9.

Inventory

Study Guide

I. Many organizations, including manufacturing and construction firms, carry inventory to

deliver goods to their customers.
A. Organizations must consider a variety of factors to determine the proper
accounting for their inventory.
1. Which goods and related costs should be included in inventory?
a. Costs to get the items ready for sale are included in inventory and
are expensed as costs of sales when the inventory is sold.
b. Costs not included in inventory (selling costs, shipping to the
customer, etc.) are expensed as operating expenses when
incurred.
c. The inclusion or exclusion of costs in inventory can have a
significant impact on an organization's gross profit.
2. Which inventory costing assumption should the organization use?
a. Depending on cost behavior, different inventory methods
(described below) can have a material effect on an organization's
gross profit.
b. Organizations should select the inventory method which best
reflects its economic reality.
B. Organizations can use either the periodic or the perpetual method to account for
inventory.
1. Periodic method: The organization's beginning inventory balance is
reflected on the balance sheet throughout the year.
a. Purchases on account are recorded in a Purchases account
separate from inventory with the offsetting entry to Accounts
Payable.
b. Sales to customers during the period do not affect the inventory
accounts in real time.
c. During the period, the organization tracks transactions like
transportation in, purchase discounts, and purchase returns (not
sales returns) in separate accounts for each type of transaction.
d. At the end of each period, the organization will count its inventory
and calculate cost of goods sold using the amounts from all of the
inventory-related accounts:
 e. An adjusting entry is then made to accomplish the following:
i. Remove the beginning inventory balance
ii. Record the correct ending inventory balance
iii. Close various inventory related accounts used during the
year (Purchases, Transportation in, Purchase Returns and
Allowances, Purchase Discounts)
iv. Record cost of sales for the period (this is the amount
needed to balance the entry)

An example of this entry is shown below.

2. Perpetual method: The organization records costs associated with

inventory purchases and cost of sales directly to the merchandise
inventory account as transactions (purchases, sales, returns, discounts)
take place throughout the year.
a. The perpetual method allows organizations to match cost of sales
and inventory transactions more closely with their sales and cash
expenditures during the year.
b. A moving average costing system requires a perpetual inventory
method.
C. Organizations should include the following items in their inventories:
1. All goods available for sale. Examples for certain industries include the
following:
 a. Manufacturing organizations—All components that are part of the
final product.
i. Components
ii. Assemblies
iii. Freight required to transport these materials
iv. Handling associated with preparing the materials for
eventual manufacturing
b. Retail organizations—Cost of goods purchased for resale.
c. Construction organizations—The cost of building supplies to be
part of the finished project.
2. All freight, import duties, and related transportation costs required to
bring goods for sale to the organization.
3. All direct labor associated with turning purchased components and
supplies into finished products.
a. Labor associated with machining or cutting raw material into
components usable for production.
b. Labor associated with assembling components into goods
available for sale.
4. All manufacturing overhead expenses required to support the process of
manufacturing or construction. Examples include:
a. Labor costs associated with factory maintenance and other
functions that are not associated directly with producing goods
for sale.
b. Costs of machinery required for manufacturing.
c. Utility costs for manufacturing facilities.
d. Office and administrative expenses supporting the manufacture of
goods.
D. For manufacturing organizations, inventory will consist of three categories.
1. Raw materials, which are the purchased goods not yet placed into
production and all related inbound transportation costs.
2. Work in process, which accounts for all costs of goods in production but
not yet completed.
3. Finished goods, which are products available for sale.
E. Retail or merchandising organizations generally only have Finished Goods
inventory.
F. Service organizations often use Work-in-Process accounts to account for the
work professionals perform directly related to revenue-producing projects. The
accounting is very similar to that of manufacturing accounting.

Practice Question

Jazz Note Corporation had the following information about inventory

transactions during the year 20X4:
 Beginning Inventory 120 units @ $5
Purchases 850 units @ $5
Sales 670 units @ $10
Ending Inventory 300 units @ $5

Prepare the journal entries and calculate cost of goods sold and ending inventory
using:

1. The perpetual inventory method.

2. The periodic inventory method.

Answer

3. Perpetual Inventory Method:

Beginning Inventory: No entry needed. The Inventory account shows the

inventory on hand at $600.

Purchase of 850 units at $5:

Sale of 670 units @ $10:

Ending Inventory of 300 units @ $5: No entry needed because the

inventory account already reflects the ending balance as shown below:
 4. Periodic Inventory Method:

Beginning Inventory: No entry needed. The inventory account shows the

inventory on hand at $600.

