Chapter 6: Inventory Costing: FIFO, LIFO & Average

CHAPTER 6 — PRACTICE WORKSHEET

Inventory Costing: FIFO, LIFO & Average · work it on paper, then check yourself

Try every exercise on paper BEFORE you check the answers. The attempt is where it sticks.

The exercises

1. Exercise 1 — The inventory split

Brightwood Traders had beginning inventory of $1,000 and net purchases of $9,600. A physical count values ending inventory at $2,650.

a
Cost of goods available for sale
b
Cost of goods sold (goods available − ending inventory)

2. Exercise 2 — Which goods are yours?

Decide whether each item belongs in the company's year-end inventory.

a
Goods you bought FOB shipping point, still in transit at year-end:
a) Include — you own them once shipped b) Exclude — the seller still owns them
b
Goods you sold FOB destination, still in transit at year-end:
a) Include — you still own them until delivery b) Exclude — the buyer already owns them
c
Goods you hold on consignment for another company:
a) Include — they're on your premises b) Exclude — the consignor owns them

3. Exercise 3 — Correct the count

Ridgeline Co. counted $95,000 of goods on hand. That count mistakenly includes $9,000 of goods held on consignment for another firm. Not counted: $6,000 of goods purchased FOB shipping point still in transit.

a
Correct inventory (remove consigned, add in-transit purchase)

4. Exercise 4 — Specific identification

A dealer holds three identical-looking machines that cost $200, $250, and $300. It sells the one that cost $250.

a
Cost of goods sold
b
Ending inventory

5. Exercise 5 — Periodic FIFO, LIFO & average (anchor)

Brightwood Traders (periodic): available 800 units for $10,600 — 100 @ $10, 200 @ $12, 300 @ $14, 200 @ $15. It sold 600 units; 200 remain.

a
FIFO ending inventory (last 200 units)
b
FIFO cost of goods sold
c
LIFO ending inventory (first 200 units)
d
LIFO cost of goods sold
e
Average cost per unit (dollars, 2 decimals)
f
Average-cost ending inventory

6. Exercise 6 — Periodic FIFO

Cedar Peak Supply (periodic): available 400 units for $10,000 — 100 @ $21, 100 @ $24, 100 @ $27, 100 @ $28. It sold 300 units; 100 remain.

a
FIFO ending inventory (last 100 units)
b
FIFO cost of goods sold

7. Exercise 7 — Periodic LIFO

Same Cedar Peak Supply data: available 400 units for $10,000 (100 @ $21, 100 @ $24, 100 @ $27, 100 @ $28); 100 units remain.

a
LIFO ending inventory (first 100 units)
b
LIFO cost of goods sold

8. Exercise 8 — Periodic average-cost

Same Cedar Peak Supply data: available 400 units for $10,000; sold 300, 100 remain.

a
Average cost per unit (dollars)
b
Average-cost ending inventory
c
Average-cost cost of goods sold

9. Exercise 9 — Perpetual FIFO

Perpetual records: Jan 1 begin 100 @ $10; Jan 8 buy 200 @ $12; Jan 12 sell 150; Jan 20 buy 100 @ $15; Jan 28 sell 100. Goods available = $4,900.

a
Cost of the Jan 12 sale under FIFO (100 @ $10 + 50 @ $12)
b
Cost of the Jan 28 sale under FIFO (100 @ $12)
c
Total FIFO cost of goods sold
d
FIFO ending inventory (4,900 − COGS)

10. Exercise 10 — Perpetual LIFO

Same perpetual data (Jan 1 100 @ $10; Jan 8 200 @ $12; sell 150; Jan 20 100 @ $15; sell 100; available $4,900).

a
Cost of the Jan 12 sale under LIFO (150 @ $12)
b
Cost of the Jan 28 sale under LIFO (100 @ $15)
c
Total LIFO cost of goods sold
d
LIFO ending inventory (4,900 − COGS)

