Determine the expense of goods accessible for sale: beginning Inventory + Purchases.Allocate the cost of total inventory prices (cost that goods easily accessible for sale) in between two components: COGS on the income statement and also the finishing inventory ~ above the balance sheet. Note that COGS = (Beginning inventory + Purchases) - finishing Inventory.

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

There space two list systems:

Perpetual list system update inventory accounts after each acquisition or sale. Inventory amounts are updated continuously. As soon as there is a sale, perform is reduced and also COGS is calculated.Periodic perform system documents inventory acquisition or sale in "Purchases" account. "Inventory" account is to update on a periodic basis, at the end of every accounting duration (e.g., monthly, quarterly). Price of items sold or price of revenue is computed from the finishing inventory figure.

In some cases, it"s feasible to specifically determine which perform items have been sold and also which remain. By the specific to know method, the actual expenses of the certain units marketed are transferred from inventory to the cost of goods sold. This technique achieves the ideal matching the sales revenue and cost of goods sold when the individual systems in the inventory space unique. However, in most cases companies may be can not to determine exactly which items are sold and which items stay in ending inventory.

The continuing to be three approaches are circulation assumptions, which should be applied only to an list of homogeneous items. The price flow assumption may or might not reflect the physical flow of inventory.

Weighted average Cost

The average expense of all devices in the inventory is computed and also used in record the price of products sold. This is the only method in which all units are assigned the exact same (average) per-unit cost.

Average price = (beginning inventory + purchases) / units accessible for sale.Ending perform = Average price x systems of finishing inventory.COGS = expense of goods available for revenue - ending inventory.


FIFO is the presumption that the very first units purchased room the first units sold. Therefore inventory is assumed come consist of the many recently to buy units. FIFO assigns current costs to inventory but older (and regularly lower) costs to the expense of goods sold.


LIFO is the presumption that the most recently acquired goods are sold first. This method matches sales revenue with reasonably current costs. In a period of inflation, LIFO usually results in lower reported profits and lower revenue taxes than the various other methods. However, the earliest purchase expenses are assigned come inventory, i m sorry may an outcome in inventory coming to be grossly understated in state of existing replacement costs.

LIFO is not permitted under IFRS. In the U.S., however, LIFO is offered by roughly 30 percent of U.S. Companies due to the fact that of potential income tax savings.

The end an outcome under perpetual FIFO is the very same as under routine FIFO. In other words, the very first costs space the same whether you move the cost out of inventory with each sale (perpetual) or whether you wait till the year is end (periodic). This is also true is the particular identification technique is used.

Using the LIFO/weighted average price methods the two systems will generally result in various allocations to price of sales and also ending inventory.

Comparison the Inventory bookkeeping Methods

Inventory data is valuable if it mirrors the current price of replacing the inventory. COGS data is valuable if it reflects the current cost of instead of the inventory item to proceed operations.

During durations of secure prices, all 4 methods will generate the same results for inventory, COGS and earnings.

During durations of increasing prices and stable or cultivation inventories, FIFO measures assets much better (the most beneficial inventory data), but LIFO measures earnings better.

Under LIFO, the expense of finishing inventory is based on the earliest acquisition prices, and also thus is well listed below current instead of cost. For numerous firms making use of LIFO, their price of inventory might be years old and almost useless for evaluation purposes. However, expense of items sold is based upon the many recent acquisition prices, and thus closely reflects existing replacement cost. Together a result, LIFO gives a much better measurement of existing income and future profitability.

Under FIFO, the cost of finishing inventory is based on the many recent purchase prices, and thus closely reflects existing replacement cost. However, costs of goods sold are based on the earliest purchase prices, and this is well listed below the present replacement cost. The get is actually holding obtain or list profit. It is debatable even if it is it must be taken into consideration income, or at least experts can to speak the underestimated COGS leads to inflated network income.

In an atmosphere of declining inventory unit expenses and constant or boosting inventory quantities the opposite is true.

The usefulness of perform data reported making use of the average-cost method lies between LIFO and also FIFO.

