CPA F3 M3 STUDY SPRING 2024
(AIAF114) EXAM QUESTIONS WITH
CORRECT ANSWERS
specific identification method - ANSWER-cost of each item in inventory is uniquely
identified (ex: VIN number)
used with physically large items or high valued items
FIFO - ANSWER-sell the old first, unsold are the newest
ending inventory and COGS are the same whether a periodic or perpetual inventory
system is used
rising prices, FIFO method results in the highest ending inventory (expenses decrease,
profit increases, RE increases which increases equity which increases higher assets)
(sell the old for cheapest, then the unsold are new and expensive)
Weighted Average Method (periodic) - ANSWER-determined by dividing the total costs
of inventory available by the total number of units of inventory available
COGAS/units available for sale
Moving Average Method (perpetual) - ANSWER-compute weighted average cost after
each purchase
LIFO (US only) - ANSWER-lower of cost or market (middle value)
does not related to actual flow of goods in a company
good for tax purposes, makes f/s look good in a rising market environment
LIFO conformity rule: if you want to use LIFO on your tax return you have to use it on
your f/s (can't mix and match)
better matches revenue and expenses because it matches current costs with current
revenues
if sales exceed production for a given period, LIFO will result in a distortion of net
income because old inventory costs (LIFO layers) will be matched with current revenue
LIFO rising price environment: expenses go up, profit goes down, less taxable income
(good on a tax return, bad on an income statement)
,LIFO layers - ANSWER-unlike FIFO, LIFO periodic doesn't equal LIFO perpetual
Dollar Value LIFO - ANSWER-estimate of changes in price levels required
dollar value lifo: inventory is measured in dollars and is adjusted for changing price
levels
price index = ending inventory at current year cost / ending inventory at base year cost
to compute the LIFO layer added in the current year at dollar value LIFO, the LIFO
layers at base cost is multiplied by the internally generated price index
Gross Profit Method - ANSWER-quarterly and periodic
used for interim f/s as a part of periodic inventory systems
inventory is valued at retail, and the average gross profit percentage is used to
determine the inventory cost for the interim f/s. The gross profit percentage is known
and is used to calculate cost of sales
Firm Purchase Commitments - ANSWER-buy stuff in the future at today's cost
legally enforceable agreement to purchase a specified amount of goods at some time in
the future
must be disclosed in either the f/s or the notes
if contract price exceeds the market price and if it is expected that losses will occur
when the purchase is actually made, the loss should be recognized at the time of the
decline in price (rule of conservatism= record loss now)
Loss on purchase commitments - ANSWER-estimated loss on purchase commitment
estimated liability on purchase commitment
equity goes down and liabilities go up, thus no change to the accounting equation
flash flood swept through Hat inc's warehouse. Acct records:
inventory 1/1 35,000
purchases: 200,000
sales: 250,000
inventory not damaged: 30,000
gross profit %: 40%
what amount of inventory was lost in the flood - ANSWER-250,000 * 60% = 150,000
beg inv: 35,000
, + purchases: 200,000
=235,000
- 150,000
=85,000
- inventory not damaged: 30,000
=55,000
Under GAAP, during periods of inflation, a perpetual inventory system would result in
the same dollar amount of ending inventory as a periodic system under which of the
following? - ANSWER-FIFO: yes
LIFO: NO
Azur Co.
