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

Which of the following is directly impacted by the selected inventory costing method (e.g., FIFO, LIFO, or Weighted Average) in financial statements?

Accounts Receivable and Sales Revenue

Depreciation Expense

Cash Flows from Financing Activities

Cost of Goods Sold and Net Income

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Verified step by step guidance

Understand the inventory costing methods: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average. These methods determine how inventory costs are allocated to Cost of Goods Sold (COGS) and ending inventory.

Recognize that the choice of inventory costing method directly impacts the Cost of Goods Sold (COGS) reported on the income statement. For example, under FIFO, older inventory costs are used for COGS, while under LIFO, newer inventory costs are used.

Understand that changes in COGS affect Net Income. Since Net Income is calculated as Revenue minus Expenses (including COGS), a higher COGS will reduce Net Income, while a lower COGS will increase Net Income.

Note that Accounts Receivable, Sales Revenue, Depreciation Expense, and Cash Flows from Financing Activities are not directly impacted by the inventory costing method. These items are influenced by other factors unrelated to inventory valuation.

Conclude that the selected inventory costing method primarily impacts Cost of Goods Sold and Net Income, as these are directly tied to how inventory costs are allocated in financial statements.