Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Financial Statement Effects of Inventory Costing Methods

Financial Accounting

5. Inventory

Financial Statement Effects of Inventory Costing Methods

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Multiple Choice

The choice of inventory cost flow assumptions (such as FIFO, LIFO, or weighted average) affects which of the following amounts on the financial statements?

Cost of Goods Sold and Net Income

Accounts Receivable and Sales Revenue

Cash and Common Stock

Dividends and Retained Earnings

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Verified step by step guidance

Understand the concept of inventory cost flow assumptions: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average are methods used to determine the cost of inventory sold and the value of ending inventory. These methods impact financial statement amounts.

Recognize that Cost of Goods Sold (COGS) is directly affected by the inventory cost flow assumption chosen. For example, under FIFO, older (lower-cost) inventory is sold first, which may result in lower COGS during periods of rising prices. Under LIFO, newer (higher-cost) inventory is sold first, leading to higher COGS in the same scenario.

Understand the relationship between COGS and Net Income: Net Income is calculated as Revenue minus Expenses, where COGS is a major expense. A higher COGS reduces Net Income, while a lower COGS increases Net Income. Therefore, the inventory cost flow assumption indirectly affects Net Income.

Analyze why other financial statement items like Accounts Receivable, Sales Revenue, Cash, Common Stock, Dividends, and Retained Earnings are not directly impacted by inventory cost flow assumptions. These items are influenced by other transactions and decisions, not the method used to account for inventory costs.

Conclude that the correct answer is 'Cost of Goods Sold and Net Income,' as these are the amounts directly affected by the choice of inventory cost flow assumptions.