Before you order, ssuggest sign up for a free user account and also in secs you"ll be experiencing the best in CFA exam preparation.

You are watching: Under which method of cost flows is the inventory assumed to be composed of the most recent costs?

Tright here are two standard problems of inventory accounting:

Determine the expense of goods accessible for sale: Beginning Inventory + Purchases.Alsituate the cost of total inventory expenses (expense of items easily accessible for sale) in between two components: COGS on the income statement and the finishing inventory on the balance sheet. Keep in mind that COGS = (Beginning Inventory + Purchases) - Ending Inventory.

There are 2 inventory systems:

Perpetual inventory system updates inventory accounts after each purchase or sale. Inventory quantities are updated repeatedly. When tright here is a sale, inventory is decreased and also COGS is calculated.Periodic inventory system documents inventory purchase or sale in "Purchases" account. "Inventory" account is updated on a routine basis, at the end of each audit duration (e.g., monthly, quarterly). Cost of goods sold or cost of sale is computed from the finishing inventory number.

In some instances, it"s possible to specifically determine which inventory items have actually been marketed and also which remain. By the certain identification method, the actual prices of the certain systems sold are moved from inventory to the expense of goods sold. This method achieves the correct corresponding of sales revenue and also price of goods offered when the individual devices in the inventory are distinctive. However before, in a lot of situations companies might be unable to recognize specifically which items are sold and which items reprimary in ending inventory.

The continuing to be 3 approaches are circulation assumptions, which need to be applied just to an inventory of homogeneous items. The cost circulation assumption might or might not reflect the physical flow of inventory.

Weighted Median Cost

The average expense of all units in the inventory is computed and used in recording the price of items sold. This is the only strategy in which all devices are assigned the exact same (average) per-unit expense.

Median expense = (start inventory + purchases) / systems available for sale.Ending inventory = Average cost x Units of finishing inventory.COGS = Cost of goods accessible for sale - finishing inventory.


FIFO is the presumption that the initially units purchased are the first units offered. Thus inventory is assumed to consist of the the majority of newly purchased devices. FIFO asindicators existing prices to inventory however older (and often lower) costs to the price of items marketed.


LIFO is the assumption that the many newly got items are sold first. This approach matches sales revenue through reasonably current prices. In a period of inflation, LIFO normally outcomes in lower reported profits and also lower income taxes than the other approaches. However, the earliest purchase expenses are assigned to inventory, which might lead to inventory ending up being grossly underdeclared in regards to present replacement prices.

LIFO is not enabled under IFRS. In the UNITED STATE, but, LIFO is provided by about 30 percent of U.S. companies bereason of potential income taxation savings.

The finish result under perpetual FIFO is the very same as under routine FIFO. In various other words, the initially prices are the same whether you relocate the expense out of inventory via each sale (perpetual) or whether you wait till the year is over (periodic). This is also true is the certain identification approach is used.

Using the LIFO/weighted average price approaches the two devices will mainly bring about various alplaces to expense of sales and also finishing inventory.

Comparichild of Inventory Accounting Methods

Inventory information is helpful if it reflects the current cost of replacing the inventory. COGS data is valuable if it shows the existing cost of replacing the inventory items to proceed operations.

Throughout periods of steady prices, all 4 techniques will certainly geneprice the very same outcomes for inventory, COGS and revenue.

Throughout durations of rising prices and stable or growing inventories, FIFO measures assets much better (the a lot of beneficial inventory data), yet LIFO actions revenue much better.

Under LIFO, the expense of finishing inventory is based on the earliest purchase prices, and therefore is well listed below present replacement expense. For many kind of firms using LIFO, their price of inventory might be decades old and also almost useless for evaluation objectives. However, expense of items sold is based on the many current purchase prices, and also for this reason carefully shows present replacement cost. As a result, LIFO provides a much better measurement of present revenue and future profitcapacity.

