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Flashcards in FAR 12 Deck (19):
1

Ashe Co. recorded the following data pertaining to raw material X during January 2005:
Units
Date Received Cost Issued On Hand
1/1/05 Inventory $8.00 3,200
1/11/05 Issue 1,600 1,600
1/22/05 Purchase 4,800 $9.60 6,400
The moving-average unit cost of X inventory on January 31, 2005 is

A. $8.80
B. $8.96
C. $9.20
D. $9.60

C. $9.20

Average cost-per-unit :
Total Cost = 4800 (Purchased) * 9.6 = 46,080/ (Ending on Hand Inventory) 6400

$9.2

Units beginning inventory remaining at year-end (3,200 - 1,600)$8 = $12,800
Plus 1/22 purchase: 4,800($9.60) = 46,080
Ending inventory $58,880
Ending unit cost: $58,880/6,400 = $9.20
The moving average method costs issues at the unit cost of goods on hand at that point. Thus, the issue was costed at $8.00 per unit. The cost per unit changes with each purchase.

2

Which of the following statements regarding inventory accounting systems is true?
A. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
C. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.
D. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.

B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages

A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.

A. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.

Estimated amounts are not used for interim period inventory reporting. The same transaction-based historical cost system is used for interim reporting as for annual reporting.

3

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
Ending inventory Net income
Increase Increase
Increase Decrease
Decrease Decrease
Decrease Increase

Correct:
Ending inventory Net income
Increase Increase

This answer is incorrect on both counts. Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.

The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

T acct: (LIFO) Increase Price time
Ending Inventory
BOY 100 (X< $cost) - sold first
Purchases 30 ( $cost > x)

B/c the old purchase is sold first, that would mean that the COGS would be less expensive, meaning net income would be higher.

Ending inventory , is going to be more expensive, therefore be valued at a higher rate.

4

Generally, which inventory costing method approximates most closely the current cost for each of the following?
Cost of goods sold Ending inventory
LIFO FIFO
LIFO LIFO
FIFO FIFO
FIFO LIFO

Cost of goods sold Ending inventory
LIFO FIFO
LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value.

FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called PSH: Purchases still here

T Acct:
Ending Inventory:

BOY 100 BISH(LIFO) - SOLD! - COGS
Purchases 30 PSHFIFO) - Ending Inventory

5

Stone Co. had the following consignment transactions during December 2005:

Inventory shipped on consignment to Beta Co.
$18,000
Freight paid by Stone
900
Inventory received on consignment from Alpha Co.
12,000
Freight paid by Alpha
500
No sales of consigned goods were made through December 31, 2005. Stone's December 31, 2005, balance sheet should include consigned inventory at
A. $12,000
B. $12,500
C. $18,000
D. $18,900
The $18,900

Incorrect:

C. $18,000
This excludes the freight charges paid by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition or location.

Correct:

D. $18,900
The $18,900 amount to be included in consigned inventory (this would be included in Stone's ending inventory) = $18,000 + $900 freight.

This inventory is owned by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition and location. The inventory Stone received on consignment is not an asset of Stone's and is not included in Stone's inventory. Stone is helping to sell Alpha's inventory, just as Beta is helping to sell Stone's inventory.

6



In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch's inventory exceeded its cost at year-end. What amount of inventory should Stitch report in its year-end balance sheet?
A. $80,000
B. $83,000
C. $85,000
D. $88,000

Correct:
B. $83,000


Beginning inventory of $50,000 is at base-year dollars and the current year increase of $30,000 is also at base-year dollars.

The current year layer must be converted to current year costs ($30,000 x 1.10) = $33,000.

Ending dollar value LIFO is the beginning dollar value LIFO (in this case it was adopted in January so the beginning inventory must be $50,000) plus the current year layer of $33,000 or $83,000.

Note that the sentence "The designated market value of Stitch's inventory exceeded its cost at year end" is a distracter. It is simply stating that there is not an issue with the lower of cost or market since cost is lower.