11. Exercise 11 — Perpetual moving-average

Same perpetual data. Recompute the average after each purchase.

a
Average unit cost after the Jan 8 purchase (3,400 ÷ 300, 4 decimals)
b
Cost of the Jan 12 sale (150 units at that average)
c
New average after the Jan 20 purchase (3,200 ÷ 250)
d
Total moving-average cost of goods sold (1,700 + 1,280)

12. Exercise 12 — Which method? (rising prices)

Prices are rising during the period. Match each 'highest/lowest' to a method.

a
Highest net income:
a) FIFO b) Average c) LIFO
b
Lowest income taxes:
a) Average b) LIFO c) FIFO
c
Highest ending inventory:
a) LIFO b) They are equal c) FIFO
d
Best approximates current cost on the BALANCE SHEET:
a) FIFO b) Specific identification c) LIFO

13. Exercise 13 — Lower-of-cost-or-market

Applying LCM item by item: Item A — 100 units, cost $50, market $45. Item B — 200 units, cost $30, market $35.

a
Item A at LCM (lower of cost or market × units)
b
Item B at LCM
c
Total inventory at LCM
d
The write-down needed
e
Record the LCM write-down.
Accounts available: Cash · Accounts Receivable · Inventory · Accounts Payable · Sales Revenue · Cost of Goods Sold

14. Exercise 14 — Inventory errors

At year-end 1, ending inventory is UNDERSTATED by $10,000.

a
Effect on year 1 cost of goods sold:
a) No effect b) Overstated c) Understated
b
Effect on year 1 net income:
a) No effect b) Overstated c) Understated
c
By how many dollars is year 1 net income misstated?
d
Effect on year 2 net income (the error reverses):
a) Overstated b) No effect c) Understated

15. Exercise 15 — Gross profit method

Silver Creek Co. needs an interim inventory estimate. Beginning inventory $30,000; net purchases $170,000. Net sales are $250,000 and the normal gross profit rate is 30%.

a
Cost of goods available for sale
b
Estimated cost of goods sold (net sales × (1 − 30%))
c
Estimated ending inventory

16. Exercise 16 — Gross profit method (fire loss)

A fire destroys Northwind Outfitters' inventory. Records show beginning inventory $40,000, net purchases $110,000, and net sales $180,000 to the fire date. The normal gross profit rate is 25%.

a
Cost of goods available for sale
b
Estimated cost of goods sold (net sales × 75%)
c
Estimated inventory lost in the fire

17. Exercise 17 — Retail inventory method

Maplewood Store: goods available for sale total $120,000 at cost and $200,000 at retail. Net sales for the period are $160,000.

a
Cost-to-retail ratio as a percent (whole number)
b
Ending inventory at retail (retail available − net sales)
c
Ending inventory at cost

18. Exercise 18 — Inventory turnover & days

Harbor Goods reports cost of goods sold $500,000, beginning inventory $80,000, and ending inventory $120,000.

a
Average inventory
b
Inventory turnover (times)
c
Days in inventory (365 ÷ turnover)

19. Exercise 19 — Comprehensive cost-flow (capstone)

Silverline Distributors (periodic): available 1,000 units for $6,400 — 200 @ $5, 300 @ $6, 400 @ $7, 100 @ $8. It sold 700 units (300 remain) and net sales were $7,000. Compute all three methods, then compare.

a
FIFO ending inventory (last 300: 100 @ $8 + 200 @ $7)
b
FIFO cost of goods sold
c
LIFO ending inventory (first 300: 200 @ $5 + 100 @ $6)
d
LIFO cost of goods sold
e
Average-cost ending inventory (avg $6.40 × 300)
f
Gross profit under FIFO (net sales − FIFO COGS)
g
Which method reports the highest net income here (rising prices)?
a) Average b) FIFO c) LIFO

Answers

Part of the free Accounting 1 course — Chapter 6: Inventory Costing: FIFO, LIFO & Average

ANSWERS — do not read these until you have finished

1. Exercise 1 — The inventory split

a
10,600
1,000 + 9,600 = 10,600.
b
7,950
10,600 − 2,650 = 7,950.

