CPA Business Environment and Concepts (BEC) : Periodic vs Perpetual Inventory Systems

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Example Questions

Example Question #1 : Financial Management Process

Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

Possible Answers:

Weighted average

Moving average

FIFO

LIFO

Correct answer:

FIFO

Explanation:

Using the FIFO method during a period of rising prices would account for the inventory that is the least expensive from the warehouse, thus maximizing profit.

Example Question #2 : Financial Management Process

Under US GAAP, during periods of inflation, a perpetual system would result in the same dollar amount of ending inventory as a periodic system under which of the following valuation methods?

Possible Answers:

FIFO

Neither

LIFO and FIFO

LIFO

Correct answer:

FIFO

Explanation:

Only under FIFO would the use of a perpetual system result in the same dollar amount of ending inventory as a periodic system.

Example Question #1 : Periodic Vs Perpetual Inventory Systems

A corporation issues quarterly interim financial statements and uses the lower cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?

Possible Answers:

Gains from valuations in previous interim periods should be fully recognized

Only the cost method of valuation should be used

Temporary market declines should be recognized in the interim statements

Inventory losses generally should be recognized in the interim statements

Correct answer:

Inventory losses generally should be recognized in the interim statements

Explanation:

Using the IFRS lower of cost or market process would entail recognizing inventory losses during interim periods.

Example Question #4 : Financial Management Process

What is the cost of ending inventory given the following factors? Beginning Inventory = $5,000 Total Production Costs = $60,000 Cost of Goods Sold = $55,000 Direct Labor = $40,000.

Possible Answers:

$45,000 

$5,000 

$50,000 

$10,000 

Correct answer:

$10,000 

Explanation:

$5,000 + $60,000 - $55,000 = $10,000

Example Question #5 : Financial Management Process

What was ABC company's cost of goods manufactured if cost of goods sold is $43,000, ending finished goods inventory is $21,000, beginning finished goods inventory is $16,000 and net income is $19,000.

Possible Answers:

$38,000 

$50,000 

$48,000 

$37,000 

Correct answer:

$48,000 

Explanation:

COGM = $43,000 + $21,000 - $16,000 = $48,000

Example Question #6 : Periodic Vs Perpetual Inventory Systems

The moving average method requires ____, while the weighted average method requires ______.

Possible Answers:

Perpetual, periodic

LIFO, FIFO

FIFO, LIFO

Periodic, perpetual

Correct answer:

Perpetual, periodic

Explanation:

Both the weighted average method and moving average methods are alternatives to LIFO and FIFO.

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