CPA Financial Accounting and Reporting Far Quiz: Apply Inventory Costing Methods
20 questions · exam conditions
0:00
Apply Inventory Costing MethodsQuestion 1 of 20

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?

$3,900
$3,600
$4,200
$3,000
← Back to quizzes

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.

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 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?

  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 = $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.

Question 2

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 3

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 4

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?

  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 < 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.

Question 5

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 6

A company applies LCNRV to individual inventory items. Item X: cost $500, NRV $480. Item Y: cost $300, NRV $350. Item Z: cost $200, NRV $175. 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, $480) = 480.ItemY=min(480. Item Y = min(300, $350) = 300.ItemZ=min(300. Item Z = min(200, $175) = $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 7

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 8

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?

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

Explanation: 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.

Question 9

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 10

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?

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

Explanation: 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.

Question 11

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?

  1. 62.5%
  2. 60.0% (correct answer)
  3. 58.8%
  4. 65.0%

Explanation: 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.

Question 12

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?

  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 = 2,100.AnswerAiscorrect.AnswerB(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.

Question 13

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 14

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?

  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 - $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.

Question 15

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?

  1. $12.00 (correct answer)
  2. $11.50
  3. $13.00
  4. $10.00

Explanation: 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.

Question 16

Coastal Manufacturing uses FIFO inventory costing and has experienced rising costs throughout the year. Due to a computational error in their inventory system, they incorrectly calculated ending inventory as $45,000 when the correct amount should be $50,000. The company has not yet closed its books for the year.

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?

  1. Current year gross profit overstated by $5,000; following year gross profit understated by $5,000
  2. Current year gross profit understated by $5,000; following year gross profit overstated by $5,000 (correct answer)
  3. Current year gross profit understated by $5,000; following year gross profit understated by $5,000
  4. Current year gross profit overstated by $5,000; following year gross profit overstated by $5,000

Explanation: 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.

Question 17

Vortex Manufacturing implemented a new ERP system during the current year. During the year-end inventory count, the following discrepancies were discovered between the perpetual records and physical counts: Product X showed perpetual records of 450 units but physical count of 425 units; Product Y showed perpetual records of 320 units but physical count of 345 units; Product Z showed perpetual records of 280 units but physical count of 280 units. The company uses weighted average costing. Product X costs $85 per unit, Product Y costs $62 per unit, and Product Z costs $94 per unit.

What adjusting entry should Vortex record to reconcile the perpetual inventory records to the physical count results?

  1. Debit Inventory $675; Credit Cost of Goods Sold $675 to reflect the net increase in inventory value
  2. Debit Cost of Goods Sold $2,125; Credit Inventory $2,125 to record the shortage in Product X
  3. Debit Inventory $1,550; Credit Inventory $2,125; Credit Cost of Goods Sold $575 to record both adjustments simultaneously
  4. Debit Cost of Goods Sold $575; Credit Inventory $575 to record the net effect of all discrepancies (correct answer)

Explanation: 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.

Question 18

Phoenix Retailers operates in a jurisdiction that allows LIFO for financial reporting. The company is considering whether to elect LIFO for tax purposes as well. Currently, the company uses FIFO for both book and tax purposes. Inventory costs have been steadily increasing.

If Phoenix elects LIFO for tax purposes while continuing to use FIFO for financial reporting, what constraint must they consider under U.S. tax regulations?

  1. The LIFO conformity rule requires that if LIFO is used for tax purposes, it must also be used for financial reporting to shareholders and creditors (correct answer)
  2. The company can use different methods for book and tax as long as they maintain detailed reconciliation schedules for the IRS
  3. LIFO can be used for tax purposes without affecting financial reporting, but requires annual recalculation of the LIFO reserve
  4. The mixed method approach is permitted but requires disclosure of the tax benefits in the footnotes to financial statements

Explanation: The LIFO conformity rule under IRC Section 472 requires that if a company elects LIFO for tax purposes, it must also use LIFO for financial reporting purposes in reports to shareholders, partners, other proprietors, and for credit purposes. This prevents companies from getting the tax benefits of LIFO (lower taxable income in inflationary periods) while reporting higher profits to stakeholders using FIFO. Choice B is incorrect as the conformity rule doesn't allow different methods with reconciliation. Choice C misunderstands the rule's requirements. Choice D incorrectly suggests mixed methods are permitted with disclosure.

Question 19

Sterling Industries switched from FIFO to weighted average cost for inventory valuation at the beginning of the current year. The change was made to better match the company's inventory flow with their cost flow assumption. Beginning inventory under FIFO was $85,000, while the same inventory under weighted average would have been $78,000. Current year purchases were $240,000, and ending inventory under weighted average is $65,000. What amount should be reported as the cumulative effect adjustment due to this accounting change?

  1. A decrease of $7,000 to retained earnings to reflect the difference in beginning inventory valuation methods (correct answer)
  2. An increase of $7,000 to retained earnings to reflect the higher FIFO valuation at the beginning of the year
  3. No cumulative effect adjustment is required since this is a change in accounting estimate, not principle
  4. A decrease of $13,000 to retained earnings representing the combined effect on beginning and ending inventory

Explanation: A change from FIFO to weighted average is a change in accounting principle requiring retrospective application under ASC 250. The cumulative effect is calculated as the difference between the new method (weighted average) and old method (FIFO) for beginning inventory. Since weighted average beginning inventory (78,000)islessthanFIFObeginninginventory(78,000) is less than FIFO beginning inventory (85,000), retained earnings decreases by $7,000. This represents the cumulative effect of applying weighted average to all prior periods. Choice B has the wrong direction. Choice C incorrectly categorizes this as an estimate change. Choice D incorrectly includes ending inventory in the cumulative effect calculation.

Question 20

Quantum Electronics uses the dollar-value LIFO method for inventory valuation. At the end of 2024, the company's inventory at year-end costs was $480,000. The relevant price index for 2024 is 120, with the base year (2020) index of 100. The company's LIFO inventory layers are as follows: Base layer (2020): $300,000 at base cost; 2022 layer: $50,000 at base cost with index 110; 2023 layer: $25,000 at base cost with index 115.

What is the total dollar-value LIFO inventory value that should be reported on Quantum's balance sheet at the end of 2024?

  1. $392,000 reflecting base layer plus existing layers with no new layer
  2. $414,000 reflecting all existing layers plus a new 2024 layer (correct answer)
  3. $450,000 reflecting total base cost converted at 2024 index
  4. $480,000 reflecting year-end costs without LIFO adjustment

Explanation: First, convert year-end costs to base cost: $480,000 ÷ 1.20 = $400,000 at base cost. Existing layers total 375,000atbasecost(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.