Incorrect:
D. $88,000

This response appears to have increased the beginning inventory for the current year price increases ($50,000 x 1.10 = $55,000) and added the current year layer at current year prices ($30,000 x 1.10 = $33,000). This is not correct. Beginning inventory should

7

The original cost of an inventory item is above the replacement cost. The inventory item's replacement cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at
A. Original cost.
B. Replacement cost.
C. Net realizable value.
Inventory must be carried at lower of cost (such as LIFO) or market. Market is replacement cost subject to a ceiling and floor. The ceiling for replacement cost is net realizable value (selling price less cost to complete) and the floor is net realizable value less normal profit margin. Use simple numbers to help solve this abstract question. In this question original cost (assume = 100) is greater than market ((replacement cost) assume = 80). Market (80) is greater than net realizable value (assume = 70). Market is subject to a ceiling of net realizable value (70). In this case the inventory would be valued at net realizable value.
D. Net realizable value LESS normal profit margin.


C. Net realizable value.
Inventory must be carried at lower of cost (such as LIFO) or market. Market is replacement cost subject to a ceiling and floor. The ceiling for replacement cost is net realizable value (selling price less cost to complete) and the floor is net realizable value less normal profit margin. Use simple numbers to help solve this abstract question. In this question original cost (assume = 100) is greater than market ((replacement cost) assume = 80). Market (80) is greater than net realizable value (assume = 70). Market is subject to a ceiling of net realizable value (70). In this case the inventory would be valued at net realizable value.

8

Units Unit cost Total cost Units on hand
Balance on 1/1 2,000 $1 $2,000 2,000
Purchased on 1/8 1,200 3 3,600 3,200
Sold on 1/23 1,800 1,400
Purchased on 1/28 800 5 4,000 2,200
Nest uses the LIFO method to cost inventory. What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory?

Perpetual Periodic
A. $2,600 $5,400
B. $5,400 $2,600
C. $2,600 $2,600
D. $5,400 $5,400

A. A
B. B
C. C
D. D

B. B
LIFO (BISH) - goods remaining (ending inventory) are assumed to be the earliest acquired goods (at their related costs).

If the perpetual LIFO inventory method is used, when goods are sold, they are assumed to be the goods acquired just prior to the sale.(PURCHASES SOLD)

Thus, Nest's sale of 1,800 units on 1/23 would have consisted of the 1,200 units acquired 1/8 and 600 units (of the 2,000) in beginning inventory. Ending inventory on January 31 would be:

1,400 units of beginning inventory @ $1 each = $1,400
800 units purchased 1/28 @ $5 each = 4,000
2,200 units in ending inventory reported @ = $5,400

If the periodic LIFO inventory method is used, ending inventory (and cost of goods sold) are determined only at the end of the period. Therefore, Nest's sale of 1,800 units on 1/23 would have consisted of (by assumption at the end of the period) 800 units acquired on 1/28 and 1,000 units (of the 1,200) acquired on 1/8. Ending inventory on January 31 would be:

200 units of the 1,200 purchased 1/8 @ $3 = $ 600
2,000 units (all) of beginning inventory @ $1 = 2,000
2,200 units in ending inventory reported @ = $2,600

C. C
C is not correct. This answer incorrectly calculates perpetual inventory using the periodic methodology.

9

Bach Co. adopted the dollar-value LIFO inventory method as of January 1, 2006.
A single inventory pool and an internally computed price index are used to compute Bach's LIFO inventory layers. Information about Bach's dollar-value inventory follows:

Inventory
Date at base-year cost at current-year cost
1/1/06 $90,000 $90,000
2006 layer 20,000 30,000
2007 layer 40,000 80,000

What was the price index used to compute Bach's 2007 dollar-value LIFO inventory layer?
A. 1.09
B. 1.25
C. 1.33
D. 2.00


B. 1.25
This amount is the increase in current cost layer for 2007 divided by the base-year increment. DV LIFO uses the current cost of the total ending inventory for a given year to compute the appropriate index.

* To get the price index you need total base year and total current year.
Then you apply those numbers to the formula and get the price index.

C. 1.33

Correct:
The question provides the ending inventory for 2007 at current cost by layer.

The sum of the current cost column ($200,000) is the current cost of the entire inventory at the end of 2007.

The sum of the base-year cost for the three years is $150,000.

Hence, under this assumption, the ratio of current cost for the total inventory at the end of 2007 to the base-year cost is 1.33 ($200,000/$150,000).

This index is then multiplied by the 2007 layer in base-year dollars to derive the increment to DV LIFO ending inventory.

10

Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.

On December 31, 2005, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, 2005 was $35,000.