Under FIFO, the cost of finishing inventory is based upon the most recent purchase prices, and hence very closely mirrors current replacement expense. However before, costs of items sold are based on the earliest purchase prices, and also this is well listed below the present replacement cost. The get is actually holding acquire or inventory profit. It is debatable whether it need to be taken into consideration income, or at leastern analysts can say the underapproximated COGS leads to inflated net earnings.

In an environment of declining inventory unit costs and also continuous or enhancing inventory quantities the oppowebsite is true.

The usefulness of inventory data reported using the average-cost strategy lies in between LIFO and FIFO.

Practice Concern 1What does the FIFO inventory approach assume around the first systems purchased?

A. They are the initially systems offered.B. They are the systems that remain in finishing inventory.C. They are the only units provided in computing average price.Correct Answer: A

FIFO treats the initially systems purchased as though they are the first unit marketed.

Practice Question 2When calculating ending inventory making use of the average price strategy, which of the adhering to is CORRECT?

A. The numerator is the beginning inventory balance plus purchases.B. The denominator is the number of units staying.C. The denominator is the variety of units purchased.Correct Answer: A

The average expense is calculated by taking the beginning inventory balance plus purchases separated by the full variety of units in inventory, which is the number in the start balance plus the number purchased.
A. $530.B. $640.C. $595.Correct Answer: B

10 x $20 + 20 x $22 = $640.

Practice Question 4Which of the following results from using the LIFO method of inventory expense flows during a period of inflation?

A. understated expense of goods offered.B. overvalued inventory.C. currently valued price of items offered.D. presently valued inventory.Correct Answer: C

LIFO matches existing costs via current earnings. Throughout a period of inflation, LIFO results in presently valued price of goods sold.

Practice Concern 5Which inventory method mostly outcomes in prices allocated to finishing inventory that will approximate existing costs?

A. LIFOB. FIFOC. average price methodCorrect Answer: B

FIFO allocates the most current expenses to inventory.

Practice Inquiry 6Under U.S. GAAP, a firm that offers the LIFO technique to compute taxable earnings need to use the ______ approach for financial reporting.

A. FIFOB. average costC. LIFOCorrect Answer: C

The taxation legislation needs a agency that offers LIFO for tax objectives also usage LIFO for financial reporting objectives.

Practice Inquiry 7Under which price circulation presumption is the finishing inventory written of the earliest purchased merchandise?

A. FIFOB. LIFOC. Mean CostCorrect Answer: B

Under the LIFO (Last-In, First-Out) expense circulation presumption, inventory is sold from the a lot of current purchases, leaving the earliest purchased inventory on hand also.

Practice Inquiry 8If inventory costs remain reasonably continuous from period to period, which inventory method is the most proper one in the alplace of cost flow in between COGS and inventory carrying value?

I. Specific identification technique.II. FIFO.III. Weighted average technique.IV. LIFO.Correct Answer: All of them

Given relatively constant prices, the alarea of expenses in between COGS and also ending inventory would certainly be very equivalent under each of the 4 techniques.

Practice Concern 9Which techniques are based on cost circulation assumptions?

I. Specific identification.II. FIFO.III. LIFO.IV. Weighted Median Cost.Correct Answer: II, III and IV

I is based on physical circulation. The flow of costs does not need to correspond with the physical circulation of devices. The expenses deserve to circulation in a different way than the goods. In various other words, if a firm provides LIFO, it may offer the oldest (first) item to a customer, but have the right to report the cost of goods sold of the price of the last purchase.

Practice Concern 10Which inventory valuation technique is not permitted under IFRS?

A. LIFO.B. FIFO.C. Specific Identification.Correct Answer: A

LIFO is allowed only under UNITED STATE GAAP.
$7 per unit2nd Sale 20 units

What is the value of the finishing inventory, making use of a perpetual inventory system and also a FIFO expense flow assumption?

A. $26B. $36C. $56Correct Answer: C

Only 8 devices remajor after the second sale. On a FIFO perpetual basis, the 8 devices will certainly be assigned the a lot of recent purchase price of $7 ($7 x 8 = $56).
$13 per unit

If 83 units are sold, what is the worth of the ending inventory under a periodic inventory device and a FIFO price flow assumption?