Solution: Goods available 10,600; cost of goods sold = 10,600 − 2,650 = 7,950.

2. Exercise 2 — Which goods are yours?

a
Include — you own them once shipped
FOB shipping point: the buyer owns the goods once shipped.
b
Include — you still own them until delivery
FOB destination: the seller owns them until they reach the buyer, so they're still yours.
c
Exclude — the consignor owns them
Consigned goods belong to the consignor, not the consignee holding them.

Solution: Include in-transit purchases (FOB shipping point) and your own in-transit sales (FOB destination); exclude consigned goods you're holding for others.

3. Exercise 3 — Correct the count

a
92,000
95,000 − 9,000 (consigned, not yours) + 6,000 (in transit, yours) = 92,000.

Solution: 95,000 − 9,000 + 6,000 = 92,000.

4. Exercise 4 — Specific identification

a
250
The specific unit sold cost $250.
b
500
The two unsold units: 200 + 300 = 500.

Solution: COGS = 250; ending inventory = 200 + 300 = 500.

5. Exercise 5 — Periodic FIFO, LIFO & average (anchor)

a
3,000
200 @ $15 = 3,000.
b
7,600
10,600 − 3,000 = 7,600.
c
2,200
100 @ $10 + 100 @ $12 = 1,000 + 1,200 = 2,200.
d
8,400
10,600 − 2,200 = 8,400.
e
13.25
10,600 ÷ 800 = 13.25.
f
2,650
200 × 13.25 = 2,650.

Solution: FIFO end 3,000 / COGS 7,600; LIFO end 2,200 / COGS 8,400; average $13.25 → end 2,650 / COGS 7,950.

6. Exercise 6 — Periodic FIFO

a
2,800
100 @ $28 = 2,800.
b
7,200
10,000 − 2,800 = 7,200.

Solution: FIFO ending 2,800; COGS 7,200.

7. Exercise 7 — Periodic LIFO

a
2,100
100 @ $21 = 2,100.
b
7,900
10,000 − 2,100 = 7,900.

Solution: LIFO ending 2,100; COGS 7,900.

8. Exercise 8 — Periodic average-cost

a
25
10,000 ÷ 400 = 25.
b
2,500
100 × 25 = 2,500.
c
7,500
300 × 25 = 7,500.

Solution: Average $25 → ending 2,500; COGS 7,500.

9. Exercise 9 — Perpetual FIFO

a
1,600
100 × 10 + 50 × 12 = 1,000 + 600 = 1,600.
b
1,200
Remaining oldest layer is $12: 100 × 12 = 1,200.
c
2,800
1,600 + 1,200 = 2,800.
d
2,100
4,900 − 2,800 = 2,100 (50 @ $12 + 100 @ $15).

Solution: FIFO: COGS 2,800; ending 2,100.

10. Exercise 10 — Perpetual LIFO

a
1,800
Newest layer is $12: 150 × 12 = 1,800.
b
1,500
Newest layer is now $15: 100 × 15 = 1,500.
c
3,300
1,800 + 1,500 = 3,300.
d
1,600
4,900 − 3,300 = 1,600 (100 @ $10 + 50 @ $12).

Solution: LIFO: COGS 3,300; ending 1,600.

11. Exercise 11 — Perpetual moving-average

a
11.33
(1,000 + 2,400) ÷ 300 = 3,400 ÷ 300 = 11.3333.
b
1,700
150 × 11.3333 = 1,700.
c
12.80
(1,700 + 1,500) ÷ 250 = 3,200 ÷ 250 = 12.80.
d
2,980
Jan 12 cost 1,700 + Jan 28 cost (100 × 12.80 = 1,280) = 2,980.

