CPA Quiz: Apply Inventory Costing Methods
20 questions · exam conditions
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Apply Inventory Costing MethodsQuestion 1 of 20

With rising costs, a LIFO company sells more units than it purchases. Compared with no liquidation, gross profit is:

Unrelated to price trends
Equal to no liquidation
Cannot be determined
Higher than no liquidation
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CPA Quiz

CPA Quiz: Apply Inventory Costing Methods

Practice Apply Inventory Costing Methods in CPA 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.

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

With rising costs, a LIFO company sells more units than it purchases. Compared with no liquidation, gross profit is:

  1. Unrelated to price trends
  2. Equal to no liquidation
  3. Cannot be determined
  4. Higher than no liquidation (correct answer)
Explanation: 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.

Question 2

Beginning 100 @ $10; buy 200 @ $12; buy 150 @ $14; ending 180 units. FIFO ending inventory?

  1. $1,960
  2. $2,160
  3. $2,460 (correct answer)
  4. $2,520
Explanation: 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.

Question 3

A LIFO reserve rose from $10,000 to $14,000 in a year of rising costs. FIFO COGS compared with LIFO is:

  1. $4,000 lower than LIFO (correct answer)
  2. $14,000 lower than LIFO
  3. $10,000 higher than LIFO
  4. Cannot be determined
Explanation: The increase in the LIFO reserve, from $10,000 to $14,000, is the $4,000 difference for the year. In a year of rising costs, LIFO COGS exceeds FIFO COGS by exactly the increase in the reserve, so FIFO COGS is $4,000 lower than LIFO COGS. A tempting mistake is using the ending reserve of $14,000 instead of the change in the reserve.

Question 4

Beginning 100 @ $10; purchases 50 @ $14; ending 60. Periodic weighted-average ending inventory?

  1. $600
  2. $680 (correct answer)
  3. $800
  4. $1,020
Explanation: Total cost is 1,000 plus 700 = 1,700 for 150 units, so weighted-average cost is 1,700 / 150 = 11.33 per unit. Ending inventory holds 60 units, so you multiply 60 by 11.33 to get 680. The tempting $1,020 is the cost of goods sold for 90 units, not the ending inventory.

Question 5

Beginning 100 @ $10; buy 50 @ $12; sell 80; buy 50 @ $14. Perpetual LIFO ending inventory?

  1. $1,240
  2. $1,380
  3. $1,400 (correct answer)
  4. $1,500
Explanation: Perpetual LIFO charges the sale to the newest layers first. The 80-unit sale uses 50 at $12 and 30 at $10, leaving 70 units at $10. Then the 50-unit purchase at $14 is added, so ending inventory is 70 x 10 + 50 x 14 = 1,400. The $1,500 choice results from FIFO, which leaves 20 at $10, 50 at $12, and 50 at $14.

Question 6

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 7

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 8

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 9

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 10

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 11

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 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

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 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?

  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 15

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 16

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 17

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 18

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 19

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 20

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.