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CPA Financial Accounting and Reporting Far Quiz

CPA Financial Accounting and Reporting Far Quiz: Apply Inventory Costing Methods

Practice Apply Inventory Costing Methods in CPA Financial Accounting and Reporting Far with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

Question 1 / 20

0 of 20 answered

A company uses FIFO (periodic). Beginning inventory: 100 units at 10.Purchases:200unitsat10. Purchases: 200 units at 10.Purchases:200unitsat12, then 150 units at $14. Sales total 300 units. What is ending inventory cost?

Select an answer to continue

What this quiz covers

This quiz focuses on Apply Inventory Costing Methods, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A company uses FIFO (periodic). Beginning inventory: 100 units at 10.Purchases:200unitsat10. Purchases: 200 units at 10.Purchases:200unitsat12, then 150 units at $14. Sales total 300 units. What is ending inventory cost?

  1. $2,100 (correct answer)
  2. $1,600
  3. $1,800
  4. $2,400

Explanation: Total units available = 450. Ending inventory = 150 units. Under FIFO, ending inventory uses the most recent costs: 150 units at 14=14 = 14=2,100. Answer A is correct. Answer B (1,600)appliesLIFOlogicratherthanFIFO,costingendinginventoryattheoldestlayers:100unitsat1,600) applies LIFO logic rather than FIFO, costing ending inventory at the oldest layers: 100 units at 1,600)appliesLIFOlogicratherthanFIFO,costingendinginventoryattheoldestlayers:100unitsat10 plus 50 units at 12=12 = 12=1,600. Answer C blends costs incorrectly across layers. Answer D overstates by applying $14 to more units than remain in ending inventory.

Question 2

A company uses LIFO (periodic). Beginning inventory: 100 units at 10.Purchases:200unitsat10. Purchases: 200 units at 10.Purchases:200unitsat12, then 150 units at $14. Sales total 300 units. What is COGS?

  1. $3,900 (correct answer)
  2. $3,600
  3. $4,200
  4. $3,000

Explanation: Periodic LIFO uses most recent costs first. 300 units: 150 at 14=14 = 14=2,100; 150 at 12=12 = 12=1,800. COGS = $3,900. Answer A is correct. Answer B is FIFO COGS. Answer C overstates. Answer D understates.

Question 3

During a period of rising prices, which inventory method produces ending inventory that most closely approximates current replacement cost?

  1. LIFO
  2. Weighted average
  3. FIFO (correct answer)
  4. 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.

Question 4

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?

  1. As a $60,000 gain in the current period income statement.
  2. As an $80,000 adjustment to opening retained earnings.
  3. As a $60,000 prospective adjustment with no prior period restatement.
  4. Retrospectively restating all prior periods, with $60,000 (net of tax) recorded to beginning retained earnings of the earliest period presented. (correct answer)

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: 80,000x7580,000 x 75% = 80,000x7560,000. 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.

Question 5

A company has the following data: beginning inventory 40,000;purchases40,000; purchases 40,000;purchases160,000; ending inventory $35,000. What is cost of goods sold?

  1. $155,000
  2. $165,000 (correct answer)
  3. $195,000
  4. $125,000

Explanation: COGS = Beginning inventory + Purchases - Ending inventory = 40,000+40,000 + 40,000+160,000 - 35,000=35,000 = 35,000=165,000. Answer B is correct. Answer A subtracts too much. Answer C adds ending inventory. Answer D subtracts purchases.

Question 6

Which of the following correctly describes the LIFO conformity rule?

  1. A company using LIFO for tax must also use LIFO for all segment reporting.
  2. A company using LIFO for book must use LIFO for tax in all jurisdictions.
  3. A company using LIFO for one inventory class must use LIFO for all classes.
  4. A company using LIFO for income tax purposes must also use LIFO for financial reporting. (correct answer)

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.

Question 7

Which of the following costs should be included in inventory under U.S. GAAP?

  1. Selling and distribution costs.
  2. General and administrative overhead.
  3. Direct materials, direct labor, and manufacturing overhead. (correct answer)
  4. 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.

Question 8

At year-end, a company (not using LIFO or retail method) has inventory with a historical cost of 85,000andanetrealizablevalueof85,000 and a net realizable value of 85,000andanetrealizablevalueof78,000. At what amount should inventory be reported under ASC 330?

  1. $78,000 (correct answer)
  2. $73,000
  3. $85,000
  4. $80,000

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<cost78,000 < cost 78,000<cost85,000, 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.

Question 9

Under the perpetual inventory system, cost of goods sold is recorded:

  1. Once at year-end after a physical count.
  2. Monthly based on estimated turnover ratios.
  3. At the time of each individual sale. (correct answer)
  4. Quarterly when financial statements are prepared.

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.

Question 10

A company uses specific identification. It holds Unit A (cost 100),UnitB(cost100), Unit B (cost 100),UnitB(cost150), and Unit C (cost 200).Itsellsoneunitfor200). It sells one unit for 200).Itsellsoneunitfor300. Which unit should be sold to maximize gross profit?

  1. Unit C, to minimize taxable income.
  2. Unit B, the middle-cost item.
  3. It makes no difference; gross profit is always $300.
  4. Unit A, because the lowest-cost item yields the highest gross profit. (correct answer)

Explanation: Gross profit = Sales - COGS. Unit A: 300−300 - 300−100 = 200.UnitB:200. Unit B: 200.UnitB:300 - 150=150 = 150=150. Unit C: 300−300 - 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.

