ACC 250 · Chapter 7 Review Name: ______________________

ACC 250 · Introduction to Financial Accounting

Chapter 7 — Review Questions

Four questions on inventory costing methods,
then the lecture’s fifty units, first under FIFO and then under LIFO.

Fall 2026

Inventory management

Q1

Which statement about managing inventory is correct?

  1. AHolding more inventory always increases net income, because more goods are available to sell.✘
  2. BDamaged or obsolete inventory lowers expenses, because it no longer has to be stored.✘
  3. CThe amount of inventory a company holds has no effect on its expenses.✘
  4. DHolding too little inventory can cause stockouts, which lower revenues.✔
  5. EHolding too much inventory lowers expenses, because the goods were bought in bulk.✘

D. A shelf that runs empty loses sales, so too little inventory lowers revenues. Too much has a cost as well: storing and insuring it raises expenses (E, A), and goods that are damaged, expired or obsolete cannot be sold, which raises expenses too (B).

Cost flow assumption

Q2

What does a company’s choice of inventory costing method (specific identification, FIFO or LIFO) decide?

  1. AHow the cost of goods available for sale is split between Cost of Goods Sold and Ending Inventory.✔
  2. BWhich units physically leave the warehouse first.✘
  3. CHow much cash the company pays its suppliers for inventory.✘
  4. DHow much the company paid for the goods it had available for sale.✘
  5. EWhether the company uses the periodic or the perpetual inventory system.✘

A. The method is a cost flow assumption: it decides which costs are assumed to be sold, not which boxes actually ship (B). Cash paid (C) and the cost of goods available for sale (D) are fixed by the purchases before any method is applied.

Specific identification

Q3

A jeweler had three rings in inventory that cost $400, $550 and $900. It sold the $400 ring and the $900 ring. Under specific identification, what is its Cost of Goods Sold?

  1. A$550✘
  2. B$950✘
  3. C$1,300✔
  4. D$1,450✘
  5. E$1,850✘

C. Specific identification uses the cost of the units actually sold: $400 + $900 = $1,300. The $550 ring (A) is what stays in Ending Inventory. High-value items with their own cost, such as cars, jewelry and real estate, are where this method is used.

LIFO · ending inventory

Q4

Under LIFO, which units are assumed to remain in Ending Inventory?

  1. AThe units bought most recently.✘
  2. BThe units bought first, the oldest units.✔
  3. CThe units with the highest cost.✘
  4. DThe units with the lowest cost.✘
  5. EA mix with each unit at the average cost of all units.✘

B. LIFO assumes the last units bought are the first units sold, so the ones left over are the first units bought. Their cost, high (C) or low (D), plays no part in the assumption.

Q5–Q8 · Fifty units under FIFO

Q5–Q8

A company uses the periodic inventory system. On October 1 it had 10 units in inventory that cost $7 each. It bought 30 units at $8 each on October 3 and 10 units at $10 each on October 5. On October 6 it sold 35 units for $20 each. Using FIFO, fill in each amount; the last digit, 0, is printed, so $410 is written as 41.

  1. Q5Cost of goods available for sale.$410
  2. Q6Cost of Goods Sold.$270
  3. Q7Ending Inventory.$140
  4. Q8Gross profit.$430

41, 27, 14, 43. The goods available cost 10 × $7 + 30 × $8 + 10 × $10 = $410. FIFO assumes the oldest 35 units were sold: 10 × $7 + 25 × $8 = $270, leaving $410 − $270 = $140. Revenue is 35 × $20 = $700, so gross profit is $700 − $270 = $430.

Q9–Q12 · Fifty units under LIFO

Q9–Q12

A company uses the periodic inventory system. On October 1 it had 10 units in inventory that cost $7 each. It bought 30 units at $8 each on October 3 and 10 units at $10 each on October 5. On October 6 it sold 35 units for $20 each. Using LIFO, fill in each amount; the last digit, 0, is printed, so $410 is written as 41.

  1. Q9Cost of goods available for sale.$410
  2. Q10Cost of Goods Sold.$300
  3. Q11Ending Inventory.$110
  4. Q12Gross profit.$400

41, 30, 11, 40. The goods available cost 10 × $7 + 30 × $8 + 10 × $10 = $410. LIFO assumes the newest 35 units were sold: 10 × $10 + 25 × $8 = $300, leaving $410 − $300 = $110. Revenue is 35 × $20 = $700, so gross profit is $700 − $300 = $400.

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