MIDTERM EXAMINATION

I. Theories

1. Which of these methods of measuring the cost of sales most likely parallels the actual
physical flow of the goods?
a. LIFO
b. FIFO
c. average cost
d. specific identification

Explanation/Verification:

Specific identification is a method of finding out ending inventory cost. It requires a detailed
physical count, so that the company knows exactly how many of each goods brought on specific
dates remained at year-end inventory. When this information is found, the amount of goods is
multiplied by their purchase cost at their purchase date, to get a number for the ending
inventory cost.

In theory, this method is the best method because it relates the ending inventory goods directly
to the specific price they were bought for. However, this method allows management to easily
manipulate ending inventory cost, since they can choose to report that the cheaper goods were
sold first, therefore increasing ending inventory cost and lowering cost of goods sold. This will
increase the income.

https://courses.lumenlearning.com/boundless-accounting/chapter/valuing-inventory/

2. The weighted average inventory costing method is particularly suitable to inventory where:
a. Dissimilar products are stored in separate locations
b. The entity carries stocks of raw materials, work-in-progress and finished goods
c. Goods have distinct use-by dates and the goods produced first must be sold earliest
d. Homogenous products are mixed together

Explanation/Verification:

Which cost method to use?

The choice of method is a matter of management judgement and depends on the nature of the
inventories, the information needs of management and financial statement users, and the cost
of applying formulas. For example, the weighted average method is easy to apply and is
particularly suited to inventories where homogeneous products are mixed together, such as
iron ore or spring water. On the other hand, first-in, first-out may be a better reflection of the
actual physical movement of the goods, such as those with use-by dates where the first
produced must be sold first to avoid loss due to obsolescence, spoilage or legislative
restrictions.

Homogeneous - consisting of parts all of the same kind

https://books.google.com.ph/books?
id=lM67DwAAQBAJ&pg=PA119&lpg=PA119&dq=The+weighted+average+inventory+costing+m
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Q&hl=en&sa=X&ved=2ahUKEwiS-
rjKn9PmAhWoyIsBHXvwAp0Q6AEwCnoECAYQAQ#v=onepage&q=The%20weighted%20average
%20inventory%20costing%20method%20is%20particularly%20suitable%20to%20inventory
%20where%20Homogeneous%20products%20are%20mixed%20together&f=false

3. Generally accepted accounting principles require the selection of an inventory cost flow
method which:
a. Most closely approximates lower of cost and net realizable value for the ending inventory
b. Most clearly reflects the periodic income
c. Matches the physical flow of goods from inventory with sales revenue
d. Yield the most conservative amount of reported income

Explanation/Verification:

Accounting Methods
Under U.S. GAAP, ASC 330-10-30-9 states: Cost for inventory purposes may be determined
under any one of several assumptions as to the flow of cost factors, such as first-in first-out
(FIFO), average, and last-in first-out (LIFO). The major objective in selecting a method should be
to choose the one which, under the circumstances, most clearly reflects periodic income.

Under IFRSs, paragraph 23 of IAS 2 requires the use of a specific identification inventory costing
method for "items that are not ordinarily interchangeable and [for] goods or services produced
and segregated for specific projects." For inventory items not covered by paragraph 23,
paragraph 25 of IAS 2 specifically requires use of the FIFO or weighted-average cost method.
LIFO is explicitly not permitted under IFRSs.

https://www.iasplus.com/en-us/standards/ifrs-usgaap/inventories

4. The allowance method of recognizing bad debt expense can be applied in more than one
way. What two conditions must be met before the allowance method can be used?
Answer: Bad debts must be probable and measurable

Explanation/Verification:

Bad Debts Allowance Method

The allowance method is one of the two common techniques of accounting for bad debts, the
other being the direct write-off method. Allowance method is a better alternative to the direct
write-off method because it is according to the matching principle of accounting. In allowance
method, the doubtful debts are estimated and bad debts expense is recognized before the
debts actually become uncollectible.

Bad debts expense is recognized early because bad debts are probable and they can be
estimated to a fairly accurate extent therefore they fulfill the criteria required for recognition of
contingent losses and it is necessary to recognize bad debts expense.

https://xplaind.com/939338/bad-debts-allowance-method