A. $219B. $905C. $177Correct Answer: A

The finishing inventory (17 units) would be written of the most current purchases (newest layers) of 15 X $13 plus 2 X $12, or $195 + $24.

Practice Question 13Which inventory cost circulation assumption generally will certainly yield the highest possible price of items sold throughout a duration of declining prices?

A. weighted averageB. FIFOC. LIFOCorrect Answer: B

The older, better inventory purchases will certainly be the expenses that go into price of products marketed under FIFO.

Practice Inquiry 14Zealous Ltd. and also Eager Ltd. are the same carriers in eexceptionally respect except that Zealous supplies the LIFO approach for inventory costing while Eager supplies FIFO costing. The carriers operate in an market in which expenses have been raising over the past numerous years. Compared to Zealous, which of the following could be said around Eager?

A. Eager has actually a lower earnings per share.B. Eager has actually a higher expense of products sold.C. Eager has a lower finishing inventory.D. Eager has actually greater total assets.Correct Answer: D

If prices are enhancing, FIFO would carry out better ending inventory, considering that the goods on hand also would be recorded at the many recent purchase prices.

Practice Question 15Which of the following is an advantage of LIFO inventory valuation over FIFO throughout periods of falling prices (assuming not all inventory is sold)?

A. Ending inventory on the balance sheet is reported at its existing replacement expense.B. Tax savings associated via reduced reported earningsC. It more very closely adheres to the equivalent principle.D. It more carefully parallels the physical flow of products sold.Correct Answer: C

LIFO costing offers the the majority of recent costs to compute price of goods marketed. Assuming costs are transforming, these costs even more very closely enhance a firm"s revenue, which is usually equivalent the trend of expense transforms.

Practice Inquiry 16In a period of declining prices, which of the complying with statements would be true?

A. LIFO would produce better gross profit margin percenteras than would average costs.B. FIFO would certainly produce greater gross profit margin percentperiods than would certainly LIFO.C. Typical costs would develop better gross profit margin percenteras than would certainly LIFO.D. FIFO would produce higher gross profit margin percentperiods than would average prices.Correct Answer: A

If prices are declining, LIFO would certainly provide lower cost of products marketed, because reduced costs would certainly be alsituated to the items marketed.

Practice Concern 17Prices have been climbing throughout the previous few years. Companies Ashley and Taylor are in the very same industry and also use the exact same audit approaches other than for inventory valuation. Ashley provides FIFO, and also Taylor uses LIFO. Which of the adhering to statements is true?

A. The inventory on Taylor"s publications carefully approximates current industry pricesB. The price of items marketed for Taylor even more carefully approximates existing replacement valuesC. The inventory for Taylor and also Ashley are the sameCorrect Answer: B

Due to the fact that Taylor supplies LIFO, the even more recent costs will certainly be the prices in costs of products sold. The even more current costs are the higher expenses, as expenses have been climbing.

Practice Inquiry 18Which of the following is true in periods of rising prices?

A. Working funding under FIFO will appear to be much better than under LIFO.B. Cash flows under FIFO will certainly be much better than LIFO.C. Cash flows will be the same under FIFO and also LIFO.Correct Answer: A

The inventory under FIFO will certainly be much greater than the inventory under LIFO. While cash flows will certainly be lower (because of the tax differences), the effect on the inventory is normally greater; for this reason the functioning resources under FIFO will certainly show up to be much better even though cash flows under LIFO are better.

Practice Concern 19Which of the complying with statements is (are) true under U.S. GAAP?

I. If a LIFO inventory layer is depleted in one period, it deserve to always be repleniburned by an identical layer in the next periodII. In durations of climbing prices, expense of items marketed under LIFO will be better than under FIFOIII. The usage of LIFO increases inventory holding revenues during periods of climbing pricesIV. A agency may use LIFO inventory actions for taxes purposes and also one more price technique for financial reporting purposesCorrect Answer: II

When LIFO is supplied in a period of increasing prices, the latest and greater prices will go into cost of products offered. When FIFO is offered in a period of climbing prices, the older and reduced prices will certainly go right into expenses of products offered.

