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Chapter 10 – Exercises & Cases

Multiple Choice Questions​

  1. Which inventory valuation method is NOT allowed in Luxembourg?
    a) FIFO
    b) Weighted Average
    c) LIFO
    d) Specific Identification
    Answer: c) LIFO (Last-In, First-Out) is not allowed in Luxembourg.

  2. In a periodic inventory system, cost of goods sold is calculated as:
    a) Beginning Inventory - Purchases + Ending Inventory
    b) Beginning Inventory + Purchases - Ending Inventory
    c) Purchases - Ending Inventory
    d) Beginning Inventory + Ending Inventory
    Answer: b) COGS = Beginning Inventory + Purchases - Ending Inventory.

  3. If ending inventory is overstated by €5,000, cost of goods sold is:
    a) Overstated by €5,000
    b) Understated by €5,000
    c) Not affected
    d) Overstated by €10,000
    Answer: b) If ending inventory is overstated, COGS is understated (by the same amount).

  4. Which PCN account is used for merchandise inventory in a retail store?
    a) 300000
    b) 310000
    c) 320000
    d) 321000

    Answer: d) 321000 is Merchandise (Marchandises) for retail inventory.

  5. Inventory turnover is calculated as:
    a) Sales ÷ Average Inventory
    b) Cost of Goods Sold ÷ Average Inventory
    c) Average Inventory ÷ Cost of Goods Sold
    d) Sales ÷ Cost of Goods Sold
    Answer: b) Inventory Turnover = Cost of Goods Sold ÷ Average Inventory.

  6. In a perpetual inventory system with FIFO:
    a) Cost is assigned only at period end
    b) Cost is assigned at each sale
    c) Physical count is required for each sale
    d) No cost tracking is needed
    Answer: b) In perpetual system, cost is assigned at each sale using FIFO.

  7. Days Sales in Inventory measures:
    a) How many times inventory turns over
    b) Average days to collect receivables
    c) Average days inventory is held
    d) Average days to pay suppliers
    Answer: c) Days Sales in Inventory measures average days inventory is held before sale.

  8. Weighted average in a perpetual system:
    a) Uses one average for the period
    b) Recalculates average with each purchase
    c) Is the same as periodic weighted average
    d) Cannot be used in perpetual system
    Answer: b) Perpetual weighted average recalculates (moving average) with each purchase.

  9. If ending inventory is understated, net income is:
    a) Overstated
    b) Understated
    c) Not affected
    d) Cannot be determined
    Answer: b) If ending inventory is understated, COGS is overstated, so net income is understated.

  10. In Luxembourg, inventory valuation methods must be:
    a) Changed frequently
    b) Consistent and disclosed
    c) Different each year
    d) Not disclosed
    Answer: b) Methods must be consistent and disclosed in financial statements.

Questions​

  1. Explain the difference between FIFO and weighted average inventory valuation methods. When might each be appropriate?

  2. Compare periodic and perpetual inventory systems. How is cost of goods sold calculated in each?

  3. If ending inventory is overstated by €3,000, what is the impact on cost of goods sold, gross profit, and net income?

  4. How is inventory turnover calculated? What does it indicate about inventory management?

  5. Explain why inventory errors are self-correcting over two periods. Why is this still a problem?

  6. What are the PCN Class 3 inventory accounts? When is each used?

  7. Why is LIFO not allowed in Luxembourg? What are the implications?

  8. How does weighted average differ between periodic and perpetual systems? Why?

  9. What factors should a business consider when choosing an inventory valuation method?

  10. How does proper inventory accounting support compliance with Luxembourg regulations?

Problems Set A​

Problem A-1: FIFO Calculation (Periodic)

Calculate cost of goods sold and ending inventory using FIFO:

  • Beginning Inventory: 100 units @ €10
  • Purchase 1: 150 units @ €12
  • Purchase 2: 200 units @ €14
  • Ending Inventory (physical count): 180 units

Problem A-2: Weighted Average (Periodic)

Using the same data as Problem A-1, calculate using weighted average method.

