CPB / BookKeeping Inventory and Cost of Goods Sold 1 — Questions and Answers
Question 1: Under the periodic inventory system, Cost of Goods Sold is calculated using which formula?
- Beginning Inventory + Purchases - Ending Inventory (Correct answer)
- Ending Inventory + Purchases - Beginning Inventory
- Net Sales - Gross Profit
- Total Assets - Total Liabilities
Correct answer: Beginning Inventory + Purchases - Ending Inventory
The periodic COGS formula adds purchases to beginning inventory and subtracts the physical ending inventory count.
Question 2: Under the FIFO inventory costing method, which units are assumed to be sold first?
- The oldest units purchased (Correct answer)
- The newest units purchased
- The average-cost units
- The highest-cost units
Correct answer: The oldest units purchased
FIFO (First-In, First-Out) assumes the earliest purchased inventory items are sold before more recently purchased items.
Question 3: A company uses LIFO during a period of rising prices. Compared to FIFO, LIFO will result in:
- Higher COGS and lower net income (Correct answer)
- Lower COGS and higher net income
- Higher ending inventory and higher net income
- No difference in COGS or net income
Correct answer: Higher COGS and lower net income
LIFO assigns the most recent (higher-cost) units to COGS, which increases COGS and reduces reported net income during inflation.
Question 4: Under the perpetual inventory system, the Inventory account is updated:
- After every purchase and sale transaction (Correct answer)
- Only at the end of the accounting period
- Only when a physical count is performed
- Only when goods are returned to a supplier
Correct answer: After every purchase and sale transaction
The perpetual system maintains a running, real-time balance of inventory by recording every purchase and sale as it occurs.
Question 5: The Lower of Cost or Net Realizable Value (LCNRV) rule is applied to inventory to ensure that:
- Inventory is not overstated on the balance sheet (Correct answer)
- Inventory turnover is maximized
- COGS is minimized for tax purposes
- Ending inventory matches the physical count
Correct answer: Inventory is not overstated on the balance sheet
LCNRV prevents overstating inventory by writing it down to its estimated selling price less completion and disposal costs when market value falls.
Question 6: If ending inventory is overstated in Year 1, the effect on Year 1 net income will be:
- Overstated (Correct answer)
- Understated
- Unaffected
- Eliminated by the audit
Correct answer: Overstated
Overstating ending inventory reduces COGS (BI + Purchases - overstated EI), which overstates gross profit and net income.
CPB / BookKeeping Inventory and Cost of Goods Sold 1
Under the periodic inventory system, Cost of Goods Sold is calculated using which formula?