IV is false. Under the �LIFO conformity dominance,� the U.S. tax code calls for that carriers using the LIFO strategy for taxes objectives need to additionally use the LIFO technique for financial reporting.

Practice Question 20Which of the complying with statements is true in a period of increasing prices?

A. The use of FIFO will certainly result in a valuable inventory turnoverB. The usage of FIFO will certainly tend to understate incomeC. The use of FIFO will certainly tend to understate the debt-to-equity ratioD. The use of FIFO will certainly improve cash flowsCorrect Answer: C

The use of FIFO will certainly geneprice a reduced expense of goods marketed, because the previously, reduced prices will be had in price of goods marketed. The reduced expense of goods marketed will cause a greater revenue. The greater earnings will be included in stockholders" equity, which will certainly reason the debt-to-equity proportion to be reduced.

Practice Question 21Which of the complying with statements is true in an inflationary environment?

A. Under FIFO, earnings will certainly tend to be understatedB. Under LIFO, functioning resources might be distortedC. Under FIFO, cash flows will be increasedD. The usage of FIFO will certainly reason debt-to-equity ratios to be overstatedCorrect Answer: B

When LIFO is used, inventory displayed under current assets will be very low, as it will certainly be making use of older, reduced expenses. While cash flows will be higher under LIFO, the boost in cash flows is typically not sufficient to counteract the result of the low inventory, and also hence functioning capital will tfinish to be reduced under LIFO.

Practice Inquiry 22When price levels have been raising throughout the duration, a company making use of the LIFO inventory valuation method rather of the FIFO inventory valuation approach would have:

A. higher equitiesB. lower net incomeC. better net incomeCorrect Answer: B

In a period of climbing prices, LIFO will certainly yield a lower earnings bereason its expense of goods marketed is better, because it supplies more recent, and also greater, prices.

Practice Question 23Throughout a duration of rising prices, which of the adhering to is reduced making use of FIFO quite than LIFO?

A. Income prior to tax.B. Income taxation.C. Cost of items sold.D. Net income.Correct Answer: C

Practice Concern 24Assume that prices are climbing and inventories balances are enhancing, which strategy will generate the highest cash flow?

A. Average cost.B. LIFO.C. FIFO.Correct Answer: B

As lengthy as the price level increases and also inventory amounts perform not decrease, a deferral of income tax occurs, for this reason generating greater cash flows (taxation must be paid in cash).

Practice Concern 25During a time of increasing inventory and also rising prices, FIFO will certainly bring about ______ than LIFO.

A. greater COGSB. better taxesC. reduced net incomeD. reduced working capitalCorrect Answer: B

Practice Question 26Throughout a time of raising inventory and also increasing prices, LIFO will certainly bring about ______ than FIFO.

A. greater inventory balanceB. greater taxesC. higher COGSD. greater net incomeCorrect Answer: C

Practice Inquiry 27An inventory write-dvery own has a positive impact on:

A. liquidity ratios.B. profitability ratios.C. task ratios.Correct Answer: C

Activity ratios such as inventory turnover will certainly be positively impacted bereason the ascollection base (denominator) is decreased.

Practice Inquiry 28Diane Corporation had actually 400 systems of inventory on hand also at July 1, 2011, costing $20 each. Purchases and also sales of products during the month of July were as follows:

July 12, 2011 Sales 200 systems

Assume Diane Corporation does not maintain perpetual inventory documents. According to a physical count, 400 devices were on hand also on July 31, 2011.

The price of finishing inventory using the FIFO price approach is:

A. $11,000B. $9,000C. $8,000Correct Answer: A

The cost of inventory is the ending inventory worth on the balance sheet on July 31, 2011. Using FIFO, the expenses allocated to ending inventory will be the most current costs. As such, if 400 systems are remaining, the finishing inventory value will be 300

Practice Concern 29Diane Corporation had actually 400 systems of inventory on hand also at July 1, 2011, costing $20 each. Purchases and sales of products during the month of July were as follows:

July 12, 2011 Sales 200 systems

Assume Diane Corporation does not maintain perpetual inventory documents. According to a physical count, 400 systems were on hand on July 31, 2011.