Purchase of 850 units @ $5:

Sale of 670 units @ $10: Remember that there is no entry to record the cost of
inventory at the time of sale.

Ending Inventory of 300 units @ $5:

*Ending Inventory is calculated as 300 × $5 = $1,500.

**Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory.

Cost of Goods Sold = $600 + $4,250 – $1,500 = $3,350.

II. Retail and manufacturing organizations can use one of four common methods to
account for the cost of raw materials and merchandise inventory.
A. Specific identification method—Common in organizations with highly customized
or unique finished goods, the specific identification method assigns actual costs
to specific goods. When the goods are sold, the organization records cost of
goods sold associated with the specific item being sold. This is the only costing
method in which the cost flow matches the actual physical flow of goods exactly.
The remaining three methods require cost flow assumptions to be made that
may not reflect the actual physical flow of the goods all the time.
B. First-in, First-out (FIFO)—The costs of the oldest goods in inventory (the goods
purchased first) are expensed as cost of sales first.
C. Last-in, First-out (LIFO)—The costs of the newest goods in inventory (the goods
purchased last) are expensed as cost of sales first.
D. Average cost—As goods are purchased or moved from raw material to
merchandise inventory, average unit costs are recalculated. Cost of goods sold is
based on a moving average cost per unit.
1. An organization will recompute average cost after each purchase.
2. Accounting software, such as QuickBooks, will generally compute average
costs under the average cost inventory method.
E. Illustration: Company A has purchased a widget for the following prices on the
following dates.

On 3/2/20X5, Company A sells 125 units of the widget.

1. FIFO will record cost of sales starting with the oldest inventory first.
a. Cost of sales = (100 units × $10/unit) + (25 units × $12/unit) = 
$1,000 + $300 = $1,300
b. Ending inventory = (75 units × $12/unit) + (100 units × $15/unit) = 
$900 + $1,500 = $2,400
2. LIFO will record cost of sales starting with the newest inventory first.
a. Cost of sales = (100 units × $15/unit) + (25 units × $12/unit) = 
$1,500 + $300 = $1,800
b. Ending inventory = (75 units × $12/unit) + (100 units × $10/unit) = 
$900 + $1,000 = $1,900
3. Average cost will record cost of sales and inventory based on an average
cost of the units in inventory.
a. Average cost/unit = $3,700 ÷ 300 units = $12.33/unit
b. Cost of sales = (125 units × $12.33) = $1,542
c. Ending inventory = (175 units × $12.33) = $2,158

Practice Question

Company B sells broomsticks. They purchase inventory on the

following dates in January 20X6:
 Company B also sold 250 broomsticks during January 20X6.

Calculate (a) the cost of goods sold for January, and (b) the ending
inventory under the following methods:

i. FIFO Inventory Method

ii. LIFO Inventory Method
iii. Weighted-Average Cost Inventory Method

Answer

iv. FIFO Inventory Method: Record the cost of goods sold

using the oldest inventory first.
a. Cost of Goods Sold = (125 units × $11.00) + (75
units × $11.50) + (50 units × $9.50) = $2,712.50
b. Ending Inventory = (50 units × $9.50) + (50 units × 
$13.00) = $1,125.00
v. LIFO Inventory Method: Record the cost of goods sold
using the newest inventory first.
a. Cost of Goods Sold = (50 units × $13.00) + (100
units × $9.50) + (75 units × $11.50) + (25 units × 
$11.00) = $2,737.50
b. Ending Inventory = (100 units × $11.00) = $1,100.00
vi. Weighted-average Cost Inventory Method: The Cost of
Goods Sold and Inventory is based on an average cost of
the units in inventory.

