AFC AFC Inventory Management 2 — Questions and Answers
Question 1: Which inventory method is NOT permitted under IFRS but is allowed under US GAAP?
- FIFO
- Weighted-average
- LIFO (Correct answer)
- Specific identification
Correct answer: LIFO
LIFO (Last-In, First-Out) is prohibited under IFRS because it can result in outdated inventory values on the balance sheet.
Question 2: Cost of goods sold is calculated as:
- Beginning inventory + Purchases – Ending inventory (Correct answer)
- Ending inventory + Purchases – Beginning inventory
- Net sales – Gross profit
- Beginning inventory – Ending inventory
Correct answer: Beginning inventory + Purchases – Ending inventory
COGS = Beginning Inventory + Purchases (net) − Ending Inventory, representing the cost of units sold during the period.
Question 3: A company discovers that ending inventory was overstated by $5,000. What is the effect on net income for that period?
- Net income is understated by $5,000
- Net income is overstated by $5,000 (Correct answer)
- Net income is unaffected
- Net income is overstated by $10,000
Correct answer: Net income is overstated by $5,000
Overstated ending inventory reduces COGS (since COGS = BI + Purchases − EI), which overstates gross profit and net income.
Question 4: What does inventory turnover ratio measure?
- How quickly a company collects receivables
- How many times inventory is sold and replaced in a period (Correct answer)
- The percentage of inventory that is obsolete
- How much inventory is held relative to equity
Correct answer: How many times inventory is sold and replaced in a period
Inventory turnover = COGS ÷ Average Inventory, indicating how efficiently a company sells its inventory during a period.
Question 5: Which of the following costs is NOT included in the cost of inventory under US GAAP?
- Purchase price
- Freight-in charges
- Storage costs after purchase (Correct answer)
- Import duties
Correct answer: Storage costs after purchase
Storage and handling costs incurred after inventory is purchased and ready for sale are period costs, not product costs, under US GAAP.
Question 6: During a physical inventory count, a company finds 50 units on hand but its records show 60 units. The journal entry to correct this discrepancy would:
- Debit Inventory Shortage and credit Inventory (Correct answer)
- Debit Inventory and credit Cost of Goods Sold
- Debit Accounts Payable and credit Inventory
- Debit Sales Returns and credit Inventory
Correct answer: Debit Inventory Shortage and credit Inventory
The 10-unit shortage requires a debit to an Inventory Shortage (or Loss) account and a credit to Inventory to reduce it to the physical count.
AFC AFC Inventory Management 2
Which inventory method is NOT permitted under IFRS but is allowed under US GAAP?