purchases: 102,800
purchase discounts: 10,280
freight in: 15,420
freight out: 5,140
beg inv: 30,840
end inv: 20,560
what should Azur report as COGS? - ANSWER-beg inv: 30,840
+ purch: 102,800
- purch disc: 10,280
=123,360
+ freight in: 15,420
-end inv: 20,560
=118,220
***freight out isn't included in inventory it goes into SG&A
Nomar Co. shipped inventory on consignment to Seabright that cost 20,000. Seabright
paid 500 for advertising that was reimbursable to Nomar. At the end of the year, 70% of
the inventory was sold at 30,000. The agreement states that commission of 20% goes
to Seabright for all sales. What amount of net inventory should Nomar report? -
ANSWER-cost of consigned inventory includes the cost of inventory and any costs
needed to get the inventory in place for sale. At the end of the year 30% of the inventory
remains unsold. 30% of the original inventory is (30% * 20,000) = 6,000 still on balance
sheet as consignment
A company decided to change its inventory valuation method from FIFO to LIFO in a
period of rising prices. What was the result of the change on ending inventory and net
income? - ANSWER-Ending inventory: decrease
net income: decrease
under LIFO, ending inventory has a lower valuation that FIFO since older, lower costs
are assigned to ending inventory. Similarly, under LIFO, COGS has a higher valuation
(AIAF114) EXAM QUESTIONS WITH
CORRECT ANSWERS
specific identification method - ANSWER-cost of each item in inventory is uniquely
identified (ex: VIN number)
used with physically large items or high valued items
FIFO - ANSWER-sell the old first, unsold are the newest
ending inventory and COGS are the same whether a periodic or perpetual inventory
system is used
rising prices, FIFO method results in the highest ending inventory (expenses decrease,
profit increases, RE increases which increases equity which increases higher assets)
(sell the old for cheapest, then the unsold are new and expensive)
Weighted Average Method (periodic) - ANSWER-determined by dividing the total costs
of inventory available by the total number of units of inventory available
COGAS/units available for sale
Moving Average Method (perpetual) - ANSWER-compute weighted average cost after
each purchase
LIFO (US only) - ANSWER-lower of cost or market (middle value)
does not related to actual flow of goods in a company
good for tax purposes, makes f/s look good in a rising market environment
LIFO conformity rule: if you want to use LIFO on your tax return you have to use it on
your f/s (can't mix and match)
better matches revenue and expenses because it matches current costs with current
revenues
if sales exceed production for a given period, LIFO will result in a distortion of net
income because old inventory costs (LIFO layers) will be matched with current revenue
LIFO rising price environment: expenses go up, profit goes down, less taxable income
(good on a tax return, bad on an income statement)
,LIFO layers - ANSWER-unlike FIFO, LIFO periodic doesn't equal LIFO perpetual
Dollar Value LIFO - ANSWER-estimate of changes in price levels required
dollar value lifo: inventory is measured in dollars and is adjusted for changing price
levels
price index = ending inventory at current year cost / ending inventory at base year cost
to compute the LIFO layer added in the current year at dollar value LIFO, the LIFO
layers at base cost is multiplied by the internally generated price index
Gross Profit Method - ANSWER-quarterly and periodic
used for interim f/s as a part of periodic inventory systems
inventory is valued at retail, and the average gross profit percentage is used to
determine the inventory cost for the interim f/s. The gross profit percentage is known
and is used to calculate cost of sales
Firm Purchase Commitments - ANSWER-buy stuff in the future at today's cost
legally enforceable agreement to purchase a specified amount of goods at some time in
the future
must be disclosed in either the f/s or the notes
if contract price exceeds the market price and if it is expected that losses will occur
when the purchase is actually made, the loss should be recognized at the time of the
decline in price (rule of conservatism= record loss now)
Loss on purchase commitments - ANSWER-estimated loss on purchase commitment
estimated liability on purchase commitment
equity goes down and liabilities go up, thus no change to the accounting equation
flash flood swept through Hat inc's warehouse. Acct records:
inventory 1/1 35,000
purchases: 200,000
sales: 250,000
inventory not damaged: 30,000
gross profit %: 40%
what amount of inventory was lost in the flood - ANSWER-250,000 * 60% = 150,000
beg inv: 35,000
, + purchases: 200,000
=235,000
- 150,000
=85,000
- inventory not damaged: 30,000
=55,000
Under GAAP, during periods of inflation, a perpetual inventory system would result in
the same dollar amount of ending inventory as a periodic system under which of the
following? - ANSWER-FIFO: yes
LIFO: NO
Azur Co.
purchases: 102,800
purchase discounts: 10,280
freight in: 15,420
freight out: 5,140
beg inv: 30,840
end inv: 20,560
what should Azur report as COGS? - ANSWER-beg inv: 30,840
+ purch: 102,800
- purch disc: 10,280
=123,360
+ freight in: 15,420
-end inv: 20,560
=118,220
***freight out isn't included in inventory it goes into SG&A
Nomar Co. shipped inventory on consignment to Seabright that cost 20,000. Seabright
paid 500 for advertising that was reimbursable to Nomar. At the end of the year, 70% of
the inventory was sold at 30,000. The agreement states that commission of 20% goes
to Seabright for all sales. What amount of net inventory should Nomar report? -
ANSWER-cost of consigned inventory includes the cost of inventory and any costs
needed to get the inventory in place for sale. At the end of the year 30% of the inventory
remains unsold. 30% of the original inventory is (30% * 20,000) = 6,000 still on balance
sheet as consignment
A company decided to change its inventory valuation method from FIFO to LIFO in a
period of rising prices. What was the result of the change on ending inventory and net
income? - ANSWER-Ending inventory: decrease
net income: decrease
under LIFO, ending inventory has a lower valuation that FIFO since older, lower costs
are assigned to ending inventory. Similarly, under LIFO, COGS has a higher valuation
