CFA Practice Question

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CFA Practice Question

In your audit of the Ski Chalet Company, you find the following inventory transactions:

  • 01/01 Beginning inventory: three units, $100 each, total value $300
  • 5/20 three units purchased for $110 each, with total purchase value of $330
  • 07/18 four units purchased for $112 each, with total purchase value of $448
  • 12/31 Ending inventory: four units with a total value of $434

Which inventory method is Ski Chalet Company using?

A. Specific identification
Correct Answer: A

FIFO ending inventory would equal $448
LIFO ending inventory would equal 300 + 110 = $410
Average cost ending inventory would equal (300 + 330 + 448)/10 = $107.80. $107.8 x 4 = $431.20
The company must be using the specific identification method.
Total inventory cost = $100 + $110 + 2 x $112 = $434

User Contributed Comments 15

User Comment
haarlemmer I wonder in the exam whether time would be enough for this kind of questions.
Done It might not but I think we will have to know the short cuts to disect this type of problem quickly
tanyak What is a specific identification method anyway?
wink44 You would only know it was specific id by way of deduction (from the other answers). The question would have to mention which units were sold.
Bibhu Specific identification method of inventory accounting is commonly used to account for "big ticket" items such as jewlery, heavy equipement and cars. Under this method, each item is specifically identified, usually by serial no, and is carried in inventory as actual cost. The inventory accounting method typically employs a perpectual method to update the records and inventory values.
julescruis Good explanation Bibhu.
thekobe you dont need a lot of time to realize the method, since there are four units, lifo would have a value of 448, Fifo would have a value of 3*100 + 1*110 =410, so the only option is A
thegeneral101 yep thekobe..thats how I answered it also..just get rid of the obvious ones
moneyguy Good conceptual exercise for us. By process of elimination we can find the correct answer.
johntan1979 If you read the notes before the questions, it says that for specific id, companies may be unable to determine which items were sold and which still remains in inventory.

Meaning, it could be any combination of items of different costs that will amount to $434, and the best possible combination is one of $100, one of $110 and two of $112.
johntan1979 And if you can't find any possible combination, and none of the other methods (LIFO, FIFO, avg cost) result in the exact ending inventory amount, and the answer would be "None of the above".
tichas This question is very easy by just looking at it and applying the methods.
schweitzdm @thekobe So is the Analyst Notes answer right or wrong?

You say that LIFO would be 448, AN says it would be 410
ana2 Did you know to use one unit at $100, one unit at $110 and two units at $112 to get the ending inventory of 4 units at $434, as the best combination, because it would be the first place for us to start? Meaning, we would take at least one unit at each value and get to 434 as quickly as possible? I understand the concept, I am trying to determine the tricks to get to the best combo the fastest, if that makes sense?
ecapocas Given that I was able to solve this problem without ever picking up the calculator or pen, I guarantee there's time to solve it.

The way to solve this one quick is easy. You know there's four units left, so start running by process of elimination: look at the cost of the four first purchased and then four last purchase units to see if they match COGS. Since they don't it has to be specific identification.

Alternatively, notice that the last digit of COGS is four. The only way that could happen is if two of the last purchased items are in inventory....which means that LIFO and FIFO are both impossible.
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