Question

Which of the following statements regarding inventory is (are) true?
I. For a merchandising company, the cost of goods available for sale minus the cost of goods sold will equal ending inventory.
II. The LIFO inventory cost flow assumption is preferable to FIFO for a company wishing to maximize profits during a period of declining costs.
III. A company which ships finished goods FOB destination will keep the inventory in its accounting records up until the point that the goods are delivered to a common carrier acting as an agent for the buyer.

Answer 1

Answer:

I. For a merchandising company, the cost of goods available for sale minus the cost of goods sold will equal ending inventory.

II. The LIFO inventory cost flow assumption is preferable to FIFO for a company wishing to maximize profits during a period of declining costs.

Explanation:

As we know, The total goods available for sale = Finished Goods

These are part of inventory out of it if some goods are actually sold then these are deducted from goods available for sale and then the figure represents closing inventory.

As goods available for sale = Opening finished goods + goods manufactured and completed

Also in statement 2

Under LIFO the goods purchased latest are sold first, that is in case of declining cost, they will be sold first.

But if we shift that system to FIFO the inventory which is acquired first that is the oldest inventory will be sold first and accordingly the newly acquired inventory which is apparently of low cost will be sold later with good margin.

Thus, statement 1 and 2 are correct.