Average cost/unit = $3,837.50 ÷ 350 units = $10.96/unit

a. Cost of Goods Sold = 250 units × $10.96 = $2,740.00

b. Ending Inventory = 100 units × $10.96 = $1,096.00
2. The following factors influence the choice of method for inventory costing.
A. FIFO will generally better reflect the actual physical flow of goods as most
organizations will sell goods purchased first to minimize spoilage and
obsolescence costs.
 B. LIFO is not allowed under International Financial Reporting Standards (IFRS).
Only specific identification, FIFO, and average cost methods are allowed.
C. If prices are rising (inflationary environment), LIFO will produce higher cost of
sales.
1. Gross margins and net income for organizations using LIFO will be lower
than organizations using average costing or FIFO.
2. Income tax liability will be lower for organizations using LIFO, meaning
the organization will generally pay less in cash income taxes than
organizations using FIFO or average cost.
D. If prices are falling (deflationary environment), LIFO will produce lower cost of
sales.
1. Gross margins and net income for organizations using LIFO will be higher
than organizations using average costing or FIFO.
2. Income tax liability will be higher for organizations using LIFO, meaning
the organization will generally pay more in cash income taxes than
organizations using FIFO or average cost.
3. The market value of inventory may decrease because of any number of factors.
A. New technology makes inventory obsolete.
B. Fire or other natural disaster can damage or destroy inventory.
C. Under most inventory cost flow assumptions (all except the LIFO and Retail
Methods), when an organization determines the net realizable value (NRV) of
inventory is less than the historical cost of inventory, then it must reduce the
value of inventory to NRV. This is called the lower of cost or NRV principle. This
new written-down value becomes “cost” for future evaluation.
D. Net realizable value (NRV)—The value an organization would expect to receive
for the inventory in the current environment less any costs associated with
selling the inventory.
E. Losses recognized for NRV write-downs are recorded as part of Cost of Goods
Sold in the period of the write-down. Illustration: Company Q has inventory with
a historical cost of $10,000 that has declined in value and is not expected to
recover. Current NRV is determined to be $9,000, so Company Q records the
following entry:

The impact is to reduce the value of inventory and record an additional expense
because of the inventory's lost value.

F. Illustration:

Lower of Cost or NRV

G. When an organization uses either the LIFO or Retail Method cost flow
assumptions, inventory should be written down to market using the Lower of
Cost or Market (LCM) principle.
1. Replacement cost – The cost the organization would incur to purchase a
similar type of inventory at current costs, including the costs associated
with transporting and handling the inventory.
2. Net realizable value (NRV) - The value an organization would expect to
receive for the inventory in the current environment less any costs
associated with selling the inventory
3. Normal profit – The profit an organization would receive for the
inventory if sold at its “regular” market price (i.e., the market price in an
environment where the organization is experiencing normal business
conditions)
4. The inventory’s market value is generally the replacement cost as defined
above, but can be no higher than the ceiling and no lower than the floor.
a. Ceiling – The NRV of the inventory item
b. Floor – The NRV of the inventory less the normal profit of the
inventory
H. Illustration: Lower of Cost or Market
1. Product A
a. The replacement cost of 43 is between the ceiling of 54 and the
floor of 42, so the market value is replacement cost of 43.
b. The cost of 40 is lower than the market of 43, so LCM values
inventory at 40.
2. Product B
a. The replacement cost of 52 is higher than the NRV ceiling of 40, so
the market value is 40.
b. The market value of 40 is lower than cost of 50, so LCM values
inventory at 40.
3. Product C
a. The replacement cost of 48 is lower than the floor of 59, so
market value is 59.
b. The cost of 50 is lower than market value of 59, so LCM values
inventory at 50.
4. Product D
a. The replacement cost of 50 is between the ceiling of 57 and the
floor of 44, so the market value is the replacement cost of 50.
b. The cost of 40 is lower than market value of 50, so LCM values
inventory at 40.
5. Product E
a. The replacement cost of 55 is higher than the ceiling of 40, so the
market value is NRV of 40.
b. The market value of 40 is less than the cost of 60, so LCM values
the inventory at 40.
4. Many organizations conduct inventory counts either at year-end or at various times
during the year. Inventory counting errors affect the organization's asset value and
income depending on the nature of the inventory errors.
A. If inventory has been under-counted (real inventory value > counted inventory
value), the following impact occurs.
1. Ending inventory is adjusted to below actual.

2. Cost of sales is higher than actual.

3. Net income will be lower than actual.
4. The entry to correct for under-counted inventory before the books are
closed is shown below.

B. If inventory is over-counted (counted inventory value > real inventory value), the

following impact occurs.
1. Ending inventory is adjusted to above actual.

2. Cost of sales is lower than actual.

3. Net income will be higher than actual.
4. The entry to correct for over-counted inventory before the books are
closed is shown below.

C. In the event that an inventory error is discovered after the organization's books
are closed for a given year, the error correction becomes a prior-period
adjustment.
1. Prior-period adjustments replace the Cost of Goods Sold account with
Retained Earnings since any balances in Cost of Goods Sold are ultimately
closed to Retained Earnings as part of the closing process.
 2. The entry to correct for previously under-counted inventory is shown
below.

3. The entry to correct for previously over-counted inventory is shown

below.

