Deck 5: Reporting and Analyzing Inventories

Question 1

In a period of rising prices,FIFO usually gives a lower taxable income,which leads to an advantage when it comes to paying income tax.

Answer 1

False

Question 2

Whether prices are rising or falling,FIFO always will yield the highest gross profit and net income.

Answer 2

False

Question 3

An advantage of the weighted-average inventory method is that it tends to smooth out the effects of price changes.

Answer 3

True

Question 4

Goods on consignment are goods shipped by their owner,called the consignee,to another party called the consignor.

Question 5

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each individual product.

Question 6

The matching principle is used by some companies to avoid allocating incidental inventory costs to cost of goods sold.

Question 7

All incidental costs of inventory acquisition and handling whether necessary or not,are assigned to inventory.

Question 8

Not many companies take a physical count of inventory each year as they rely primarily on inventory records alone to determine the inventory value.

Question 9

Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.

Question 10

If the seller is responsible for paying freight charges,then ownership of inventory passes when goods arrive at their destination.

Question 11

Incidental costs most commonly added to the costs of inventory include import duties,freight,storage and insurance.

Question 12

When taking a physical count of inventory,the use of pre-numbered inventory tickets assists in the control process.

Question 13

A company can change its inventory costing method without mentioning this change in its financial statements since it is a decision made by internal management.

Question 14

The cost of an inventory item includes its invoice cost and any added or incidental costs necessary to make it saleable less any discount.

Question 15

The consistency principle requires a company to use the same accounting methods period after period,so that financial statements are comparable across periods.

Question 16

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

Question 17

If obsolete or damaged goods can be sold,they will be included in inventory at their net realizable value.

Question 18

Goods in transit are automatically included in a company's inventory account.

Question 19

If damaged and obsolete goods cannot be sold they are not included in inventory.

Question 20

LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income.The reasons for doing this is for a bonus plan,job security and reputation.

Question 21

Neither GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.

Question 22

An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.

Question 23

Errors in the period-end inventory balances only have an impact on the current period's records and financial statements.

Question 24

An understatement of the ending inventory balance will understate cost of goods sold and overstate net income.

Question 25

One of the most important decisions in accounting for inventory is determining the unit costs assigned to each inventory item.

Question 26

Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and as a result,are less serious.

Question 27

Toys "R" Us had cost of goods sold of $8,321 million and its ending inventory was $2,027 million.Based on this,its days' sales in inventory is equal to 89 days.

Question 28

An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

Question 29

The full disclosure principle requires that the notes to the financial statements report a change in accounting method for inventory costing.

Question 30

The four methods of inventory valuation are SIFO,FIFO,LIFO and average cost.

Question 31

The inventory turnover ratio is computed by dividing average merchandise inventory by cost of goods sold.

Question 32

GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.

Question 33

It can be expected that companies that sell perishable goods have higher inventory turnover than companies that sell nonperishable goods.

Question 34

There is no simple rule for inventory turnover,except that a high ratio is preferable provided inventory is adequate to meet demand.

Question 35

An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next period.

Question 36

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Question 37

A company's ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.

Question 38

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Question 39

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500.Its inventory turnover equals 3.4.

Question 40

According to IRS requirements,companies are allowed to use FIFO for financial reporting and LIFO for tax reporting.

Question 41

When LIFO is used with the periodic inventory system,cost of goods sold is assigned costs from the most recent purchases at the point of each sale,rather than from the most recent purchases for the period.

Question 42

The matching principle requires that the inventory valuation method follow the physical flow of inventory.

Question 43

Three key variables determine the dollar value of inventory: (1)inventory quantity, (2)costs of inventory and (3)cost flow assumption.

Question 44

The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used

Question 45

In applying the lower of cost or market method to inventory valuation,market is defined as the current replacement cost.

Question 46

In applying the lower of cost or market method to inventory valuation,market is defined as the current selling price.

Question 47

A company's cost of inventory was $317,500.Due to phenomenal demand for this product,the market value of its inventory increased to $323,000.According to the consistency principle,this company should write up the value of its inventory.

Question 48

When units are purchased at different costs over time,it is simple to determine the cost per unit assigned to inventory.

Question 49

A company has inventory with a market value of $217,000 and a cost of $241,000.According to the lower of cost or market,the inventory should be written down to $217,000.

Question 50

The assignment of costs to the cost of goods sold and to inventory under the FIFO is the same for both the perpetual and periodic inventory systems.

Question 51

Under LIFO,the most recent costs are assigned to ending inventory.

Question 52

The lower of cost or market rule for inventory valuation must be applied to each individual unit separately and not to major categories of inventory or to the entire inventory.

Question 53

Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statement dates.

Question 54

LIFO assumes that inventory costs flow in the order they were incurred.

Question 55

The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification,FIFO,LIFO and weighted average.