The price of inventory at July 31, 2011, making use of the LIFO expense approach, is:

A. $11,000B. $8,000C. $9,500Correct Answer: B

Using LIFO, the prices allocated to ending inventory will be the earliest costs. Therefore, if 400 systems are remaining, the ending inventory worth will be 400

Practice Concern 30If carriers have identical inventoriable prices, but usage various inventory circulation presumptions once the price of goods has actually not been consistent, then the:

A. net revenue of the suppliers will certainly be the same.B. ending inventory of the suppliers will certainly be identical.C. expense of goods obtainable for sale of the providers will certainly be similar.Correct Answer: C

The cost of products available for sale will be the same if start inventory and purchases are the same, however if various techniques are provided, expense of products marketed and net earnings will be different, as various approaches give a various worth for ending inventory.

Practice Question 31Which of the complying with circulation assumptions is not acceptable under primarily accepted accounting principles?

A. FIFO/LIFO.B. Next-in, first-out.C. Mean expense.Correct Answer: B

Practice Concern 32Which statement(s) is (are) true?

I Under the FIFO method of inventory valuation, the assignment of costs to merchandise marketed is in the exact same order in which the merchandise was purchased.II. The FIFO method of inventory valuation is based on an presumption that the a lot of recent prices incurred have to be charged against current-year earnings.III. The FIFO approach of inventory valuation is based upon the assumption that prices should be charged versus revenues in the same order in which the prices were incurred.IV. LIFO is considered the a lot of conservative inventory pricing method.

A. I, II and also IIIB. I, II and also IVC. I, III and also IVCorrect Answer: C

I. FIFO means "first-in, first-out"--the initially items purchased are the initially items sold. Inventory costs are assigned to the merchandise offered in the exact same order in which the purchases of merchandise were made.II. Under FIFO, expenses are charged in the order in which they happen, but the many recent inventory costs (purchases) are assigned to ending inventory. Inventory does not become a "cost" till it is sold.III. FIFO suggests "first-in, first-out", in other words, the expense of the first items purchased come to be the expense of the initially items offered.IV. With a LIFO pricing device the inventory is valued at the oldest costs (normally the lowest bereason of inflation) and also the worths of the recent purchases (slightly higher costs) are assigned to the expense of products sold. With greater costs of products tright here will certainly be a reduced net income.

Practice Question 33Under which expense flow assumption is the finishing inventory created of the most freshly purchased merchandise?

A. FIFO.B. LIFO.C. Median Cost.Correct Answer: A

Under the FIFO (First-In, First-Out) cost circulation presumption, the inventory on hand is thought about to be written of the most current items purchased.

Practice Question 34Which of the complying with statements concerned the LIFO strategy of inventory valuation is false?

A. In spite of the many benefits of LIFO, it is supplied by fewer U.S. suppliers than both FIFO and weighted average.B. The LIFO conformity dominion is a taxation judgment prohibiting the usage of LIFO for taxes purposes unless it is additionally provided for exterior financial reporting functions.C. Under LIFO, carriers can manage earnings at the finish of an bookkeeping duration by purchasing added inventory.Correct Answer: A

LIFO is more frequently offered than weighted average for inventory valuation functions.

Practice Concern 35Every-Day Clopoint had actually a November 1 merchandise inventory balance of $45,000. It made purchases of $80,000 and taped sales of $130,000, in the time of November. Its estimated gross profit on sales was 25%. On November 30, the save was damaged by fire. What was the value of the merchandise inventory loss?

A. $ 27,500B. $125,000C. $ 97,500Correct Answer: A

The price of items sold is equal to sales less the gross profit on sales, or $97,500 ($130,000 X (1 -.25)). The lost inventory will be approximated as inventory available at cost less the price of items offered.

