Question

Gain B3-INVENTORY CHOICE AND FINANCIAL REPORTING (9 points, 3 points each) Answer the following questions related to the accounting for inventory and the impact on your financial reporting. 1) Inventory costs are decreasing. Which inventory cost flow assumption method would result in the highest net income, and why? 2) Suppose your ending inventory count was overstated in Year 1. What is the impact on your Cost of Goods Sold during Year 2, assuming that the ending inventory count during Year 2 is accurate? Explain. 3) Your intern has taken Introductory Financial Accounting and he tells you that "specific identification" is the best inventory cost flow assumption method because it is the most "accurate". Comment on his statement, including what are the benefits and limitations of "specific identification"

Answer 1

Que.1
Ans:
LIFO
Reason: Assuming the sales price is constant, with the decrease in inventory cost, to yield
more profit it is advisable to use LIFO, as the recent purchases cost will be less than
the earlier purchases cost.
Que.2
Ans:
COGS will be higher during year 2
Reason: Lets understand with an example:
	Year 1	Year 2
Opening stock	10000	20000
Purchases	15000	15000
COGS	8000	27000
Closing stock	20000	8000
In year 1 instead 17000 closing stock reported as 20000 (Overstated 3000)
In year 2 as specified in the question ending inventory reported correctly.
So, COGS of year 2 overstated by 3000 due to ending inventory of year 1 overstated.
Que.3
Ans:
Benefits of specific identification method:
(a)Net income can be identified easily
(b)COGS can be more accurate than other methods
(c)Lowest cost inventory can be easily be selected for the purpose of sale.
Limitation of specific identification method:
(a) This method is little complicated for small business, as it imposes to allocate separate
code for each inventory,thus it is not possible in some cases.