Chapter 6 - Merchandise Inventory

A company ignores a small inventory error. This is the application of which concept/principle?

• Conservatism

• Disclosure

• Materiality

• Consistency

Answer explanation

Materiality says we only need to follow accounting principles strictly for significant items. A small inventory error can safely be ignored.

A company goes from LIFO to FIFO, then back to LIFO, then to weighted average. What have they violated?

• Conservatism

• Disclosure

• Materiality

• Consistency

Answer explanation

The company should pick a method and stick with it. They can change, but it shouldn't happen often, and it should be justified.

This amount of changing is inconsistent.

Which inventory costing method is based on actual cost of each particular unit of inventory?

• Specific cost

• FIFO

• LIFO

• Weighted average

Which inventory costing method assigns the cost of the oldest items in inventory to cost of goods sold?

• Specific cost

• FIFO

• LIFO

• Weighted average

Answer explanation

FIFO = First In, First Out.

When we sell an item, we sell the oldest item in inventory (or use the cost of the oldest item on record).

Our inventory balance represents the newest items.

Which inventory costing method assigns the cost of the oldest items in inventory to ending inventory?

• Specific cost

• FIFO

• LIFO

• Weighted average

Answer explanation

LIFO = Last In, First Out.

When we sell an item, we sell the newest item in inventory (or use the cost of the newest item on record).

Our inventory balance represents the oldest items.

Which inventory costing method requires calculation of a new average cost after each purchase?

• Specific cost

• FIFO

• LIFO

• Weighted average

Answer explanation

Weighted average calculates a new weighted average cost per unit each time we buy more inventory.

(Or, each item we sell is a little bit of the old and a little bit of the new. It's mixed together like a slushee; we can't tell what's what.)

We had two items costing $20 each. We buy two more at $25 each. We use FIFO and sell one. How much is cost of goods sold?

• $20

• $22.50

• $25

• $20 or $25, depending on which item the customer picks up

Answer explanation

FIFO = First In, First Out.

The oldest item -- the first one in -- cost $20.

We had two items costing $20 each. We buy two more at $25 each. We use LIFO and sell one. How much is cost of goods sold?

• $20

• $22.50

• $25

• $20 or $25, depending on which item the customer picks up

Answer explanation

LIFO = Last In, First Out.

We sell the newest item -- the last one in -- which cost $25.

We had two items costing $20 each. We buy two more at $25 each. We use weighted average and sell one. How much is cost of goods sold?

• $20

• $22.50

• $25

• $20 or $25, depending on which item the customer picks up

Answer explanation

New weighted average cost:

Qty: 2 + 2 = 4

Total cost:

2 * 20 + 2 * 25 = 40 + 50 = 90

Weighted average cost:

90 / 4 = 22.50

We had two items costing $20 each. We buy two more at $25 each. We use specific identification and sell one. How much is cost of goods sold?

• $20

• $22.50

• $25

• $20 or $25, depending on which item the customer picks up

Answer explanation

With specific identification, it literally comes down to which item the customer picks up to buy - and whether that specific item cost $20 or $25.