Practice inquiry 1What does the FIFO inventory technique assume about the an initial units purchased?

A. They space the an initial units sold.B. They space the systems that continue to be in finishing inventory.C. They are the just units offered in computing average cost.Correct Answer: A

FIFO treats the an initial units purchased as though they are the very first unit sold.

Practice inquiry 2When calculating ending inventory utilizing the average expense method, which of the adhering to is CORRECT?

A. The molecule is the beginning inventory balance add to purchases.B. The denominator is the variety of units remaining.C. The denominator is the number of units purchased.Correct Answer: A

The average cost is calculation by acquisition the start inventory balance plus purchases separated by the total number of units in inventory, i m sorry is the number in the beginning balance add to the number purchased.
A. $530.B. $640.C. $595.Correct Answer: B

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

Practice concern 4Which the the adhering to results from utilizing the LIFO technique of inventory expense flows throughout a period of inflation?

A. Understated cost of products sold.B. Overvalued inventory.C. Right now valued expense of products sold.D. At this time valued inventory.Correct Answer: C

LIFO matches current prices with current revenues. Throughout a period of inflation, LIFO outcomes in currently valued expense of goods sold.

Practice question 5Which inventory technique generally results in costs allocated to finishing inventory that will certainly approximate current costs?

A. LIFOB. FIFOC. Average expense methodCorrect Answer: B

FIFO allocates the many recent costs to inventory.

Practice question 6Under U.S. GAAP, a firm that uses the LIFO technique to compute taxable earnings must usage the ______ technique for jae won reporting.

A. FIFOB. Average costC. LIFOCorrect Answer: C

The tax law requires a firm that uses LIFO for tax purposes likewise use LIFO because that financial reporting purposes.

Practice question 7Under which price flow assumption is the ending inventory composed of the faster purchased merchandise?

A. FIFOB. LIFOC. Median CostCorrect Answer: B

Under the LIFO (Last-In, First-Out) expense flow assumption, perform is marketed from the most recent purchases, leave the earliest purchased list on hand.

Practice question 8If inventory costs remain relatively continuous from period to period, which inventory method is the most appropriate one in the assignment of cost flow in between COGS and also inventory transporting value?

I. Particular identification method.II. FIFO.III. Weighted typical method.IV. LIFO.Correct Answer: every one of them

Given relatively constant prices, the allocation the costs between COGS and ending inventory would certainly be very comparable under every of the four methods.

Practice question 9Which methods are based upon cost circulation assumptions?

I. Certain identification.II. FIFO.III. LIFO.IV. Weighted median Cost.Correct Answer: II, III and also IV

I is based upon physical flow. The flow of costs does not need to correspond with the physical flow of units. The prices can flow in different ways than the goods. In various other words, if a firm uses LIFO, it might sell the earliest (first) item come a customer, however can report the cost of items sold of the price that the critical purchase.

Practice inquiry 10Which list valuation an approach is not permitted under IFRS?

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

LIFO is permitted just under U.S. GAAP.
$7 every unitSecond revenue 20 devices

What is the value of the finishing inventory, using a perpetual inventory system and a FIFO price flow assumption?

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

Only 8 units continue to be after the 2nd sale. ~ above a FIFO perpetual basis, the 8 systems will it is in assigned the most recent acquisition price the $7 ($7 x 8 = $56).
$13 per unit

If 83 units room sold, what is the value of the ending inventory under a regular inventory system and a FIFO cost flow assumption?

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

The ending inventory (17 units) would be composed of the many recent purchases (newest layers) that 15 X $13 plus 2 X $12, or $195 + $24.

Practice question 13Which inventory cost flow assumption normally will yield the highest expense of items sold during a period of declining prices?

A. Load averageB. FIFOC. LIFOCorrect Answer: B

The older, greater inventory purchases will certainly be the costs that walk into cost of products sold under FIFO.

Practice question 14Zealous Ltd. And also Eager Ltd. Are identical companies in every respect except that Zealous provides the LIFO an approach for list costing if Eager uses FIFO costing. The companies run in an industry in which costs have been increasing over the previous several years. Contrasted to Zealous, which of the following can be said around Eager?

