Question

Question 5 2 pts Simon Cereal purchased 100 pounds of cornflakes for $100. Transportation cost to Simon's production facility was $25 for the barrel of cornflakes shipped FOB destination. Simon paid $60 for 100 one pound biodegradable plastic bags into which the cornflakes were placed. The cost of each one-pound bag of cornflakes is: $1.00 $1.25. $1.60. $175. Question 6 2 pts During a year of rising prices and increasing inventory, which cost flow assumption would measure the smallest working capital ratio? FIFO LIFO Average Working capital is not sensitive to inventory cost flow assumptions.

Answer 1

Question 5	Purchase cost of cornflakes for 100 pounds	$100.00
	Transportation cost	$0.00	(Note 1)
	Packing cost	$60.00
	Total cost	$160.00
	Total pounds	100
	Cost of each pound	$1.60
Note1	Transportation cost has not been included in the costing. As purchase was FOB Destination. It means purchase cost
	$100 includes transportation of $25, hence no need to add it again.
Question 6	During the year of rising prices and increasing inventory:
	LIFO will report inventory at old prices or reduced prices resulting in UNDERSTATEMENT OF INVENTORY(current assets)
	FIFO will report inventory at new prices or increased prices resulting in OVERSTATEMENT OF INVENTORY(current asset)
	Working capial ratio is Current assets/Current liabilities
	Under LIFO current assets will be lower, because of lower valuation of inventory, hence, Working capial ratio under LIFO would be smallest.
	LIFO correct answer

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