CIM CIM Inventory Costing & Valuation 1 — Questions and Answers
Question 1: Which inventory costing method assumes the first items purchased are the first items sold?
- LIFO
- FIFO (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: FIFO
FIFO (First-In, First-Out) assumes the earliest purchased inventory is sold first, leaving newer costs in ending inventory.
Question 2: Under LIFO during periods of rising prices, what effect does it have on reported net income compared to FIFO?
- Higher net income
- No effect on net income
- Lower net income (Correct answer)
- Variable effect depending on volume
Correct answer: Lower net income
LIFO matches the most recent (higher) costs against revenue, reducing gross profit and resulting in lower net income during inflation.
Question 3: The weighted average cost method calculates inventory cost by:
- Assigning actual cost to each unit
- Dividing total inventory cost by total units available (Correct answer)
- Using the most recent purchase price
- Using the oldest purchase price on record
Correct answer: Dividing total inventory cost by total units available
The weighted average method computes a blended cost per unit by dividing total inventory cost by total units available for sale.
Question 4: Which inventory valuation method is prohibited under International Financial Reporting Standards (IFRS)?
- FIFO
- Weighted Average
- LIFO (Correct answer)
- Specific Identification
Correct answer: LIFO
LIFO is banned under IFRS because it can produce outdated balance sheet values that don't reflect the actual physical flow of goods.
Question 5: The Lower of Cost or Net Realizable Value (LCNRV) rule requires a write-down when:
- Market value exceeds historical cost
- Historical cost exceeds net realizable value (Correct answer)
- Inventory turns fall below the industry average
- Storage costs rise unexpectedly
Correct answer: Historical cost exceeds net realizable value
LCNRV requires inventory to be reported at the lower of its purchase cost or its expected selling price minus completion and selling costs.
Question 6: What does the inventory turnover ratio measure?
- Frequency of stockout events
- How many times inventory is sold and replaced in a period (Correct answer)
- Number of purchase orders issued per year
- Cost of carrying inventory as a percentage of sales
Correct answer: How many times inventory is sold and replaced in a period
Inventory turnover (COGS ÷ Average Inventory) measures how efficiently a company sells through and replenishes its inventory over a period.
CIM CIM Inventory Costing & Valuation 1
Which inventory costing method assumes the first items purchased are the first items sold?