A. Eager has a lower income per share.B. Eager has actually a greater cost of items sold.C. Eager has actually a lower finishing inventory.D. Eager has greater total assets.Correct Answer: D

If prices space increasing, FIFO would certainly provide higher ending inventory, because the items on hand would certainly be tape-recorded at the many recent acquisition prices.

Practice question 15Which of the adhering to is an benefit of LIFO inventory valuation end FIFO throughout periods the falling price (assuming not all list is sold)?

A. Ending inventory on the balance sheet is report at its present replacement cost.B. Taxation savings associated with reduced reported earningsC. It more closely adheres come the matching principle.D. It much more closely parallels the physical circulation of goods sold.Correct Answer: C

LIFO costing supplies the most recent expenses to compute expense of items sold. Assuming expenses are changing, these costs more closely enhance a firm"s revenue, which is usually corresponding the tendency of cost changes.

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

A. LIFO would certainly produce greater gross benefit margin percentages than would typical costs.B. FIFO would certainly produce greater gross profit margin percentages than would certainly LIFO.C. Average prices would produce higher gross benefit margin percentages than would certainly LIFO.D. FIFO would certainly produce greater gross profit margin percentages 보다 would typical costs.Correct Answer: A

If prices room declining, LIFO would carry out lower cost of goods sold, since lower costs would be allocated come the items sold.

Practice question 17Prices have actually been rising throughout the past few years. Service providers Ashley and also Taylor space in the same industry and also use the same audit methods except for perform valuation. Ashley provides FIFO, and also Taylor offers LIFO. Which of the adhering to statements is true?

A. The list on Taylor"s publications closely approximates current market pricesB. The price of products sold because that Taylor more closely approximates current replacement valuesC. The inventory for Taylor and Ashley are the sameCorrect Answer: B

Because Taylor provides LIFO, the much more recent costs will be the prices in expenses of items sold. The more recent expenses are the higher costs, as prices have been rising.

Practice question 18Which the the adhering to is true in periods of increasing prices?

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

The inventory under FIFO will be much greater than the inventory under LIFO. If cash flows will be lower (due to the taxes differences), the effect on the inventory is usually greater; for this reason the working resources under FIFO will show up to be much better even despite cash flows under LIFO room better.

Practice concern 19Which of the following statements is (are) true under U.S. GAAP?

I. If a LIFO inventory layer is depleted in one period, that can always be replenished by an similar layer in the following periodII. In durations of climbing prices, cost of products sold under LIFO will be better than under FIFOIII. The usage of LIFO rises inventory stop profits during periods of increasing pricesIV. A company may usage LIFO inventory actions for tax purposes and another cost an approach for financial report purposesCorrect Answer: II

When LIFO is supplied in a period of rising prices, the latest and greater costs will go into cost of items sold. Once FIFO is used in a duration of climbing prices, the older and lower expenses will go into expenses of goods sold.

IV is false. Under the �LIFO conformity rule,� the U.S. Taxation code calls for that companies using the LIFO method for tax objectives must also use the LIFO an approach for jae won reporting.

Practice question 20Which of the adhering to statements is true in a duration of climbing prices?

A. The use of FIFO will bring about a beneficial inventory turnoverB. The usage of FIFO will tend to understate incomeC. The use of FIFO will often tend to understate the debt-to-equity ratioD. The usage of FIFO will enhance cash flowsCorrect Answer: C

The usage of FIFO will certainly generate a lower price of goods sold, because the earlier, lower prices will be had in cost of goods sold. The lower cost of items sold will result in a higher income. The higher income will certainly be contained in stockholders" equity, which will cause the debt-to-equity ratio to be lower.

Practice concern 21Which the the adhering to statements is true in an inflationary environment?

A. Under FIFO, income will have tendency to be understatedB. Under LIFO, working funding may it is in distortedC. Under FIFO, cash flows will be increasedD. The usage of FIFO will cause debt-to-equity ratios to be overstatedCorrect Answer: B

When LIFO is used, inventory presented under current assets will be really low, as it will be utilizing older, reduced costs. When cash flows will be greater under LIFO, the rise in cash operation is typically not sufficient to against the impact of the low inventory, and thus working capital will tend to be lower under LIFO.