5. Changing inventory costing methods is a significant accounting change.

A. If an organization changes its inventory costing method, it will be required to
disclose the change and restate prior-period financial statements to reflect the
change as of the beginning of the period presented.
B. Organizations constantly changing accounting methods are generally considered
to have lower quality of earnings and will see their value discounted by investors
who are not as trusting of financial results.

Practice Question
T Company has discovered an inventory error that needs to be adjusted. List the journal entries
that should be made to correct the error under the following unrelated circumstances:

1. In April 20X3, T Company discovers that inventory was overstated by $10,000 on the
20X2 books. This error was found after the 20X2 books were already closed.
2. Prior to the closing of the 20X2 books, T Company discovers that their 20X2 Inventory
was overstated by $8,000 due to a counting error.

Answer

1. This is an example of a prior-period adjustment. Prior-period adjustments are not made

directly to Cost of Goods Sold; rather the adjustment is made to Retained Earnings. In
this case, inventory for 20X2 was overstated. If inventory was overstated, Cost of Goods
Sold would have been understated and net income would have been overstated. The
following entry is needed to correct the error:
 2. Because the books have not been closed for the year, this adjustment can be made
directly to the Cost of Goods Sold account to correct it. If the Inventory balance was
over-counted, the Cost of Goods Sold account would need to be increased; otherwise
the Net Income would be overstated. These accounts can be corrected with the
following entry:

Summary
Many organizations carry inventory to deliver goods to their customers. These organizations
will evaluate all costs associated with inventory and decide whether to include it as inventory or
to expense as an operating expense. Additionally, when accounting for inventories,
organizations must decide whether to use a periodic system (costs associated with inventory
are not recorded to inventory until the end of the period) or a perpetual system (costs
associated with inventory are recorded continuously throughout the year). There are four
common methods to account for inventory: specific identification; first-in, first-out; last-in, last-
out; and average cost. Decreasing market value, physical inventory counts, and a change in
inventory costing methods can all have an impact on inventory and must be accounted for
when such instances occur.
SLIDES
Notes

1
 Study Guide
LIFO is not allowed under International Financial Reporting Standards (IFRS). Only specific
identification, FIFO, and average cost methods are allowed.
2
 Study Guide
Gross margins and net income for organizations using LIFO will be higher than organizations
using average costing or FIFO.
3
 Study Guide
When an organization uses either the LIFO or Retail Method cost flow assumptions, inventory
should be written down to market using the Lower of Cost or Market (LCM) principle.
FLASHCARDS
What is the periodic inventory valuation method?
Precise records are not kept at the moment of sale. Instead, the entity determines how much it
spent on acquiring new inventory (including transportation in and discounts taken) and uses
this in conjunction with ending inventory and beginning inventory to determine COGS.
How is Cost of Goods Sold calculated under the periodic inventory valuation method?

 Beginning Inventory + Transportation In + Purchases − Purchase Returns and Allowances 

− Purchase Discounts = Goods Available for Sale
 Goods Available for Sale − Ending Inventory = Cost of Goods Sold

What is the perpetual method of inventory valuation?

The organization records any amounts associated with inventory purchases and sales directly to
the inventory account when transactions take place throughout the year. This method allows
companies to match the cost of sales and inventory transactions more closely with their sales
and expenditures throughout the year. A perpetual inventory method is required for a moving
average costing system.
Describe the four common methods to account for the cost of raw materials and merchandise
inventory.

 Specific Identification Method: Common for organizations with unique finished goods.

Assigns actual costs to specific goods.
 First-in, First-out (FIFO): The goods purchased first are expensed as cost of sales first.
 Last-in, First-out (LIFO): The goods purchased last are expensed as cost of sales first.
 Average Cost: Cost of Goods Sold is based on a moving average cost per unit. As goods
are purchased or moved from raw materials to inventory, average unit costs are
recalculated.

What are some factors that might influence the choice of inventory costing method?

 FIFO generally reflects the actual physical flow of goods better.

 LIFO is not allowed under International Financial Reporting Standards.
 If there is an inflationary environment, LIFO will have higher cost of sales, so the gross
margins and net income will be lower, but the income tax liability will also be lower.
 If there is a deflationary environment, LIFO will have lower cost of sales, so it will have
higher gross margins, net income, and income tax liability.

What is the lower of cost or NRV principle?

Used for inventory valued using most cost flow assumptions, excluding LIFO and Retail Method.
Inventory is carried at net realizable value (NRV) if it is determined to be less than the historical
cost of inventory. NRV is the value an organization would expect to receive in the current
market, less any costs associated with selling the inventory.

