Inventory Methods

2.

If the merchandise inventory is being valued at cost and the price level is steadily rising,the method of costing that will yield the highest net income is:

Lifo
Fifo
Average cost

Correct Answer

A. Fifo

Explanation

FIFO (First-In, First-Out) method of costing assumes that the items purchased or produced first are sold first. In a rising price scenario, using FIFO will result in lower cost of goods sold (COGS) as the older inventory with lower costs is sold first, while the newer inventory with higher costs remains in the inventory. This lower COGS will lead to higher net income as the difference between sales revenue and COGS will be greater. Therefore, FIFO will yield the highest net income in a steadily rising price situation.

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3.

The inventory costing method that is based on the assumption that cost should be charged against revenue in the order in which they were incurred.

Fifo
Lifo
Average cost

Correct Answer

A. Fifo

Explanation

FIFO (First-In, First-Out) is an inventory costing method that assumes that the first items purchased or produced are the first ones sold or used. This means that the cost of goods sold is based on the oldest inventory, while the ending inventory is based on the most recent purchases. This method aligns with the assumption that costs should be charged against revenue in the order they were incurred, as it ensures that the oldest costs are recognized first.

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4.

The following units of a particular item were purchased and sold during the period: Beginning inventory 40 units at P20 First purchase 50 units at P21 Second purchase 50 units at P22 First sale 110 units Third purchase 50 units at 23 Second sale 45 units What is the cost of the 35 units on hand at the end of the period as determined under the periodic inventory system by the fifo costing method

P20
P21
P22
P23

Correct Answer

A. P23

Explanation

The FIFO (First-In, First-Out) costing method assumes that the first units purchased are the first ones sold. In this case, the cost of the 35 units on hand at the end of the period would be determined by the cost of the most recent purchase, which is P23. Therefore, the correct answer is P23.

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5.

The following units of a particular item were purchased and sold during the period:What is the cost of the 35 units on hand at the end of the period as determined under the perpetual inventory system by the lifo costing method Beginning inventory 40 units at P20 First purchase 50 units at P21 Second purchase 50 units at P22 First sale 110 units Third purchase 50 units at 23 Second sale 45 units

715
705
700
805

Correct Answer

A. 715

Explanation

The LIFO (Last In, First Out) costing method assumes that the most recently purchased items are the first ones to be sold. According to the given information, the first sale was for 110 units, which means that the 50 units from the second purchase and 60 units from the first purchase were sold. This leaves us with 40 units from the beginning inventory, 50 units from the third purchase, and 45 units from the second sale. Therefore, the cost of the 35 units on hand at the end of the period would be calculated by adding the cost of the remaining units, which is 40 units at P20 and 35 units at P23, resulting in a total cost of 715.

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Inventory Methods

The inventory costing method that charges the most recent costs incurred against revenue

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If the merchandise inventory is being valued at cost and the price level is steadily rising,the method of costing that will yield the highest net income is:

The inventory costing method that is based on the assumption that cost should be charged against revenue in the order in which they were incurred.