CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

A retail company prepares its financial statements in accordance with U.S. GAAP (generally accepted accounting principles). Its purchases and sales of inventory for its first two years of operations are listed below.

Items | First Year | Second Year
Units Purchased | 80,000 | 100,000
Unit Cost | \$8.43 | \$12.25
Units Sold | 73,000 | 78,000
Unit Selling Price | \$15.00 | \$16.00

In its second year of operation, the company's ending inventory is \$348,003. Which of the following inventory cost flow assumptions is the company most likely using?
A. LIFO
B. FIFO
C. Weighted average cost
Explanation: The company is accounting for its inventory using the weighted average cost method.

In the second year of operations, under weighted average cost:
Units available for sale include ending inventory from year 1 plus purchases for year 2: 7,000 + 100,000 = 107,000
Cost of Goods Available for Sale: 7,000 x \$8.43 + 100,000 x \$12.25 = \$1,284,000
Unit Cost: \$1,284,000/107,000 = \$12.00
End Inventory = 107,000 - 78,000 = 29,000 units. \$12.00 x 29,000 = \$348,003