Practice question 22When price levels have actually been increasing throughout the period, a agency using the LIFO list valuation an approach instead of the FIFO list valuation method would have:

A. Greater equitiesB. Lower net incomeC. Greater net incomeCorrect Answer: B

In a duration of rising prices, LIFO will yield a lower income due to the fact that its price of goods sold is higher, due to the fact that it offers newer, and also higher, costs.

Practice inquiry 23During a period of climbing prices, which of the complying with is lower using FIFO fairly than LIFO?

A. Income before tax.B. Revenue tax.C. Cost of products sold.D. Net income.Correct Answer: C

Practice inquiry 24Assume that prices room rising and inventories balances are increasing, which method will generate the greatest cash flow?

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

As long as the price level increases and inventory quantities execute not decrease, a deferral of income tax occurs, therefore generating higher cash flows (tax must be payment in cash).

Practice concern 25During a time of enhancing inventory and also rising prices, FIFO will result in ______ 보다 LIFO.

A. Higher COGSB. Greater taxesC. Reduced net incomeD. Reduced working capitalCorrect Answer: B

Practice question 26During a time of enhancing inventory and rising prices, LIFO will result in ______ than FIFO.

A. Higher inventory balanceB. Greater taxesC. Higher COGSD. Higher net incomeCorrect Answer: C

Practice concern 27An list write-down has a positive result on:

A. Liquidity ratios.B. Profitability ratios.C. Task ratios.Correct Answer: C

Activity ratios such together inventory turnover will certainly be positively influenced because the asset base (denominator) is reduced.

Practice question 28Diane Corporation had 400 devices of perform on hand in ~ July 1, 2011, costing $20 each. Purchases and also sales of goods throughout the month that July were together follows:

July 12, 2011 Sales 200 systems

Assume Diane Corporation go not keep perpetual list records. According to a physics count, 400 systems were top top hand ~ above July 31, 2011.

The price of finishing inventory utilizing the FIFO cost an approach is:

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

The cost of perform is the ending inventory worth on the balance sheet on July 31, 2011. Making use of FIFO, the prices allocated to ending inventory will be the most recent costs. Therefore, if 400 units room remaining, the finishing inventory worth will be 300

Practice inquiry 29Diane Corporation had 400 devices of perform on hand at July 1, 2011, costing $20 each. Purchases and also sales the goods during the month that July were as follows:

July 12, 2011 Sales 200 devices

Assume Diane Corporation does not keep perpetual list records. Follow to a physics count, 400 systems were ~ above hand top top July 31, 2011.

The price of inventory at July 31, 2011, making use of the LIFO cost method, is:

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

Using LIFO, the expenses allocated to finishing inventory will certainly be the earliest costs. Therefore, if 400 units are remaining, the ending inventory value will be 400

Practice question 30If companies have actually identical inventoriable costs, yet use various inventory flow assumptions when the price of products has not been constant, then the:

A. Net income of the providers will it is in identical.B. Finishing inventory that the companies will it is in identical.C. Price of goods obtainable for sale of the companies will be identical.Correct Answer: C

The price of goods accessible for sale will be the exact same if beginning inventory and also purchases room the same, however if various methods room used, cost of items sold and also net revenue will be different, as various methods offer a different value for finishing inventory.

Practice question 31Which of the adhering to flow presumptions is no acceptable under typically accepted bookkeeping principles?

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

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

I Under the FIFO technique of list valuation, the assignment of prices to merchandise sold is in the very same order in which the merchandise was purchased.II. The FIFO technique of list valuation is based upon an presumption that the most recent costs incurred have to be charged versus current-year revenues.III. The FIFO technique of list valuation is based on the presumption that costs should be charged against revenues in the exact same order in which the expenses were incurred.IV. LIFO is taken into consideration the most conservative inventory pricing method.

