CPA Financial Accounting and Reporting (FAR) : Inventory Costing Methods
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Example Questions
Example Question #1 : Inventory Costing Methods
A company has two pieces of Inventory, A and B. Inventory A cost the company $40 per unit and can now be sold for $60 per unit after incurring $15 in selling expenses per unit. It has a replacement cost of $35 per unit and a normal profit of $4 per unit. Inventory B cost the company $52 per unit and can now be sold for $63 per unit after incurring $15 in selling expenses per unit. It has a replacement cost of $55 per unit and a normal profit of $4 per unit. If the company uses the retail method to value its inventory, how much should be reported on the balance sheet for these items?
$89
$86
$90
$88
$88
The inventory should be reported at the lower of cost or market, subject to a ceiling and floor. Replacement cost is used unless it is higher than the ceiling or lower than the floor. For Item A, the ceiling value is $45 ($60 selling price - $15 selling expenses). The floor value is $41 ($45 - $4 profit margin). The historical cost of Item A is lower and thus is used in inventory valuation. For Item B, the ceiling value is $48 (sales price of $63 - $15 selling expenses). The floor value is $44 ($48 - $4 profit margin). Replacement cost is used because it isn't above the ceiling for Item B.
Example Question #2 : Inventory Costing Methods
A company counts its inventory and arrives at a total of $167,000. The company fears that some merchandise has been stolen and seeks to estimate the amount of the loss. Sales for the period were $600,000. Gross profit is set by the company at a standard 40% of the sales price. According to ledger balances, inventory on the first day of the year was $150,000 and purchases of $390,000 were made during the period. How much theft has occurred?
$18,000
$15,000
$13,000
$10,000
$13,000
If gross profit is 40%, COGS is 60%, meaning that the sales of $600K had a cost of $360K ($600K x 60%). Ending inventory should be $150K beginning inventory plus purchases of $390K minus sales of $360K, for correct ending inventory of $180K. The inventory count only found $167K, for a difference of $13K.
Example Question #3 : Inventory Costing Methods
A company buys 100 units of inventory for $20 each. Later, 90 of these units are sold on credit for $50 each. The company then buys an additional 40 units but the cost has risen to $22 each. The company sells a final 30 units for $55 each. The company uses a moving average system for calculating its cost of goods sold. What should be reported as the cost of the 120 units sold during the year?
$2,592
$2,538
$2,468
$2,448
$2,448
The moving average cost of inventory is calculated by recalculating the average cost each time a sale is made. When 90 units are sold, the average cost is $20 per unit. After the second purchase, the remaining units have a total cost of $1,080 (10 x $20 + 40 x $22) and the average cost is $21.6 ($1,080/50 units). The total cost of the sold units is $21.6 x 30 + $20 x 90.
Example Question #4 : Inventory Costing Methods
Of the following, which is not a legitimate method of inventory costing?
FIFO
Weighted Average
Discounted Method
Dollar value LIFO
Discounted Method
There is no such concept of a Discounted Method in inventory valuation.
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