Solution: Moving-average: COGS 2,980; ending 1,920.

12. Exercise 12 — Which method? (rising prices)

a
FIFO
FIFO has the lowest COGS (oldest, cheapest costs), so the highest net income.
b
LIFO
LIFO has the highest COGS and lowest taxable income.
c
FIFO
FIFO leaves the most recent (highest) costs in ending inventory.
d
FIFO
FIFO's ending inventory carries the most recent costs.

Solution: Rising prices: FIFO → highest net income, highest ending inventory, best balance-sheet value; LIFO → lowest taxes.

13. Exercise 13 — Lower-of-cost-or-market

a
4,500
Lower is $45: 100 × 45 = 4,500.
b
6,000
Lower is $30: 200 × 30 = 6,000.
c
10,500
4,500 + 6,000 = 10,500 (vs. cost of 11,000).
d
500
Cost 11,000 − LCM 10,500 = 500.
e
Account Debit Credit
Cost of Goods Sold 500
Inventory 500
Debit Cost of Goods Sold 500; credit Inventory 500.

Account	Debit	Credit
Cost of Goods Sold	500
Inventory		500

Solution: Item A 4,500 + Item B 6,000 = 10,500; write down 500 (Dr Cost of Goods Sold / Cr Inventory).

14. Exercise 14 — Inventory errors

a
Overstated
A lower ending inventory is subtracted, so COGS is overstated.
b
Understated
Overstated COGS → understated net income.
c
10,000
Dollar-for-dollar with the inventory error: $10,000.
d
Overstated
Year 1's ending inventory is year 2's beginning inventory; understated beginning → understated COGS → overstated net income.

Solution: Year 1: COGS overstated, net income understated $10,000. Year 2: net income overstated $10,000. Self-correcting over two years.

15. Exercise 15 — Gross profit method

a
200,000
30,000 + 170,000 = 200,000.
b
175,000
250,000 × 70% = 175,000.
c
25,000
200,000 − 175,000 = 25,000.

Solution: Available 200,000; est COGS 175,000; est ending inventory 25,000.

16. Exercise 16 — Gross profit method (fire loss)

a
150,000
40,000 + 110,000 = 150,000.
b
135,000
180,000 × 75% = 135,000.
c
15,000
150,000 − 135,000 = 15,000.

Solution: Available 150,000; est COGS 135,000; estimated inventory lost 15,000.

17. Exercise 17 — Retail inventory method

a
60
120,000 ÷ 200,000 = 0.60 = 60%.
b
40,000
200,000 − 160,000 = 40,000.
c
24,000
40,000 × 60% = 24,000.

Solution: Ratio 60%; ending @ retail 40,000; ending @ cost 24,000.

18. Exercise 18 — Inventory turnover & days

a
100,000
(80,000 + 120,000) ÷ 2 = 100,000.
b
5
500,000 ÷ 100,000 = 5.
c
73
365 ÷ 5 = 73.

Solution: Average inventory 100,000; turnover 5×; days in inventory 73.

19. Exercise 19 — Comprehensive cost-flow (capstone)

a
2,200
800 + 1,400 = 2,200.
b
4,200
6,400 − 2,200 = 4,200.
c
1,600
1,000 + 600 = 1,600.
d
4,800
6,400 − 1,600 = 4,800.
e
1,920
6,400 ÷ 1,000 = 6.40; 300 × 6.40 = 1,920.
f
2,800
7,000 − 4,200 = 2,800.
g
FIFO
FIFO has the lowest COGS (4,200), so the highest gross profit and net income.

Solution: FIFO end 2,200 / COGS 4,200 / GP 2,800; LIFO end 1,600 / COGS 4,800; average end 1,920 / COGS 4,480. FIFO gives the highest net income.

optionflowtracker.com/learn/accounting-1/chapter-6/worksheet — free practice exercises, quizzes, mock exams and a quiz generator.