Apply Inventory Costing Methods
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CPA Financial Accounting and Reporting (FAR) › Apply Inventory Costing Methods
A company uses FIFO (periodic). Beginning inventory: 100 units at $10. Purchases: 200 units at $12, then 150 units at $14. Sales total 300 units. What is ending inventory cost?
$2,100
$2,400
$1,600
$1,800
Explanation
Total units available = 450. Ending inventory = 150 units. Under FIFO, ending inventory uses the most recent costs: 150 units at $14 = $2,100. Answer A is correct. Answer B ($1,600) applies LIFO logic rather than FIFO, costing ending inventory at the oldest layers: 100 units at $10 plus 50 units at $12 = $1,600. Answer C blends costs incorrectly across layers. Answer D overstates by applying $14 to more units than remain in ending inventory.
A company uses LIFO (periodic). Beginning inventory: 100 units at $10. Purchases: 200 units at $12, then 150 units at $14. Sales total 300 units. What is COGS?
$4,200
$3,000
$3,600
$3,900
Explanation
Periodic LIFO uses most recent costs first. 300 units: 150 at $14 = $2,100; 150 at $12 = $1,800. COGS = $3,900. Answer A is correct. Answer B is FIFO COGS. Answer C overstates. Answer D understates.
During a period of rising prices, which inventory method produces ending inventory that most closely approximates current replacement cost?
LIFO
Weighted average
FIFO
Base stock method
Explanation
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.
A company switches from LIFO to FIFO. The cumulative pretax effect is $80,000. Assuming a 25% tax rate, how is this reported under ASC 250?
Retrospectively restating all prior periods, with $60,000 (net of tax) recorded to beginning retained earnings of the earliest period presented.
As a $60,000 gain in the current period income statement.
As a $60,000 prospective adjustment with no prior period restatement.
As an $80,000 adjustment to opening retained earnings.
Explanation
A change in inventory method is a change in accounting principle requiring retrospective application under ASC 250. Prior periods are restated and the cumulative effect on earlier periods is recorded net of tax to the earliest retained earnings presented: $80,000 x 75% = $60,000. Answer D is correct. Answer A is the old APB 20 cumulative effect approach. Answer B uses the gross pretax amount. Answer C applies prospective treatment, which is not correct for this type of change.
A company has the following data: beginning inventory $40,000; purchases $160,000; ending inventory $35,000. What is cost of goods sold?
$125,000
$165,000
$195,000
$155,000
Explanation
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.
Which of the following correctly describes the LIFO conformity rule?
A company using LIFO for book must use LIFO for tax in all jurisdictions.
A company using LIFO for tax must also use LIFO for all segment reporting.
A company using LIFO for one inventory class must use LIFO for all classes.
A company using LIFO for income tax purposes must also use LIFO for financial reporting.
Explanation
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.
Which of the following costs should be included in inventory under U.S. GAAP?
General and administrative overhead.
Direct materials, direct labor, and manufacturing overhead.
Selling and distribution costs.
Interest on borrowings used to finance routine inventory production.
Explanation
Under ASC 330, inventory cost includes direct materials, direct labor, and manufacturing overhead. Answer C is correct. Selling costs (A) and G&A (B) are period costs. Interest (D) is generally expensed - routine inventory does not qualify for interest capitalization under ASC 835.
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?
$85,000
$80,000
$78,000
$73,000
Explanation
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.
Under the perpetual inventory system, cost of goods sold is recorded:
Quarterly when financial statements are prepared.
Once at year-end after a physical count.
At the time of each individual sale.
Monthly based on estimated turnover ratios.
Explanation
Under the perpetual system, inventory quantities and costs are updated continuously. COGS is debited and Inventory credited at the time of each sale. Answer C is correct. Answer A describes the periodic system, which records COGS only after a physical count. Answer B describes a monthly estimation approach that is inconsistent with real-time perpetual tracking. Answer D describes a quarterly approach, also inconsistent with the perpetual system.
A company uses specific identification. It holds Unit A (cost $100), Unit B (cost $150), and Unit C (cost $200). It sells one unit for $300. Which unit should be sold to maximize gross profit?
Unit B, the middle-cost item.
Unit A, because the lowest-cost item yields the highest gross profit.
Unit C, to minimize taxable income.
It makes no difference; gross profit is always $300.
Explanation
Gross profit = Sales - COGS. Unit A: $300 - $100 = $200. Unit B: $300 - $150 = $150. Unit C: $300 - $200 = $100. Selling Unit A maximizes gross profit. Answer D is correct. Answer A minimizes gross profit to minimize tax. Answer B is arbitrary. Answer C is incorrect - gross profit varies with which unit is sold.