Problem A-3: Inventory Turnover

Calculate inventory turnover and days sales in inventory:

  • Cost of Goods Sold: €80,000
  • Beginning Inventory: €12,000
  • Ending Inventory: €18,000

Problem A-4: Inventory Error Impact

If ending inventory is overstated by €4,000, calculate the impact on: a) Cost of goods sold b) Gross profit c) Net income d) Total assets

Problem A-5: FIFO (Perpetual)

Calculate cost of goods sold using FIFO perpetual method:

  • Jan 1: Purchase 100 units @ €10
  • Jan 10: Purchase 150 units @ €12
  • Jan 15: Sell 120 units
  • Jan 20: Purchase 200 units @ €14
  • Jan 25: Sell 150 units

Problems Set B​

Problem B-1: Complete Inventory Calculation

A business has the following for the year:

Beginning Inventory: €20,000 (500 units @ €40)

Purchases:

  • March: 300 units @ €42
  • June: 400 units @ €44
  • September: 200 units @ €46

Sales: 1,200 units during the year

Ending Inventory (physical count): 200 units

Required: a) Calculate COGS and ending inventory using FIFO (periodic) b) Calculate COGS and ending inventory using weighted average (periodic) c) Compare results

Problem B-2: Perpetual FIFO

Using the same purchases as Problem B-1, but with perpetual system:

Sales:

  • April: 400 units
  • July: 500 units
  • October: 300 units

Required: Calculate COGS and ending inventory using FIFO perpetual method.

Problem B-3: Inventory Error Analysis

A business discovers that ending inventory was understated by €6,000 in Year 1.

Required: a) Impact on Year 1 financial statements
b) Impact on Year 2 financial statements
c) Total impact over 2 years
d) Why this is still a problem

Problem B-4: Inventory Management Analysis

A business has:

  • Cost of Goods Sold: €150,000
  • Beginning Inventory: €25,000
  • Ending Inventory: €35,000
  • Industry average turnover: 5 times

Required: a) Calculate inventory turnover b) Calculate days sales in inventory c) Compare to industry average d) Recommend improvements

Comprehensive Problem​

Comprehensive Problem 10: Complete Inventory Management

Mode Luxembourg SARL needs to properly account for inventory. The business has the following information for the year ended December 31, 2024:

Beginning Inventory (Jan 1, 2024):

  • 500 units @ €20 = €10,000

Purchases:

  • February 15: 800 units @ €22 = €17,600
  • May 10: 1,200 units @ €24 = €28,800
  • August 20: 1,000 units @ €26 = €26,000
  • November 5: 600 units @ €28 = €16,800

Sales:

  • March: 600 units
  • June: 900 units
  • September: 800 units
  • December: 700 units
  • Total: 3,000 units

Ending Inventory (Physical Count, Dec 31):

  • 1,100 units

Required:

  1. FIFO Method (Periodic):
    a) Calculate cost of goods sold
    b) Calculate ending inventory
    c) Show calculations

  2. Weighted Average Method (Periodic):
    a) Calculate average cost per unit
    b) Calculate cost of goods sold
    c) Calculate ending inventory
    d) Compare to FIFO

  3. FIFO Method (Perpetual):
    a) Calculate cost of goods sold for each sale
    b) Calculate ending inventory
    c) Compare to periodic FIFO

  4. Inventory Management Analysis:
    a) Calculate inventory turnover (using FIFO periodic)
    b) Calculate days sales in inventory
    c) Industry average: 4.5 times per year
    d) Analyze and recommend improvements

  5. Error Analysis:
    If ending inventory was counted as 1,200 units (100 units too high): a) Impact on cost of goods sold
    b) Impact on gross profit
    c) Impact on net income
    d) Impact on balance sheet

  6. Luxembourg Compliance:
    a) Explain PCN accounts used (Class 3)
    b) Explain valuation method requirements
    c) Explain disclosure requirements
    d) Explain documentation needed

Cases​

Case 10-1: Choosing an Inventory Method

Marie's restaurant needs to choose an inventory valuation method. The restaurant has:

  • Food ingredients (perishable, prices rising)
  • Wine inventory (non-perishable, prices stable)
  • Retail merchandise (various items, prices varying)

Questions for Analysis:

  1. Which inventory method (FIFO or weighted average) is most appropriate for each type of inventory?

  2. Can Marie use different methods for different inventory types?

  3. What are the tax implications of each method in Luxembourg?

  4. How does each method affect financial statements?

  5. What factors should Marie consider in making the decision?

  6. What are the Luxembourg requirements for disclosure?

Case 10-2: Inventory Management Problems

A Luxembourg retail store is experiencing inventory management issues:

  • High inventory levels (90 days sales in inventory)
  • Frequent stockouts
  • High storage costs
  • Slow-moving items

Questions for Analysis:

  1. What is the current inventory turnover? Is it acceptable?

  2. What are the causes of the problems?

  3. What strategies can improve inventory management?

  4. How can inventory levels be reduced without causing stockouts?

  5. What systems or procedures are needed?

  6. How does this affect financial performance?

Solutions are published in supplementary/instructor/solutions/chapter_10_solutions.md.