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

I. FIFO way "first-in, first-out"--the first items purchased are the very first items sold. Inventory expenses are assigned come the merchandise sold in the exact same order in i m sorry the purchase of merchandise to be made.II. Under FIFO, prices are charged in the bespeak in which castle occur, yet the most recent inventory prices (purchases) room assigned to ending inventory. Inventory walk not come to be a "cost" until it is sold.III. FIFO method "first-in, first-out", in other words, the price of the an initial items purchased come to be the cost of the first items sold.IV. V a LIFO pricing device the perform is valued in ~ the oldest costs (usually the lowest since of inflation) and the worths of the current purchases (slightly higher costs) space assigned to the cost of items sold. With higher costs of goods there will be a lower net income.

Practice concern 33Under which expense flow presumption is the ending inventory written of the many recently to buy merchandise?

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

Under the FIFO (First-In, First-Out) expense flow assumption, the perform on hand is considered to be written of the most recent items purchased.

Practice question 34Which of the following statements concerned the LIFO technique of list valuation is false?

A. Regardless of the numerous benefits of LIFO, the is supplied by fewer U.S. Suppliers than both FIFO and also weighted average.B. The LIFO conformity rule is a tax ruling prohibiting the usage of LIFO because that tax functions unless the is likewise used for external financial reporting purposes.C. Under LIFO, providers can regulate earnings in ~ the finish of one accounting period by purchasing added inventory.Correct Answer: A

LIFO is much more commonly used than weighted typical for list valuation purposes.

Practice concern 35Every-Day apparel had a November 1 merchandise inventory balance the $45,000. The made purchases of $80,000 and recorded sales the $130,000, during November. Its estimated gross profit on sales to be 25%. Top top November 30, the store was destroyed by fire. What was the value of the merchandise perform loss?

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

The expense of goods sold is same to sales less the gross profit on sales, or $97,500 ($130,000 X (1 -.25)). The shed inventory will certainly be estimated as inventory accessible at cost less the expense of items sold.

Practice concern 36The goods available for sale, at retail prices, full $200,000. If the cost ratio because that the period totals 60%, and the network sales at sleeve for the duration total $120,000, what is the ending inventory in ~ cost?

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

Reducing total goods available for sale at sleeve ($200,000) by sales at retail ($120,000) leaves a remainder (ending inventory in ~ retail) that $80,000. If the expense of the ending inventory is 60% of finishing inventory at sleeve value, the expense of the ending inventory at cost is $48,000 ($80,000 x 60%).

Practice question 37Czech Ltd. Shipped items to a customer on December 30, 2010. Due to the fact that Czech provided the shipping agency requested by the customer, the customer take it the danger of the goods not being ceded by the shipping company. The customer obtained the products on January 6, 2011. The marketing price the the goods was $57,000. The revenue was tape-recorded by Czech on January 2, 2011. Czech had actually paid $42,000 for the goods and also used the periodic an approach to account for its inventory. Which of the following statements with respect to this transaction is true?

A. Revenue for 2010 is understated through $42,000.B. Income for 2011 is exaggeration by $15,000.C. Revenues for 2010 space understated through $57,000.Correct Answer: C

The revenue should be taped in 2010 due to the fact that the items were shipped before the year end.

Practice concern 38Greenbelt Processors had actually a beginning inventory of 798 systems valued in ~ a expense of 34,895. That purchased 4,474 units of brand-new inventory precious 195,402 throughout the year. A year-end audit revealed the it had actually 853 systems on hand.

If Greenbelt offers the FIFO method, what was its COGS because that the year?

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

Since Greenbelt has 853 units on hand in ~ year-end, under FIFO they every belong to purchases made throughout the year.

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

Practice question 39Greenbelt Processors had actually a start inventory the 798 units valued in ~ a price of 34,895. That purchased 4,474 devices of brand-new inventory worth 195,402 during the year. A year-end audit revealed the it had actually 853 units on hand.

If Greenbelt provides the load average price method, what to be its COGS for the year?

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

Under average price method, we price every units including those in beginning inventory and also purchased during the year at an typical price.