Some factors that could cause the NRV of inventory to decrease:

 New technology.
 Fire or other natural disasters that damage or destroy inventory.

What is the lower of cost or market principle?

Only used for inventory valued with LIFO or Retail Method cost flow assumptions.

Inventory is carried at market if it is determined to be less than the historical cost of inventory.

Market is generally replacement cost, but can be no higher than NRV (ceiling) and no lower
than NRV less is normal profit margin (floor).

Some factors that could cause the NRV of inventory to decrease:

 New technology.
 Fire or other natural disasters that damage or destroy inventory.

Question 1 
aq.inv.001_1802
Jonestown Company operates in an inflationary environment and sells luxury cars. Jonestown
intends to decrease its tax burden by using LIFO for its inventory pricing method. Under which
of the following circumstances would the tax-reducing implications of LIFO be mitigated?
The products Jonestown sells are generally unaffected by inflationary pressure.
Jonestown indexes its prices to inflation.
Jonestown's competitors use specific identification of inventory.
The weighted average cost method produces costs that are typically 70% of the LIFO
costs.
 This Answer is Correct
This answer is correct. If the luxury goods are not affected by the inflationary pressure, then the
prices would generally be similar between FIFO and LIFO, reducing the tax implications of LIFO.
Question 2 
aq.inv.002_1802
The management accountant of Clifford Products has decided to value inventory using last in,
first out (LIFO) to reduce its tax expense. Under which of the following situations can the
decision of the management accountant go wrong?
 When the LIFO balance is the same as the FIFO balance due to stable costs.
When the prices are rising and inventory quantities on hand are decreasing.
When LIFO includes inventory holding gains in the net income.
When the company uses LIFO only for external financial reporting and average cost
method for internal reporting.
 This Answer is Correct
This answer is correct. During rising prices, a reduction in inventory quantities results in higher
levels of income because lower cost (older) inventories are being sold at higher prices, thereby
increasing the tax expense. Hence, reducing inventory quantities can reduce the benefits of
valuation of inventory using LIFO.
Question 3 
aq.inv.003_1802
Sandra Bellucci, a financial analyst, is analyzing inventory of companies from four different
industries: consumer goods, sports goods manufacturers, electronics, and aircraft
manufacturers. Assuming that the inventory valuation methods reflect the actual flow of
inventory and the inventory includes finished goods only, which of the following industries will
most likely have similar costs under both FIFO and LIFO?
Consumer goods
Sports goods
manufacturers
Electronics
Aircraft manufacturers
 This Answer is Correct
This answer is correct. Since this industry deals with high-value and customized orders, the
production usually starts after the order is received. Since there will not be any equipment lying
in inventory, the inventory balance will be zero, irrespective of the method of valuation used.
Therefore, the inventory costing method would not create any differences in COGS.
Question 4 
aq.inv.004_1802
Trans Co. uses a perpetual inventory system. The following are inventory transactions for the
month of January:
1/1 Beginning inventory 10,000 units at $3
1/5 Purchase 5,000 units at $4
1/15 Purchase 5,000 units at $5
1/20 Sales at $10 per unit 10,000 units
Trans uses the average pricing method to determine the value of its inventory. What amount
should Trans report as cost of goods sold on its income statement for the month of January?
$30,000
 $37,500
$40,000
$100,000
 You Answered Correctly!
This answer is correct. The requirement is to determine the amount of cost of goods sold.
    # Units Price Total Cost
1/1 Beg. Inv. 10,000 $3 $30,000 
1/5 Purchase 5,000 $4 $20,000 
1/15 Purchase 5,000 $5 $25,000
  Total 20,000   $75,000 
The weighted-average pricing method is $75,000 ÷ 20,000 units = $3.75 per unit. The number of
units sold times the cost per unit equals cost of goods sold (10,000 units × $3.75 per unit = 
$37,500). Therefore, this is correct.
Question 5 
aq.inv.005_1802
Bowman Devices values its inventory using last in, first out (LIFO) method. For the current year,
the inventory usage exceeded the purchases. Assuming inventory costs are falling, and all else
is constant, how will this situation affect the income statement for the year?
Taxes will be higher.
Net income will be lower.
Net income will be higher.
Cost of Goods Sold will be
lower.
 You Answered Correctly!
This answer is correct. If usage of goods exceeds purchases during a period, inventory levels are
decreasing and older costs are passing through to COGS. If prices (costs) are falling, then the
older costs per unit are more expensive than the cost per unit of purchases made this period.