Question 56

The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

Question 57

The assignment of costs to cost of goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems.

Question 58

The conservatism principle requires that when more than one estimate of the amounts that are to be received or paid in the future exist and these estimates are about equally likely,then the less optimistic amount is used.

Question 59

The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

Question 60

A company's total cost of inventory was $305,000 and its market value is $297,000.Under the lower cost or market,the amount reported should be $305,000.

Question 61

In the retail inventory method of inventory valuation,the retail amount of inventory refers to the dollar amount measured by looking at the selling prices of inventory items.

Question 62

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Question 63

Damaged and obsolete goods:

A)Are never included in inventory
B)Are included in inventory at their full cost
C)Are included in inventory at their net realizable value
D)Should be disposed of immediately
E)Are assigned a value of zero

Question 64

An error in the period-end inventory causes an offsetting error in the next period and therefore:

A)Managers can ignore the error
B)It is sometimes said to be self-correcting
C)It affects only income statement accounts
D)If affects only balance sheet accounts
E)Is immaterial for managerial decision making

Question 65

The full disclosure principle:

A)Requires that when a change in inventory valuation method is made,the notes to the financial statements report the type of change,why it was made and its effect on net income
B)Requires that companies use the same accounting method for inventory valuation period after period
C)Is not subject to the materiality principle
D)Is only applied to retailers
E)Is also called the consistency principle

Question 66

Using the retail inventory method,if the cost to retail ratio is 60% and ending inventory at retail is $45,000,then estimated ending inventory at cost is $27,000.

Question 67

To avoid the time-consuming process of taking an inventory each year,the majority of companies use the gross profit method to estimate ending inventory.

Question 68

Goods on consignment:

A)Are goods shipped by the owner to the consignee who sells the goods for the owner
B)Are reported in the consignee's books as inventory
C)Are goods shipped to the consignor who sells the goods for the owner
D)Are not reported in the consignor's inventory since they do not have possession of the inventory
E)Are always paid for by the consignee when they take possession of the goods

Question 69

Given the following items and costs as of the balance sheet date,determine the value of Light Company's merchandise inventory.
$2,000 goods sold by Light to another company.The goods are in transit and shipping terms are FOB shipping point.
$3,000 goods sold by another company to Light.The goods are in transit and shipping terms are FOB shipping point.
$4,000 owned by Light but in the possession of another company the consignee.
Damaged goods owned by Light which originally cost $5,000,but which now have an $800 net realizable value.

A)$7,000
B)$7,800
C)$9,800
D)$9,000
E)$6,800

Question 70

Merchandise inventory includes:

A)All goods owned by a company and held for sale
B)All goods in transit
C)All goods on consignment
D)Only damaged goods
E)Only items that are on the shelf

Question 71

Physical inventory counts:

A)Are not necessary under the perpetual system
B)Are necessary to measure and adjust for inventory shrinkage
C)Must be taken at least once a month
D)Require the use of hand-held portable computers
E)Are not necessary under the cost-to benefit constraint

Question 72

The inventory valuation method that tends to smooth out erratic changes in costs is:

A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)WIFO

Question 73

The inventory valuation method that results in the lowest taxable income in a period of inflation is:

A)LIFO method
B)FIFO method
C)Weighted-average cost method
D)Specific identification method
E)Gross profit method

Question 74

Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?

A)FIFO
B)Weighted average
C)LIFO
D)Specific identification
E)First In Still Here

Question 75

Goods in transit are included in a purchaser's inventory:

A)At any time during transit
B)When the purchaser is responsible for paying freight charges
C)When the supplier is responsible for freight charges
D)If the goods are shipped FOB destination
E)After the half-way point between the buyer and seller

Question 76

The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made,it can be multiplied by the ending inventory at retail to estimate ending inventory at cost.

Question 77

The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

Question 78

During a period of steadily rising costs,the inventory valuation method that yields the lowest reported net income is:

A)Specific identification method
B)Average cost method
C)Weighted-average method
D)FIFO method
E)LIFO method

Question 79

Given the following items and costs as of the balance sheet date,determine the value of Faltron Company's merchandise inventory.
$1,000 goods sold by Faltron to another company.The goods are in transit and shipping terms are FOB destination.
$2,000 goods sold by another company to Faltron.The goods are in transit and shipping terms are FOB destination.
$3,000 owned by Faltron but in the possession of another company the consignee.
Damaged goods owned by Faltron which originally cost $4,000,but which now have a $500 net realizable value.

A)$10,000
B)$6,500
C)$5,500
D)$5,000
E)$4,500

Question 80

The consistency principle:

A)Requires a company to consistently use the same accounting method of inventory valuation unless a change will improve financial reporting
B)Requires a company to use one method of inventory valuation exclusively
C)Requires that all companies in the same industry use the same accounting methods of inventory valuation
D)Is also called the full disclosure principle
E)Is also called the matching principle