CB CB Inventory and Fixed Assets 1 — Questions and Answers
Question 1: Under the FIFO inventory method, the first units purchased are assumed to be:
- The last units sold
- The first units sold (Correct answer)
- The most expensive units sold
- Held in ending inventory
Correct answer: The first units sold
FIFO (First-In, First-Out) assumes the oldest inventory items are sold first, leaving more recent purchases in ending inventory.
Question 2: During a period of rising prices, LIFO results in a higher cost of goods sold compared to FIFO because:
- It assigns the oldest, cheapest costs to inventory sold
- It assigns the most recent, higher costs to inventory sold (Correct answer)
- It ignores purchase price fluctuations
- It averages all costs equally
Correct answer: It assigns the most recent, higher costs to inventory sold
LIFO (Last-In, First-Out) assigns the latest—and in inflationary times, highest—costs to cost of goods sold, reducing taxable income.
Question 3: A physical inventory count revealed 50 fewer units than the perpetual inventory records showed. The bookkeeper should:
- Ignore the discrepancy if it is small
- Debit Inventory Over and Short and credit Inventory (Correct answer)
- Debit Inventory and credit Cost of Goods Sold
- Debit Cash and credit Inventory
Correct answer: Debit Inventory Over and Short and credit Inventory
An inventory shortage is recorded by crediting Inventory (reducing it) and debiting an Inventory Over and Short account to track the discrepancy.
Question 4: Goods held on consignment by a retailer are included in whose inventory?
- The retailer's inventory
- The consignor's (owner's) inventory (Correct answer)
- Both parties' inventories equally
- Neither party's inventory
Correct answer: The consignor's (owner's) inventory
Title to consigned goods remains with the consignor until sold, so consigned goods must be included in the consignor's inventory, not the retailer's.
Question 5: Which inventory valuation method results in an ending inventory value closest to current replacement cost?
- LIFO
- FIFO (Correct answer)
- Weighted-average
- Specific identification
Correct answer: FIFO
FIFO leaves the most recently purchased units in ending inventory, so the balance sheet value reflects prices closest to current market cost.
Question 6: The lower-of-cost-or-net-realizable-value (LCNRV) rule requires writing inventory down when:
- Market price rises above cost
- Net realizable value falls below cost (Correct answer)
- Units on hand increase beyond forecast
- The FIFO method is used
Correct answer: Net realizable value falls below cost
LCNRV conservatism requires recognizing a loss when inventory's expected selling price (less disposal costs) drops below its recorded cost.
CB CB Inventory and Fixed Assets 1
Under the FIFO inventory method, the first units purchased are assumed to be: