Q: Which formula correctly calculates Weighted Average Cost per unit?

$$\text{Weighted Average Cost per unit} = \frac{\text{Total Cost of Goods Available for Sale}}{\text{Total Units Available for Sale}}$$

Q: Which equation represents the calculation of WACC?

$$\text{WACC} = \frac{E}{V} \times r_E + \frac{D}{V} \times r_D \times (1 - T)$$

Question 1

Which inventory costing method is most likely to result in higher reported net income during periods of rising prices?

Accepted Answer

FIFO (First-In, First-Out)

Question 2

A company uses the FIFO method for inventory costing. If the cost of goods sold is $$50,000 and ending inventory is 20$$,000, what is the cost of goods available for sale?

Accepted Answer

$70,000

Question 3

Which of the following best describes the impact of using FIFO versus LIFO on financial statements during inflation?

Accepted Answer

FIFO results in higher net income and higher ending inventory.

Question 4

If a company records a purchase of inventory on account, which journal entry is correct?

Accepted Answer

Debit Inventory, Credit Accounts Payable

Question 5

A company has the following data: Beginning Inventory = $$10,000, Purchases = 40$$,000, Ending Inventory = $8,000. What is the cost of goods sold?

Accepted Answer

$42,000

Question 6

Which formula correctly calculates Weighted Average Cost per unit?

Accepted Answer

$$	ext{Weighted Average Cost per unit} = \frac{	ext{Total Cost of Goods Available for Sale}}{	ext{Total Units Available for Sale}}$$

Question 7

A company is considering investing in a project. The Weighted Average Cost of Capital (WACC) is 8%. If the expected return is 6%, what should the company do?

Accepted Answer

Reject the project because the return is less than WACC.

Question 8

Which equation represents the calculation of WACC?

Accepted Answer

$$	ext{WACC} = \frac{E}{V} 	imes r_E + \frac{D}{V} 	imes r_D 	imes (1 - T)$$

Question 9

If a company’s WACC is 10%, and it can borrow at 6% after tax, what is the implication for financing decisions?

Accepted Answer

Debt financing is cheaper than the overall cost of capital.

Question 10

A company has $$100,000 in equity, 50$$,000 in debt, cost of equity $$12\,\%$$, cost of debt $$6\,\%$$, and tax rate $$30\,\%. $$What is the WACC?

Accepted Answer

$$	ext{WACC} = 9.6\,\%$$

Question 11

Which of the following is NOT a component of the WACC formula?

Accepted Answer

Cost of goods sold

Question 12

A company uses FIFO and sells 100 units at $$10 each. The first 50 units cost 6$$, the next 50 units cost $8. What is the cost of goods sold?

Accepted Answer

$$700$$

Question 13

If a company’s ending inventory is overstated by $5,000, what is the effect on net income?

Accepted Answer

Net income is overstated by $5,000

Question 14

Which of the following best describes the purpose of the Weighted Average Cost method?

Accepted Answer

To smooth out price fluctuations in inventory valuation

Question 15

A company’s WACC is 7%. It is considering two projects: Project A with expected return 9%, Project B with expected return 6%. Which project(s) should it accept?

Accepted Answer

Accept Project A only

Question 16

Which inventory method is most appropriate for a company selling perishable goods?

Accepted Answer

FIFO (First-In, First-Out)

Question 17

A company’s WACC increases. What is the likely effect on the company’s investment decisions?

Accepted Answer

Fewer projects will be accepted because the hurdle rate is higher.

Question 18

If a company uses LIFO during inflation, what is the effect on its tax liability compared to FIFO?

Accepted Answer

Tax liability is lower under LIFO.

Question 19

Which of the following is a limitation of the FIFO method?

Accepted Answer

It may overstate net income during periods of rising prices.

Question 20

A company has $$200,000 in equity, 100$$,000 in debt, cost of equity $$10\,\%$$, cost of debt $$5\,\%$$, and tax rate $$40\,\%. $$Calculate the WACC.

Accepted Answer

$$	ext{WACC} = 7.67\,\%$$

Inventory Valuation and Weighted Average Cost of Capital (WACC)

Study Guide - Practice Questions

Study Guide - Flashcards