Practice Inquiry 36The products obtainable for sale, at retail prices, total $200,000. If the cost proportion for the duration totals 60%, and the net sales at retail for the period complete $120,000, what is the finishing inventory at cost?

A. $ 48,000B. $ 24,000C. $ 72,000Correct Answer: A

Reducing complete products easily accessible for sale at retail ($200,000) by sales at retail ($120,000) leaves a remainder (finishing inventory at retail) of $80,000. If the cost of the ending inventory is 60% of finishing inventory at retail value, the cost of the ending inventory at price is $48,000 ($80,000 x 60%).

Practice Concern 37Czech Ltd. shipped goods to a customer on December 30, 2010. Because Czech supplied the shipping firm asked for by the customer, the customer took the hazard of the items not being yielded by the shipping company. The customer received the products on January 6, 2011. The offering price of the goods was $57,000. The sale was recorded by Czech on January 2, 2011. Czech had actually passist $42,000 for the items and provided the regular technique to account for its inventory. Which of the complying with statements via respect to this transaction is true?

A. Income for 2010 is underproclaimed by $42,000.B. Income for 2011 is overproclaimed by $15,000.C. Revenues for 2010 are underproclaimed by $57,000.Correct Answer: C

The revenue need to be recorded in 2010 given that the items were shipped prior to the year finish.

Practice Question 38Greenbelt Processors had actually a start inventory of 798 systems valued at a cost of 34,895. It purchased 4,474 units of new inventory worth 195,402 throughout the year. A year-end audit revealed that it had 853 devices on hand also.

If Greenbelt uses the FIFO approach, what was its COGS for the year?

A. 193,000B. 193,042C. 193,027Correct Answer: B

Because Greenbelt has 853 systems on hand at year-finish, under FIFO they all belengthy to purchases made throughout the year.

Unit price of purchases = 195,402 / 4,474 = 43.675Ending inventory = 853 x 43.675 = 37,255COGS = BI + Purchases - EI = 34,895 + 195,402 - 37,255 = 193,042.

Practice Inquiry 39Greenbelt Processors had a beginning inventory of 798 systems valued at a cost of 34,895. It purchased 4,474 units of brand-new inventory worth 195,402 during the year. A year-finish audit revealed that it had actually 853 devices on hand also.

If Greenbelt offers the weighted average cost method, what was its COGS for the year?

A. 193,000B. 193,027C. 193,035Correct Answer: C

Under average price technique, we price all systems including those in start inventory and also purchased in the time of the year at an average price.

Mean price = <34,895 + 195,402> / <798 + 4,474> = 43.683Ending inventory = 853 x 43.683 = 37,262COGS = BI + Purchases - EI = 34,895 + 195,402 - 37,262 = 193,035.

Practice Question 40Greenbelt Processors had a beginning inventory of 798 devices valued at a price of 34,895. It purchased 4,474 devices of brand-new inventory worth 195,402 in the time of the year. A year-finish audit revealed that it had 853 systems on hand.

If the average unit price was 43.65 at the end of the year, what COGS would certainly Greenbelt report?

A. 193,064B. 193,035C. 193,027Correct Answer: A

If the finishing price is 43.65, which is much less than all 3 unit prices calculated under FIFO, LIFO or Mean Cost Method, the conservative principle of "lower of expense or market" needs to be applied. At this price,

Ending inventory = 853 x 43.65 = 37,233COGS = BI + Purchases - EI = 34,895 + 195,402 - 37,233 = 193,064.

Practice Concern 41When comparing FIFO with LIFO, which of these arguments is INCORRECT (Assume increasing prices.)

A. FIFO more closely complies with the actual physical flow of many kind of inventory items.B. The dollar amount reported as price of items marketed under FIFO more very closely approximates present expense of items offered.C. The dollar amount reported as finishing inventory under FIFO even more closely approximates the present expense of inventory.Correct Answer: B

A is correct because the FIFO method even more closely adheres to the actual physical flow of a lot of inventory items. B is incorrect bereason LIFO, not FIFO, reports the even more current, higher-priced products as cost of goods offered. C is correct because ending inventory under FIFO is consisted of of the more recent, higher-priced items, which is a closer approximation of existing expenses.