This situation results in higher COGS and lower income levels being reported and likely lower
taxes as well.
Question 6 
aq.inv.006_1802
Loft Co. reviewed its inventory values for proper pricing at year-end. Loft values its inventory
using FIFO. The following summarizes two inventory items examined for the lower of cost or
net realizable value:
  Inventory Item #1 Inventory Item #2
Original cost  $210,000 $400,000
   Inventory Item #1 Inventory Item #2
Replacement cost $150,000 $370,000
Selling price $240,000 $410,000
Selling price less disposal costs $208,000 $405,000
What amount should Loft include in inventory at year-end if it uses the total of the inventory to
apply the lower of cost or net realizable value?
$520,000
$610,000
$613,000
$650,000
 You Answered Correctly!
This answer is correct. When evaluating total inventory, only the total is evaluated for the lower
of cost or net realizable value, not the individual inventories that make up the total. If Loft uses
the total of the inventory to apply the lower of cost or net realizable value method, it must
compare the original cost of $610,000 ($210,000 + $400,000) to the net realizable value of the
inventory (the selling price less disposal costs) of $613,000 ($208,000 + $405,000). The total
replacement cost of the inventory and the selling price alone are not relevant. The lower of net
realizable value of $613,000 compared with the original cost of $610,000 is the cost of
$610,000.
Question 7 
aq.inv.007_1802
During year 4, Olsen Company discovered that the ending inventories reported on its previous
three years’ financial statements were understated as follows:
Year Understatement
Year 1 $50,000
Year 2 $60,000
Year 3 $0
Olsen ascertains year-end quantities on a periodic inventory system. These quantities are
converted to dollar amounts using the FIFO cost flow method. Assuming no other accounting
errors, Olsen's retained earnings at December 31, Year 3, will be:
Correct, not overstated or
understated.
$ 60,000 understated.
$ 60,000 overstated.
$110,000 understated.
 This Answer is Correct
This answer is correct. If ending inventory is understated, cost of goods sold is overstated, and
net income is, therefore, understated. The opposite is true for beginning inventory. Since
ending inventory of one period is the beginning inventory of the next period, errors in inventory
determination affect income for only two consecutive periods. Thus, the error in Year 1 will be
offset in Year 2, and the error in Year 2 will be offset in Year 3. Since ending inventory is correct
in Year 3, retained earnings for Year 3 will be correct even though Year 3 net income was
overstated. This is summarized in the following table:
  Year 1 Year 2 Year 3
Net Income 50,000 under *10,000 under 60,000 over
Retained Earnings 50,000 under 60,000 under -0-
* Y2 NI $10,000 under = $50,000 over + $60,000 under.
Question 8 
aq.inv.008_1802
Warner Machines missed recording an end-of-year $10,000 inventory purchase on account in
the current year's financial records. While finalizing the financial statements after the inventory
was located during the year-end count, the company's accountant detected the error and
attempted to correct it. Under which of the following situations will the company report lower
than actual net income?
The accountant has increased inventory and reduced cash by $10,000.
The accountant has increased cost of goods sold and increased accounts payable by
$10,000.
The accountant has increased inventory and accounts payable by $10,000.
The accountant has reduced accounts payable and inventory by $10,000.
 You Answered Correctly!
This answer is correct. When the company misses recording a purchase but includes the
purchase as part of cost of goods sold (COGS) in the income statement, COGS will be overstated
and the net income will be understated. The missing $10,000 should have been included both
in ending inventory and in accounts payable, which would appropriately result in the COGS
being unaffected. The net income is incorrect in this scenario.
Question 9 
aq.inv.009_1802
In a period of rising prices, which of the following inventory valuation methods will most likely
have the lowest tax expense, all else equal?
LIFO
FIFO
Weighted Average
Specific
Identification
 This Answer is Correct
This answer is correct. In a period of rising prices, LIFO expenses the most recent, and hence
highest, costs. This results in higher COGS, lower income, and lower income tax expense.
Question 10 
aq.inv.010_1802
Which of the following inventory valuation methods cannot be used for IFRS purposes?
FIFO
LIFO
Weighted Average
Specific
Identification
 This Answer is Correct
This answer is correct. This method cannot be used for IFRS purposes.
Question 11 
aq.inv.011_1809
Which of the following inventory cost flow assumptions would require the application of the
Lower of Cost or Market (LCM) principle?
FIFO
LIFO
Weighted Average
Specific
Identification
 This Answer is Correct
This answer is correct. This cost flow assumption uses Lower of Cost or Market.