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

Practice inquiry 40Greenbelt Processors had a start inventory that 798 devices valued at a price of 34,895. The purchased 4,474 units of new inventory precious 195,402 throughout the year. A year-end audit revealed the it had actually 853 systems on hand.

If the typical unit price to be 43.65 at the end of the year, what COGS would Greenbelt report?

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

If the ending price is 43.65, i beg your pardon is much less than all 3 unit price calculated under FIFO, LIFO or Average price Method, the conservative principle of "lower of price or market" requirements to it is in applied. In ~ this price,

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

Practice question 41When to compare FIFO v LIFO, which of these debates is not correct (Assume climbing prices.)

A. FIFO more closely follows the really physical flow of many inventory items.B. The dollar amount reported as cost of goods sold under FIFO more closely almost right current expense of items sold.C. The dollar amount reported as ending inventory under FIFO much more closely almost right the current cost of inventory.Correct Answer: B

A is correct because the FIFO technique more closely follows the really physical circulation of most inventory items. B is incorrect due to the fact that LIFO, not FIFO, reports the more recent, higher-priced goods as price of products sold. C is correct due to the fact that ending list under FIFO is consisted of of the newer, higher-priced goods, i m sorry is a closer approximation of present costs.

Practice inquiry 42Which the the following statements is no true in regard to the LIFO inventory price flow assumption?

A. The LIFO price flow presumption does not normally reflect the usual physical circulation of list units.B. Because that balance paper purposes, the expense of inventory will certainly approximate the present replacement price under the LIFO assumption.C. If a agency uses LIFO for tax purposes, the must additionally use LIFO for external financial report purposes.Correct Answer: B

Under LIFO, the inventory on the balance sheet will certainly consist of larger costs, normally from a ahead period, and will not stand for the recent costs.

Practice inquiry 43Given same circumstances, i beg your pardon inventory method is the best to usage for tax purposes (assume prices space rising)?

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

LIFO reduces taxable income and also thus to reduce taxes.

Practice inquiry 44Date quantity Per Unit full CostJan 1, start Inventory 100 $18.00 $ 1,800.00Mar 4, purchase 400 19.00 7,600.00May 8, acquisition 800 18.25 14,600.00Nov 3, purchase 500 20.40 10,200.00Merchandise obtainable 1,800 34,200.00

Five hundred units are unsold. Using the average cost technique under a regular inventory system, just how much is the cost assigned to the ending merchandise inventory?

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

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

Practice concern 45In periods of increasing prices and also stable or enhancing inventory quantities, the influence of LIFO and also FIFO ~ above income before taxes is:

A. LIFO results in lower income.B. FIFO outcomes in reduced income.C. The choice of LIFO vs. FIFO go not impact income.Correct Answer: A

LIFO retains (earlier) lower cost inventory, thereby boosting COGS, and also thereby to decrease income. FIFO results in the opposite.

Practice inquiry 46In a period of climbing prices, many firms take on the periodic LIFO method of audit for inventory cost for tax purposes. When compared with periodic FIFO or median cost:

A. LIFO allocates older and also therefore smaller inventory costs to expense of products sold.B. LIFO allocates the newest and also therefore the biggest inventory expenses to expense of goods sold.C. LIFO produces an inventory valuation ~ above the balance sheet the is always closer to replacement cost.Correct Answer: B

The latest costs, which space the greatest costs, will be allocated to expense of goods sold. The higher cost of products sold will reason income prior to taxes to it is in lower, and thus revenue taxes will certainly be lower.

Practice concern 47Which of the complying with statements is true worrying the use of LIFO in a period of rising prices?

A. The use of LIFO will lead to a valuable working capital number and also inventory turnover.B. The debt-to-equity proportion will be greater than under FIFO.C. The usage of LIFO will bring about lower cash flows.Correct Answer: B

When FIFO is used, the cost of goods sold is lower, income is higher, and also retained revenue is higher. This renders the equity higher; hence the debt-to-equity ratio under FIFO will certainly be reduced than under LIFO.

Practice concern 48Which the the following statements worrying inventory valuation is INCORRECT?