What adjusting entry should Drew record to adjust from average cost to LIFO on December 31, 2005?
Debit Credit
Cost of goods sold $55,000 Inventory $55,000
Cost of goods sold $55,000 LIFO reserve $55,000
Cost of goods sold $20,000 Inventory $20,000
Cost of goods sold $20,000 LIFO reserve $20,000

Debit Credit
Incorrect:
Cost of goods sold $20,000 Inventory $20,000

-because inventory should not be credited. Although, under LIFO, there would be a lower amount of inventory reported, the LIFO reserve account is the account, which accomplishes the lower reporting of inventory. For internal purposes, the inventory account balance is not changed.

Correct:
Cost of goods sold $20,000 LIFO reserve $20,000
-The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.

The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.

11

When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is
A. The same as in a periodic inventory system.
B. Higher than in a periodic inventory system.
C. Lower than in a periodic inventory system.
D. Higher or lower than in a periodic inventory system, depending on whether physical quantities have increased or decreased.

A. The same as in a periodic inventory system.

FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.
Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.

12

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?
A. Conventional retail.
B. Dollar-value LIFO.
C. Weighted average cost.
D. Average cost retail.

B. Dollar-value LIFO.

DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO.

Thus, price-level changes are used throughout this method.
Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.

13

When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is
A. The same as in a periodic inventory system.
B. Higher than in a periodic inventory system.
C. Lower than in a periodic inventory system.
D. Higher or lower than in a periodic inventory system, depending on whether physical quantities have increased or decreased.

A. The same as in a periodic inventory system.

FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired.

Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.


Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.

14

Generally, which inventory costing method approximates most closely the current cost for each of the following?
Cost of goods sold Ending inventory
LIFO FIFO
LIFO LIFO
FIFO FIFO
FIFO LIFO

Cost of goods sold Ending inventory
LIFO FIFO

LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called LISH: last in still here.

15

Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.
On December 31, 2005, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, 2005 was $35,000.

What adjusting entry should Drew record to adjust from average cost to LIFO on December 31, 2005?

Debit Credit
Cost of goods sold $55,000 Inventory $55,000
Cost of goods sold $55,000 LIFO reserve $55,000
Cost of goods sold $20,000 Inventory $20,000
Cost of goods sold $20,000 LIFO reserve $20,000

Debit Credit
Cost of goods sold $20,000 LIFO reserve $20,000

The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.
The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.

16

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
Ending inventory Net income
Increase Increase
Increase Decrease
Decrease Decrease
Decrease Increase

Ending inventory Net income
Decrease Decrease

Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.
The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

17

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?
A. Conventional retail.
B. Dollar-value LIFO.
C. Weighted average cost.
D. Average cost retail.

B. Dollar-value LIFO.

DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO.
Thus, price-level changes are used throughout this method.

18

Brock Co. adopted the dollar-value LIFO inventory method as of January 1, 2003. A single inventory pool and an internally computed price index are used to compute Brock's LIFO inventory layers. Information about Brock's dollar-value inventory follows:

Inventory
_________________________________
Date at base-year cost at current-year cost at dollar-value LIFO
1/1/03 $40,000 $40,000 $40,000
2003 layer 5,000 14,000 6,000
__________ __________ __________ __________
12/31/03 45,000 54,000 46,000
2004 layer 15,000 26,000 ?
__________ __________ __________ __________
12/31/04 $60,000 $80,000 ?
========= ========== ==========
What was Brock's dollar-value LIFO inventory on December 31, 2004?

A. $80,000
B. $74,000
C. $66,000
D. $60,000

1. Current Year/ Base Year= Index / Ratio of inventory
a. 80/60= 1.33
B. 04 Layer base year cost 15000*1.3333= 1999.5=2000
C. Take dollar value lifo and add back the difference to get the EOY dollar-value Lifo #

The ending inventory is used to construct the internal price index. At the end of 2004, the ratio of current cost to base-year cost for ending inventory is $80,000/$60,000 = 1 1/3 or 4/3. This ratio is applied to the 2004 layer at base-year cost, yielding $20,000 ($15,000 x 4/3). This amount is the increase to DV LIFO. Therefore, ending 2004 DV LIFO is $66,000 ($46,000 + $20,000).

19

Define Dollar Value Lifo

Measure the change in inventory based on the total dollar value, not physical quality