 In this presentation we will take a look at multiple choice questions related to inventory and inventory cost flows. First question. Physical inventory counts A are not needed when using a perpetual system. B must be taken weekly. C requires the use of electronic counters. D are not necessary at all. E are necessary to adjust the inventory account to actual. Once again we'll read this off and go through to see if we can eliminate some of the items. Physical inventory counts A are not needed when using a perpetual inventory system. And now this is the one they're probably trying to get you on the most and when we use a perpetual system as opposed to a periodic the physical count serves a different purpose but we still need one and the purpose for a perpetual system is to check to see if we have any loss in inventory, inventory shrinkage, inventory damage, spoilage, things like that. So that's not going to be it. B says must be taken weekly. So physical inventory counts must be taken weekly. It really depends on the system we're going to have. We might be taking a physical inventory account daily and or even each shift possibly for employee shift or weekly or possibly monthly. So it's not the case that we have to do it monthly. It just depends you know that's kind of the system that that would rely on. So it's not B. C requires the the use of electronic counters. Requires the use of electronic counters. So that would basically imply that a physical inventory couldn't be done you know just by counting them and marking that off. Electronic counters might be needed in some types of counts but it is possible to do a traditional physical count as well. So I'm going to say that's not it. D are not necessary at all and that's that's clearly probably not true. A physical count is going to be one of our major internal controls for inventory. So we're left with E which says are necessary to adjust the inventory accounts to actual and that would be the case typically. We want to make sure that we have the physical count to adjust the inventory. So basically through the process of elimination we've got E here. Note that the physical count this might not be the first thing you thought of when you think of a physical count necessary to adjust the inventory to actual because if we're using a perpetual inventory system our inventory should be fairly accurate as we go but if there's any shrinkage or anything like that the the count will allow us to write down to the counts of the physical count is what we're going to ultimately go by and record our inventory to that. So the answer then once again physical inventory counts E are necessary to adjust the inventory account to actual. Next question which method results in the highest net income when costs rise a specific identification method b average cost method c first in first out method d weighted average method or e last in first out method. Once again which method results in the highest net income when costs rise. So we're going to go through these and try to cross some of them out and then try to think through this more specifically one a specific identification. Now specific identification means that we know exactly which item of inventory is being sold. So it really has no we don't have any control over which item is being sold. So we wouldn't really know if that would have a positive or negative income impact on the having the highest net income just depends on which items we sold and specific identification is usually used if we have large items items that are kind of unique in nature in terms of inventory. So I don't think it's going to be specific identification b average cost method. Now the average cost method because it's an average is you would think somewhere in the middle somewhere in the average somewhere between two extremes. So I'm not sure that I don't think then that the it's going to get the highest net income if we're talking about a method that's in the average method. So I'm going to say b's probably not it c says the first in first out method. That means we're going to account for things the first ones they come in are going to be the first ones we assume to go out. That one I'm going to keep there that I'm not quite sure d says weighted average method which sounds very similar to the average method and also is an average. So if it's an average once again I would think it would be not on the extreme. I think I would think that would be in the middle. So b and d sound similar which may eliminate them as a possible option and they both have averages. So I think I'm going to eliminate that as an extreme meaning the highest method with the lowest method and then e says LIFO last in first out method. So I think it's going to narrow down to c first in first out and e last last in first out. So now we got to really kind of think about it to narrow down between those two. Which method results in the highest net income when costs rise? Now I would try to memorize you're going to get these questions all the time with this topic. I would try to memorize that costs rising is the norm. Typically when we purchase inventory meaning when we purchase inventory the costs are going up over time and with that normal condition we would think that the first in first out leaves us in a favorable position makes us look better and last in first out typically makes us look worse. So just as a default kind of memorization tool that's what I would memorize this at in terms of normal rising prices the first in first out makes us look better last in first out makes us look worse. Well how can it make us look better? First in first out results in higher inventory assets. The assets would be reported higher and a lower cost of good sold which would result in a higher net income. The last in first out would result in a lower asset account for the inventory a lower cost of good sold and therefore a higher net income. So between those two you're just going to have to you know find some way to memorize that you can think through it too and try to think through the cost flow to know that if you're if you're selling the first ones first the first ones were the cheaper ones that means you're left with the more expensive ones on the balance sheet in inventory so your inventory therefore is higher under first in first out. If you're selling the cheaper ones your cost of good sold is lower that's an expense and the revenue minus the expenses then would be higher so and then the reverse would be true if we had the reverse costs going down. So the answer then is C question answer which method results in the highest net income when costs rise? C first in first out FIFO method. Next question which method smooths out cost changes? A specific identification method B first in first out method C weighted average method and I think that should be D which would be last in first out method. So once again we'll read this through and then we'll see if we can eliminate some of the options which method smooths out cost changes? A specific identification now that once again not really a cost flow assumption method we don't really have control over the flow method there it's just whatever the customer decided to pick in terms of inventory usually for larger pieces of inventory so it doesn't we really couldn't tell whether or not that's going to result in changes that will be smooth or not that we'd have to just see what which item sold and so I don't think that's going to apply we're really looking for the flow assumption methods. B says first in first out method so I'll keep that for now. C says weighted average method and and D which should say the last in first out method so of those two three methods we would think that the two extremes are first in first out and last in first out so if we're talking about something that smooths out costs I would think that would be some type of average so even if we don't know the methods I would assume that if this was a legitimate method one of the methods and it's an average type method that it would be one that would smooth out the extremes of the other methods which is the case here so first in first out we'll have the extremes in terms of the inventory and cost of goods sold amounts and the LIFO will be in the opposite extreme weighted average will typically be somewhere in the middle therefore our answer is going to be C this C is which is which method smooths out cost changes C weighted average method