Inventory and Cost of Goods Sold Flashcards
6 cards from real CPB / BookKeeping practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Inventory and Cost of Goods Sold flashcards as text
Under the periodic inventory system, Cost of Goods Sold is calculated using which formula?
Answer: Beginning Inventory + Purchases - Ending Inventory
The periodic COGS formula adds purchases to beginning inventory and subtracts the physical ending inventory count.
Under the FIFO inventory costing method, which units are assumed to be sold first?
Answer: The oldest units purchased
FIFO (First-In, First-Out) assumes the earliest purchased inventory items are sold before more recently purchased items.
A company uses LIFO during a period of rising prices. Compared to FIFO, LIFO will result in:
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.
Under the perpetual inventory system, the Inventory account is updated:
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.
The Lower of Cost or Net Realizable Value (LCNRV) rule is applied to inventory to ensure that:
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.
If ending inventory is overstated in Year 1, the effect on Year 1 net income will be:
Answer: Overstated
Overstating ending inventory reduces COGS (BI + Purchases - overstated EI), which overstates gross profit and net income.