Question 11

A company applies LCNRV to individual inventory items. Item X: cost 500,NRV500, NRV 500,NRV480. Item Y: cost 300,NRV300, NRV 300,NRV350. Item Z: cost 200,NRV200, NRV 200,NRV175. What is total inventory on the balance sheet?

  1. $1,000
  2. $955 (correct answer)
  3. $1,005
  4. $975

Explanation: Item X = min(500,500, 500,480) = 480.ItemY=min(480. Item Y = min(480.ItemY=min(300, 350)=350) = 350)=300. Item Z = min(200,200, 200,175) = 175.Total=175. Total = 175.Total=955. Answer B is correct. Answer A uses cost for all items. Answer C uses NRV for Item Z incorrectly. Answer D applies an incorrect combination.

Question 12

Which inventory costing method is NOT permitted under U.S. GAAP for external financial reporting?

  1. FIFO
  2. LIFO
  3. Weighted average cost
  4. Base stock method (correct answer)

Explanation: The base stock method, which holds a fixed base quantity at a historical cost, is not accepted under U.S. GAAP or IFRS. Answer D is correct. FIFO (A), LIFO (B), and weighted average (C) are all permitted under U.S. GAAP. Note that while LIFO is not permitted under IFRS, it is accepted under U.S. GAAP.

Question 13

During a period of rising prices, which inventory method produces the lowest net income and the lowest ending inventory balance?

  1. FIFO
  2. Weighted average
  3. LIFO (correct answer)
  4. Specific identification

Explanation: LIFO assigns the most recent (highest) costs to COGS, minimizing net income, and retains the oldest (lowest) costs in ending inventory, minimizing the balance sheet amount. Answer C is correct. Answer A (FIFO) produces the highest net income and ending inventory in a period of rising prices because it assigns the oldest, lowest costs to COGS. Answer B (weighted average) produces results between FIFO and LIFO. Answer D (specific identification) varies depending on which specific units are selected and does not systematically produce the lowest income or inventory balance.

Question 14

Under FIFO (periodic), beginning inventory is 200 units at 8.Purchases:400unitsat8. Purchases: 400 units at 8.Purchases:400unitsat10 and 300 units at $12. Sales: 700 units. What is ending inventory?

  1. $2,400 (correct answer)
  2. $1,600
  3. $2,000
  4. $3,200

Explanation: Total units = 900. Ending units = 200. Under FIFO, ending inventory uses the most recent layers: 200 units at 12=12 = 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.

Question 15

A LIFO company has a LIFO reserve of 45,000.IfFIFOwereused,pretaxincomewouldbe45,000. If FIFO were used, pretax income would be 45,000.IfFIFOwereused,pretaxincomewouldbe45,000 higher. Assuming a 21% tax rate, by how much is LIFO net income lower than FIFO net income?

  1. $45,000
  2. $9,450
  3. $35,550 (correct answer)
  4. $45,000 higher, not lower

Explanation: After-tax impact = 45,000x(1−2145,000 x (1 - 21%) = 45,000x(1−2135,550. Net income under LIFO is $35,550 lower than under FIFO. Answer C is correct. Answer A uses the pretax amount. Answer B uses only the tax portion. Answer D reverses the direction.

Question 16

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?

  1. COGS increases and net income decreases.
  2. No income statement effect; only the balance sheet is affected.
  3. COGS decreases and net income increases, because low-cost older LIFO layers are matched against current revenues. (correct answer)
  4. COGS increases because older layers must be replenished at higher current costs.

Explanation: 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.

Question 17

A company uses the weighted average cost method (periodic). Beginning inventory: 200 units at 5.Purchases:300unitsat5. Purchases: 300 units at 5.Purchases:300unitsat8. Sales: 400 units. What is the weighted average cost per unit?

  1. $6.50
  2. $6.80 (correct answer)
  3. $6.00
  4. $7.00

Explanation: Total cost = (200 x 5)+(300x5) + (300 x 5)+(300x8) = 1,000+1,000 + 1,000+2,400 = 3,400.Totalunits=500.Weightedaverage=3,400. Total units = 500. Weighted average = 3,400.Totalunits=500.Weightedaverage=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.

Question 18

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?

  1. Year 2 net income is overstated by $20,000.
  2. Year 2 net income is understated by $20,000. (correct answer)
  3. Year 2 net income is unaffected.
  4. Year 2 net income is overstated by $40,000.

Explanation: 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.

Question 19

A company uses the gross profit method to estimate ending inventory. Net sales: 500,000.Beginninginventory:500,000. Beginning inventory: 500,000.Beginninginventory:60,000. Purchases: $320,000. Historical gross profit rate: 35%. What is estimated ending inventory?

  1. $205,000
  2. $55,000 (correct answer)
  3. $175,000
  4. $325,000

Explanation: Estimated COGS = 500,000x65500,000 x 65% = 500,000x65325,000. Goods available = 60,000+60,000 + 60,000+320,000 = 380,000.Endinginventory=380,000. Ending inventory = 380,000.Endinginventory=380,000 - 325,000=325,000 = 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.

Question 20

Under U.S. GAAP, once inventory has been written down to net realizable value, which of the following is correct?

  1. The write-down may be reversed if NRV recovers in a subsequent period.
  2. The write-down may be reversed up to original cost if NRV recovers.
  3. The written-down value becomes the new cost basis; subsequent recoveries are not recognized. (correct answer)
  4. The write-down is reported as an extraordinary item.

Explanation: 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.