Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
- Option : C
- Explanation : If prices are rising and a company uses the LIFO method then cost of sales will be high and inventory value will be low. If prices are rising and a company uses the FIFO method then cost of sales will be low and inventory value will be high. Hence the change in prices and the inventory valuation method impact the amount assigned to cost of sales versus inventory. The type of good does not impact the amount assigned to cost of sales versus inventory.
- Option : C
- Explanation : Specific identification matches the actual historical costs of the specific inventory items to their physical flow: The costs remain in inventory until the actual identifiable inventory is sold.
- Option : B
- Explanation : When using the FIFO inventory method the ending inventory, the cost of goods sold and the gross margin, are the same under either the perpetual or periodic methods. The use of a perpetual or periodic system makes a difference under weighted average, and LIFO.
- Option : A
- Explanation : Perpetual inventory system records purchases and sales of goods in inventory as they occur.
| Date | Activity | Tons (000s) | $ per Ton |
| Beginning inventory | 1 | 500 | |
| Feb | Purchase | 8 | 540 |
| May | Sale | 5 | 600 |
| July | Purchase | 2 | 575 |
| Nov | Sale | 3 | 620 |
The cost of sales (in ‘000s) is closest to:
- Option : C
- Explanation : FIFO: Cost of Sales = 1 * 500 + 7 *540 = 4,280 LIFO: Cost of Sales = 2 * 575 + 6 * 540 = 4,390 WA: Total units = 11 Total cost = 5,970 Cost of Sales = 5,970/11 * 8 = 4,342
