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.
Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 2
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.
73
Which inventory valuation method records purchases and sales of goods in
inventory as they occur?
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.
Perpetual inventory system records purchases and sales of goods in
inventory as they occur.
75
A firm which prepares its financial statements according to U.S. GAAP and uses a periodic inventory system had the following transactions during the year:
| Date  | Activity | Tons (000s) | $ per Ton |
| Â | 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:
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
