AFC AFC Inventory Management 1 — Questions and Answers
Question 1: Under the FIFO (First-In, First-Out) inventory method, which units are assumed to be sold first?
- The most recently purchased units
- The oldest purchased units (Correct answer)
- The highest-cost units
- Units are sold in random order
Correct answer: The oldest purchased units
FIFO assumes the first units purchased are the first units sold, so ending inventory reflects the most recent costs.
Question 2: Which inventory costing method typically results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted-average
- Specific identification
Correct answer: FIFO
During rising prices, FIFO assigns lower (older) costs to cost of goods sold, resulting in higher gross profit and net income.
Question 3: A company uses the weighted-average cost method. It has 100 units at $10 and purchases 200 more units at $13. What is the weighted-average cost per unit?
- $11.00
- $11.50
- $12.00 (Correct answer)
- $12.50
Correct answer: $12.00
Weighted-average cost = Total cost ÷ Total units = [(100×$10)+(200×$13)] ÷ 300 = $3,600 ÷ 300 = $12.00.
Question 4: Under the lower-of-cost-or-net-realizable-value (LCNRV) rule, inventory is written down when:
- Its market value exceeds its cost
- Its net realizable value falls below its recorded cost (Correct answer)
- Its cost exceeds the replacement cost
- Its carrying value equals net realizable value
Correct answer: Its net realizable value falls below its recorded cost
GAAP requires inventory to be reported at the lower of its historical cost or net realizable value, recording a loss when NRV drops below cost.
Question 5: Which inventory system records cost of goods sold and updates inventory balances after each individual sale?
- Periodic system
- Perpetual system (Correct answer)
- Weighted-average system
- Consignment system
Correct answer: Perpetual system
A perpetual inventory system continuously updates inventory and COGS records with every purchase and sale transaction.
Question 6: Goods in transit shipped FOB shipping point should be included in whose inventory at year-end?
- The seller's inventory
- The buyer's inventory (Correct answer)
- Neither party's inventory
- Both parties' inventories equally
Correct answer: The buyer's inventory
Under FOB shipping point, title transfers to the buyer when goods leave the seller's dock, so the buyer owns the goods in transit.
AFC AFC Inventory Management 1
Under the FIFO (First-In, First-Out) inventory method, which units are assumed to be sold first?