU 2015-01, and inventory write-downs were never extraordinary.
  20. What is the total dollar-value LIFO inventory value that should be reported on Quantum's balance sheet at the end of 2024?
    Answer: $414,000 reflecting all existing layers plus a new 2024 layer First, convert year-end costs to base cost: $480,000 ÷ 1.20 = $400,000 at base cost. Existing layers total $375,000 at base cost ($300,000 + $50,000 + $25,000). Since $400,000 > $375,000, a new 2024 layer of $25,000 at base cost is added. LIFO value calculation: Base layer: $300,000 × 1.00 = $300,000; 2022 layer: $50,000 × 1.10 = $55,000; 2023 layer: $25,000 × 1.15 = $28,750; 2024 layer: $25,000 × 1.20 = $30,000. Total = $413,750, rounded to $414,000.

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