Practice Concern 42Which of the adhering to statements is not true in regard to the LIFO inventory expense flow assumption?

A. The LIFO cost flow assumption does not typically reflect the usual physical circulation of inventory devices.B. For balance sheet functions, the cost of inventory will certainly approximate the present replacement price under the LIFO assumption.C. If a company provides LIFO for tax objectives, it have to also use LIFO for outside financial reporting purposes.Correct Answer: B

Under LIFO, the inventory on the balance sheet will consist of older costs, typically from a previous period, and will not reexisting the latest expenses.

Practice Question 43Given equal situations, which inventory technique is the finest to use for taxes objectives (assume prices are rising)?

A. Typical cost.B. FIFO.C. LIFO.Correct Answer: C

LIFO reduces taxable income and for this reason reduces taxes.

Practice Inquiry 44Date Quantity Per Unit Total CostJan 1, Beginning Inventory 100 $18.00 $ 1,800.00Mar 4, Purchase 400 19.00 7,600.00May 8, Purchase 800 18.25 14,600.00Nov 3, Purchase 500 20.40 10,200.00Merchandise Available 1,800 34,200.00

Five hundred devices are unmarketed. Using the average price strategy under a routine inventory device, exactly how much is the expense assigned to the finishing merchandise inventory?

A. $ 9,400B. $ 9,800C. $ 9,500Correct Answer: C

Using the average cost method, the ending inventory would certainly be calculated as: $34,200 / 1,800 = $19 per unit cost. 500 X $19 = $9,500.

Practice Question 45In periods of climbing prices and stable or boosting inventory amounts, the affect of LIFO and FIFO on earnings prior to taxes is:

A. LIFO outcomes in lower income.B. FIFO outcomes in lower revenue.C. The option of LIFO vs. FIFO does not impact income.Correct Answer: A

LIFO retains (earlier) reduced cost inventory, thereby boosting COGS, and thereby decreasing income. FIFO outcomes in the oppowebsite.

Practice Inquiry 46In a duration of climbing prices, many kind of firms embrace the routine LIFO approach of accounting for inventory price for tax objectives. When compared through routine FIFO or average cost:

A. LIFO allocates older and also therefore smaller sized inventory prices to price of items offered.B. LIFO allocates the newest and therefore the largest inventory costs to price of products offered.C. LIFO produces an inventory valuation on the balance sheet that is always closer to replacement expense.Correct Answer: B

The latest prices, which are the highest possible expenses, will be alsituated to cost of goods sold. The greater expense of goods marketed will certainly cause income prior to taxes to be lower, and also hence earnings taxes will be reduced.

Practice Inquiry 47Which of the adhering to statements is true concerning the use of LIFO in a duration of increasing prices?

A. The usage of LIFO will certainly lead to a helpful working resources number and inventory turnover.B. The debt-to-equity proportion will certainly be better than under FIFO.C. The use of LIFO will bring about reduced cash flows.Correct Answer: B

When FIFO is provided, the expense of items marketed is reduced, earnings is better, and also retained revenue is higher. This provides the equity higher; hence the debt-to-equity ratio under FIFO will certainly be reduced than under LIFO.

Practice Concern 48Which of the adhering to statements concerning inventory valuation is INCORRECT?

A. LIFO is superior for earnings statement objectives whereas FIFO is premium for balance sheet purposes.B. In order to change balance sheet worths for a firm utilizing LIFO, an analyst would certainly add LIFO reserve to the reported inventory worth.C. Throughout periods of climbing input prices, LIFO would certainly underestimate gross profit.Correct Answer: C

LIFO reports proper earnings or profit when prices are increasing. FIFO would overestimate it.

