 In this presentation, we will take a look at multiple choice questions related to inventory and cost flow. First question, methods of assigning cost to inventory include all except a specific identification, b retail method, c first and first out method, or FIFO method, d weighted average method, and e last in first out or LIFO method. So we'll read these through again, see if we can eliminate any of them. Question, methods of assigning cost to inventory include all except a specific identification. That is going to be an inventory method we typically will use. It's not going to be a flow method. It's going to be when we specifically identify the inventory, typically if there are large inventory or inventory that's different in nature from each other, non-hormogenous. B retail method. That, you know, it doesn't really, it doesn't really sound right to me. So let's see what else we got. C first in first out method. We know that that's going to be clearly a method that we would be using. So that will not be it. D weighted average method. That's clearly a method that is a flow method that belongs in the list here. E last in first out method. Also a method that we have dealt with here. So these should all sound very familiar. We spend a lot of time with that specific in this kind of section. This specific identification may be the one that you don't recognize quite as much, even though it might be the default that most people think about it. They're non dealing with accounting and that would be the one because we specifically identify the inventory that we sold. Retail method isn't one of the ones that we typically are dealing with in terms of flow methods. So that's going to be the one. So the answer B one more time. Methods assigning cost to inventory include all except B retail method. Next one. Next question. Understanding ending understating ending inventory will cause a an understatement of assets and equity B an understatement of assets and overstatement of equity C an overstatement of assets and understatement of equity D an overstatement of assets and equity E immaterial difference. Once again we'll go through this and see if we can eliminate some of the options. Understanding understating ending inventory will cause. Now one way to think about this is might be right down the accounting equation. We could say assets equal liabilities plus equity. And we're saying that if we're understating ending inventory, we understated the assets. So those are too low. Now if the accounting equation is to remain in balance and this side went down, something over here liabilities or equity must have going down. And typically the thing that would be going down on the other side is going to be the equity would go down. Because we're talking about an asset of inventory the related account being cost of goods sold. And that's going to be, you know, the difference that's going to be causing the equity to be decreasing. So if we go through these, these, this is one of those types of questions that you're going to get kind of mixed up unless you go through the thought process first and kind of then pick out the one that it's along with your thought process. So a an understatement of assets and equity. And that's that's basically what we have here assets would be clearly understated. So we know that's the case because inventory, it says inventories is being is understated. So we know that's an asset and assets are understated. The only question is what the other side is and equity seems more reasonable than liabilities. And it must be going down in order for the accounting equation to remain in balance. So I'm going to think it's it's a go through the rest of them be an understatement of assets and overstatement of equity. Again, this one seems right. But the overstatement of equity would mean that we're out of balance. If assets are understated and equities overstated, then we wouldn't be in balance. And C says an overstatement of assets and an understatement of equity. So so once again, the the overstatement of assets, it said right here that it was an understatement of inventory. So it wouldn't be an overstatement of the asset. And then D says an overstatement of assets and equity. Again, we can eliminate that because the overstatement of assets, it's not because ending inventory is understated and it's an asset. And he says immaterial difference, which maybe depends how much it was out of balance by. So that's kind of so it's going to be a here. So we're going to say a question. Once again, understate understating ending inventory will cause a an understatement of assets and equity. Next question. Understating the beginning inventory will cause a cost of good soul to be overstated and net income to be understated. B cost of good sold to be understated and net income to be overstated. C cost of good soul to be understated and net income to be understated. D revenue to be overstated and net income to be understated and E revenue to be overstated and net income to be correct. Okay, so this one note what we have here. We can't do this really with the accounting equation because both everything in the answer deals with the income statement deals with the equity side. So it's all within equities. So what we could deal with here is we're talking about inventory, the cost of good sold equation might help us out to think this through. So and this is the only real way to do this because these if you don't have any idea and you read through these these things will just you know keep you going the wrong way. Have your mind spinning or at least it does for me. So if you wanted to think through this we'd have to say the beginning inventory is the cost of good sold equation plus purchases plus purchases gives us goods available for sale minus ending inventory and that gives us the cost of goods sold. So what we're saying here is that understating the beginning inventory, beginning inventory is understated what's going to be the effect on the rest of this equation. So if beginning inventory is too low lower than actual and we add it to the purchases that happen that's what we have available for sale it being too low and then we subtract that out the cost of good sold then the cost of good sold too would be too low. So we'd have to say cost of good sold is too low. Now the other thing there that we know if is the cost of good sold is low we know that net income is calculated as revenue minus expenses including cost of good sold. So now we're going to say that cost of good sold included is an expense and it's too low so that would mean that revenue is going to be too high or net income is going to be too high. So let's think through that one more time and these can get easy to get mixed up on this cost of good sold we're saying understating the beginning inventory beginning inventory is too low beginning