Question

Company C is identical to Company D in every respect except that Company C uses LIFO and Company D uses average costs. In an extended period of rising inventory costs, Company C's gross profit and inventory turnover ratio, compared to Company D's, would be:

	Gross Profit		Inventory Turnover
a.	higher		higher
b.	higher		lower
c.	lower		lower
d.	lower		higher

Multiple Choice

• Option C

• Option A

• Option B

• Option D

A company uses the periodic average cost method to account for inventory. For the year, the company had the following beginning inventory and purchases:

Beginning inventory on January 1	100 units	at	$	2,800	per unit
Purchase on March 1	400 units	at	$	3,000	per unit
Purchase on September 1	800 units	at	$	3,200	per unit

Sales for the year totaled 1,000 units, leaving 300 units on hand at the end of the year. The company reported ending inventory for $900,000. Which of the following is correct?

Multiple Choice

• The amount reported for ending inventory is correct.

• The amount reported for ending inventory cannot be determined with the information given because the amount depends on which of the 1,000 units were assumed to be sold.

• The amount reported for ending inventory is incorrect because the unit cost of ending inventory should be the average cost of the last 300 units purchased.

• The amount reported for ending inventory is incorrect because management used a simple average instead of weighted-average to calculate the unit cost of inventory for the year.

During periods when costs are rising and inventory quantities are stable, ending inventory will be:

Multiple Choice

• Higher under LIFO than FIFO.

• Higher under FIFO than LIFO.

• Higher under average cost than FIFO.

• Lower under average cost than LIFO.

Which of the following is false regarding the FIFO inventory method?

Multiple Choice

• Perishable goods often follow an actual physical flow that is consistent with the FIFO method assumptions.

• FIFO under a perpetual inventory system results in the same cost of goods sold as FIFO under a periodic inventory system.

• A company can choose to account for the flow of inventory using the FIFO method even if this doesn’t match the actual flow of its inventory.

• All of the other answer choices are true.

Mogul Company ships merchandise to Ski Outfit in a consignment arrangement. The arrangement specifies that Ski Outfit will attempt to sell the merchandise, and in return, Mogul will pay to Ski Outfit a 15% sales commission on any merchandise sold. During the year, Mogul ships inventory with a cost of $115,000 to Ski Outfit. By the end of the year, $88,000 of the merchandise has been sold to customers for a total of $121,400. What amount of inventory will Mogul report at year end?

Multiple Choice

• $6,400.

• $17,250.

• $0.

• $27,000.

Answer 1

Company C is identical to Company D in every respect except that Company C uses LIFO and Company D uses average costs. In an extended period of rising inventory costs, Company C's gross profit and inventory turnover ratio, compared to Company D's, would be:

Ans: Option D (Gross Profit lower and Inventory Turnover Ratio higher)

Explanation: In the days of rising inventory cost, the cost of ending inventory will be lesser for a company following last in first out (LIFO), As the inventory costing more is accounted first, resulting in higher cost of goods sold and eventually lower Gross Profit. At the same time Inventory Turnover Ratio (Cost of Goods sold / Average inventory) will be higher . When the Cost of Goods sold is more so is the Inventory Turnover ratio.

A company uses the periodic average cost method to account for inventory. For the year, the company had the following beginning inventory and purchases:

Beginning inventory on January 1	100 units	at	$	2,800	per unit
Purchase on March 1	400 units	at	$	3,000	per unit
Purchase on September 1	800 units	at	$	3,200	per unit

Sales for the year totaled 1,000 units, leaving 300 units on hand at the end of the year. The company reported ending inventory for $900,000. Which of the following is correct?

Answer: The amount reported for ending inventory is incorrect because management used a simple average instead of weighted-average to calculate the unit cost of inventory for the year.

Explanation:

Date	Purchases			Sale			Balance
	Quantity	Price per Unit	Value	Quantity	Price per Unit	Value	Quantity	Price per Unit	Value
1-Jan	100	2800	280000				100	2800	280000
1-Mar	400	3000	1200000				500	2960.00	1480000
1-Sep	800	3200	2560000				1300	3107.69	4040000
				1000	3107.69	3107692	300	3107.69	932308

During periods when costs are rising and inventory quantities are stable, ending inventory will be:

Answer:  Higher under FIFO than LIFO.

Explanation: When costs are rising, Under LIFO all the inventory that has higher cost will be moved out first and hence the ending inventory will be calculated with the value of those inventory that has moved in first with relatively lower cost. Thereby having a lower ending inventory.

Which of the following is false regarding the FIFO inventory method?

Answer: All of the above

Mogul Company ships merchandise to Ski Outfit in a consignment arrangement. The arrangement specifies that Ski Outfit will attempt to sell the merchandise, and in return, Mogul will pay to Ski Outfit a 15% sales commission on any merchandise sold. During the year, Mogul ships inventory with a cost of $115,000 to Ski Outfit. By the end of the year, $88,000 of the merchandise has been sold to customers for a total of $121,400. What amount of inventory will Mogul report at year end?

Answer: $27,000.

Explanation: $115000-$88000= $27000