Practice Question 49Comparing through FIFO, LIFO results in (throughout periods of climbing prices)

A. higher COGS and also higher inventory balance.B. greater COGS and reduced inventory balance.C. lower COGS and higher inventory balance.Correct Answer: B

Practice Inquiry 50Comparing with FIFO, LIFO outcomes in (in the time of durations of climbing prices)

A. higher taxes and also reduced cash flows.B. lower taxes and higher cash flows.C. reduced taxes and also reduced cash flows.Correct Answer: B

Practice Question 51When prices are rising, comparing with LIFO, FIFO results in

A. reduced working funding and greater cash flows.B. greater working funding and better cash flows.C. higher working capital and lower cash flows.Correct Answer: C

Practice Inquiry 52Comparing via LIFO, FIFO results in ______ once prices are rising.

A. lower inventory balance and reduced net income.B. reduced inventory balance and also greater net earnings.C. higher inventory balance and also higher net revenue.Correct Answer: C

Practice Concern 53Swimsuit Shop offers FIFO inventory method. Throughout a time of increasing prices and also constant inventory level (in terms of quantity), Swimsuit Shop would experience

A. better taxes.B. higher cash flows.C. greater cost of items marketed (COGS) and also lower net revenue.Correct Answer: A

The sequence is: lower COGS --> higher net earnings --> greater taxes --> lower cash flows.

Practice Inquiry 54Which statement(s) is (are) FALSE?

I. Under the LIFO technique of inventory valuation, the ending merchandise inventory would certainly be valued at the purchase price of the a lot of current purchases.II. During extended durations of rising prices, the FIFO technique of inventory valuation will certainly yield a higher expense of goods sold and also a lower ending merchandise inventory, when compared to the LIFO approach of inventory valuation.III. The audit principle of consistency prohibits any kind of alters in the approach of inventory valuation.IV. JIT implies simply in time and also is an inventory strategy wright here the raw materials for manufacturing are purchased in smaller sized quantities after orders have actually been taken for the manufactured products.

A. I, II and also IIIB. I, II and IVC. II, III and IVCorrect Answer: A

I. LIFO implies "last-in, first-out"--the expense of the last items purchased are charged to the a lot of recent sales. The merchandise inventory at the end of the year is thought about to be from the earliest purchases.II. The FIFO technique will certainly lead to a lower cost of goods offered and a higher ending merchandise inventory (valued at first-in costs).III. While consistency need to be maintained, legitimate changes are enabled. However before, the nature, justification, and also effect of the readjust on net earnings have to be disclosed (full-disclocertain principle).IV. JIT inventory systems require trusted suppliers and also reliable managing and shipping of products.

Practice Concern 55If finishing inventory is understated by $2,000 and start inventory is overproclaimed by $3,000, the net income will be

A. understated by $5,000.B. overstated by $1,000.C. overproclaimed by $5,000.Correct Answer: A

COGS = BI + Acquisition - EI.If BI is higher, the COGS is greater.If EI is lower, the COGS is better.Based on the connection, the COGS is overproclaimed by $2,000 + $3,000.The net income is underdeclared by $5,000.

Practice Question 56If prices of a product are falling the usage of LIFO rather than FIFO will certainly lead to:

A. higher working funding and higher net earnings.B. greater working resources and lower net earnings.C. reduced working capital and higher net revenue.Correct Answer: A

COGS will certainly be lower under LIFO in a duration of falling prices leading to better net income and better taxes payments. Working funding will certainly be greater given that the higher inventory worth will certainly outweigh the reduced cash balance because of greater tax payments.

Practice Inquiry 57An inventory write-dvery own has actually an unfavorable result on:

I. liquidity ratios.II. profitcapacity ratios.III. activity ratios.IV. solvency ratios.

See more: Why Is -2 Squared -4 - Squares Of Negative Numbers

A. I, II and also IIIB. I, II and IVC. All of themCorrect Answer: B

An inventory write-dvery own will certainly positively affect task ratios such as inventory turnover bereason the ascollection base (denominator) is decreased. However, all various other ratios will be negatively impacted as both the profit and also the delivering amount of inventory are reduced.