Question 1: How does the FIFO method differ from the average costing method of process costing system? Provide an example of FIFO.
Question 2: You own Widgets 'R Us and are preparing your year-end financial statements.
a) What inventory system do you use and why? What are its advantages and disadvantages?
b) What activities should you perform to correctly account for your inventory at year-end?
c) Why is it important to track inventory? What does this information tell you about your business?
Question 3: For each of the following situations, indicate whether FIFO, LIFO, or weighted average applies.
a) In a period of rising prices, net income would be highest.
b) In a period of rising prices, cost of goods sold would be highest.
c) In a period of rising prices, ending inventory would be highest.
d) In a period of falling prices, net income would be highest.
e) In a period of falling prices, the unit cost of goods would be the same for ending inventory and cost of goods sold.
Question 4: Mix Co. started the year with no inventory. During the year, it purchased two identical inventory items. The inventory was purchased at different times. The first purchase cost $1,200 and the other, $1,500. One of the items was sold during the year.
Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory on the year-end financial statements, assuming use of
a) FIFO?
b) LIFO?
c) Weighted Average?
Question 5: Some say that Bernard L. Madoff is the biggest financial fraud in history. The New York Times gives us some background on Mr. Madoff
"For Bernard L. Madoff, there was also his multimillion-dollar private foundation that doled out money to hospitals and theaters. Indeed, through his charity work at places like the Gift of Life Bone Marrow Foundation or his public service at institutions like Yeshiva University, where he served on the board, Mr. Madoff seemed to have created a stainless persona of integrity and trust. And that fit with his rate of return, which was never attention-grabbing, just solid 12-13 percent year in, year out."
How did Mr. Mandoff keep his new investments at such a high rate of return and keep paying off investors and giving to charities? How was he able to do what he did financially for so long?