A. LIFO is remarkable for earnings statement purposes whereas FIFO is superior for balance sheet purposes.B. In bespeak to change balance sheet values for a company using LIFO, one analyst would include LIFO reserve come the report inventory value.C. During periods of climbing input prices, LIFO would certainly underestimate pistol profit.Correct Answer: C

LIFO reports suitable income or profit as soon as prices space rising. FIFO would certainly overestimate it.

Practice inquiry 49Comparing v FIFO, LIFO outcomes in (during periods of climbing prices)

A. Greater COGS and higher inventory balance.B. Higher COGS and lower perform balance.C. Reduced COGS and greater inventory balance.Correct Answer: B

Practice concern 50Comparing with FIFO, LIFO outcomes in (during durations of rising prices)

A. Higher taxes and lower cash flows.B. Lower taxes and higher cash flows.C. Reduced taxes and also lower cash flows.Correct Answer: B

Practice concern 51When prices space rising, comparing with LIFO, FIFO results in

A. Lower working resources and higher cash flows.B. Greater working funding and greater cash flows.C. Greater working capital and also lower cash flows.Correct Answer: C

Practice concern 52Comparing through LIFO, FIFO results in ______ as soon as prices space rising.

A. Reduced inventory balance and also lower net income.B. Lower inventory balance and higher net income.C. Greater inventory balance and higher net income.Correct Answer: C

Practice concern 53Swimsuit Shop uses FIFO inventory method. During a time of increasing prices and consistent inventory level (in regards to quantity), Swimsuit Shop would suffer

A. Greater taxes.B. Greater cash flows.C. Higher cost of products sold (COGS) and lower net income.Correct Answer: A

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

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

I. Under the LIFO an approach of perform valuation, the finishing merchandise inventory would certainly be valued in ~ the purchase price the the many recent purchases.II. Throughout extended periods of increasing prices, the FIFO an approach of perform valuation will certainly yield a greater cost of products sold and also a lower finishing merchandise inventory, when compared to the LIFO technique of inventory valuation.III. The bookkeeping principle the consistency prohibits any kind of changes in the technique of perform valuation.IV. JIT way just in time and also is an inventory technique where the raw products for production are purchase in smaller quantities after orders have actually been taken because that the made products.

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

I. LIFO method "last-in, first-out"--the cost of the critical items purchased room charged come the most recent sales. The was inventory in ~ the finish of the year is taken into consideration to it is in from the oldest purchases.II. The FIFO method will an outcome in a lower cost of goods sold and also a greater ending merchandise inventory (valued at first-in costs).III. If consistency need to be maintained, legitimate alters are allowed. However, the nature, justification, and effect the the change on net earnings must be disclosed (full-disclosure principle).IV. JIT inventory equipment require dependable suppliers and also efficient handling and shipping that materials.

Practice concern 55If finishing inventory is understated by $2,000 and also beginning perform is overstated by $3,000, the net earnings will be

A. Understated by $5,000.B. Overstated by $1,000.C. Exaggeration by $5,000.Correct Answer: A

COGS = BI + purchase - EI.If BI is higher, the COGS is higher.If EI is lower, the COGS is higher.Based on the relationship, the COGS is exaggeration by $2,000 + $3,000.The net earnings is understated by $5,000.

Practice question 56If price of a product room falling the use of LIFO fairly than FIFO will lead to:

A. Greater working capital and higher net income.B. Higher working capital and lower network income.C. Lower working funding and higher net income.Correct Answer: A

COGS will be lower under LIFO in a period of falling price leading to higher net earnings and greater tax payments. Working funding will be higher since the greater inventory worth will outweigh the reduced cash balance due to higher tax payments.

Practice inquiry 57An perform write-down has a negative effect on:

I. Liquidity ratios.II. Benefit ratios.III. Task ratios.IV. Solvency ratios.

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

An perform write-down will certainly positively affect task ratios such together inventory turnover due to the fact that the asset base (denominator) is reduced. However, all various other ratios will certainly be negatively impacted as both the profit and also the delivering amount the inventory space reduced.