inventory plus purchases gives us cost of good gives us cost of goods available for sale and it's too low if we subtract out ending inventory from that then the cost of good sold is going to be understated. If cost of good sold is understated then we can say well what's going to be the impact on net income well revenue minus expenses cost of good sold being an expense is net income revenue is what it is net expenses is too low because it's cost of good sold is too low and therefore net income will be too high so net income will be too high. So if we go through these then A says cost of good sold will be overstated and net income will be understated. Now that's backwards we think cost of good sold will be understated and net income will be over so I don't think it's that one B says cost of good sold will be understated and that looks good and net income will be overstated so that looks like the one that we're looking at here C says cost of good sold will be understated that looks right and net income will be understated we think net income will be overstated so that's why that one's not it D says revenue to be overstated and revenue isn't really involved here because we're talking about inventory which means we're talking about the cost of good sold calculation and and and so revenue is not really a factor so we can pretty much eliminate D and E because they're talking revenue so B is the answer here we're once again understating the beginning inventory will cause B cost of good sold to be understated and net income to be overstated next problem understating ending inventory will cause A cost of good sold to be overstated and net income to be understated B cost of good sold to be overstated and net income to be overstated C cost of good sold to be understated and net income to be understated D revenue to be understated and net income to be overstated and E revenue to be overstated and net income to be correct so we can go through this again note that we're We're talking about pretty much all income statement accounts here again. Cost of goods sold and net income. So we can use our cost of goods sold, calculation cost of goods sold, which is beginning inventory plus purchases gives us good available for sale minus ending inventory will give us cost of goods sold. And so what we're saying now is there's understating ending inventory. So ending inventory is too low. So that means that purchases beginning inventory plus purchases is what it is minus an ending inventory that is too low, causing cost of goods sold to be too high. So cost of goods sold would be too high. And then if we if we look at net income, which is revenue minus expenses, cost of goods sold being an expense, and therefore being too high, given our last scenario, that's a terrible arrow, given what we said last time is too high. So that means that this net income will be too low. So once again, beginning inventory plus purchases minus a ending inventory that is too low results in cost of goods sold being too high. Cost of goods sold being an expense results in net income calculated as revenue minus expenses, including cost of goods sold, which is too high net income to be too low. So if we go through these then a cost of goods sold to be overstated and net income to be understated. That looks like what we have here. Let's read through the rest of them though. The cost of goods sold to be overstated, it looks right and net income to be overstated. So that looks incorrect. C says cost of goods sold to be understated, that's not right. And net income to be understated. Net income to be understated cost of goods sold cost of goods sold to be so yes cost sold is overstated and D revenue to be understated and that's dealing with revenue and again we're not really dealing with revenue this looks almost exactly the same as a might be the same problem so I don't think it's either of these two so that means that understating ending inventory will cause a cost of goods sold to be overstated and net income to be understated next question because an error in the in the period in inventory causes an offsetting error in the next period a it's not a problem b it is a timing difference c immaterial to decision making d affects only the income statement or he affects only the balance sheet so once again we'll read it off and see if we can eliminate some options because an error is the period in inventory causes an offsetting error in the next period so I think that should be an error in in period ending inventory is causing an offsetting error in the next period meaning when we have an error in one period it typically will cause a reversing or an opposite direction error in the other period if we look at the two time periods the entire period like if it's years the two-year period it would even itself out and so that's going to be the idea so one is it not a problem and you might think that it first I say well it's gonna even itself out after two years that might not be a problem and after the two-year period it may not but it does cause comparability differences when you try to compare those years because if you try to compare one year to the other and you have a significant difference even if it's a timing difference it could cause distortion in that comparison so it's still it's still a problem be be it is a timing difference that sounds it could possibly be called a timing difference let's look at the rest see a material to decision-making and it could be material again you could think well if it's going to reverse itself it's not material but if it's significant within those two time periods we don't have a good comparison so it could be material to the decision-making within those two periods once we're well past that time period then maybe it's not that significant anymore it's in the past and it's corrected itself it's okay after a certain point in time but it when we're reading those financial statements it would be it could be a material depending on the the dollar amount to the effects only the income statement and it doesn't affect only the income statement tip it's gonna have affect both the income statement and the balance sheet because it'll have cost a good sold and inventory inventory and asset cost good sold and expense inventory on the balance sheet cost good sold on the income statement so it's not that affects only the balance sheet again which same reason it's not that because it affects them both so B is going to be the answer here once again question because an error in the period and ending because an error in the period and inventory causes an offsetting error in the next period B it's a timing difference and that's just one way we can phrase this we can say it's an offsetting difference as well meaning it will work itself out the difference will reverse itself over time but can still be a problem