Question 1

One reason that generally accepted accounting principles allow firms to choose different methods for computing amortization is that amortization expenses have no effect on net income.

Accepted Answer

Amortization expenses do have an effect on net income as they represent the allocation of the cost of an asset over its useful life. Different methods of computing amortization can lead to different amounts of expenses and therefore affect net income.

Question 2

According to generally accepted accounting principles,a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory.

Accepted Answer

Generally accepted accounting principles (GAAP) allow firms to choose from several inventory valuation methods (e.g., FIFO, LIFO, weighted average) based on their financial reporting needs, not necessarily the actual movement of goods.

Question 3

Although a firm may choose from a variety of different amortization and inventory valuation methods,it is expected to provide readers of its financial statements with information about the methods it uses.

Accepted Answer

Firms are required to disclose information about the amortization and inventory valuation methods they use in their financial statements. This enables readers to understand how the firm values its assets and how it allocates the cost of those assets over time. Failure to disclose this information could be seen as a lack of transparency on the part of the firm.

Question 4

The LIFO method of inventory valuation assumes that the newest items in inventory are sold first.

Accepted Answer

LIFO stands for "last in, first out" and assumes that the last (most recent) items added to inventory are the first ones sold.

Question 5

FIFO and LIFO are two common methods used to compute the amortization of tangible assets.

Accepted Answer

FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are inventory valuation methods, not methods for computing amortization of tangible assets. Amortization typically applies to intangible assets, while depreciation is used for tangible assets.

Question 6

During periods of rising prices,firms that want to report more attractive profits would tend to favour the FIFO technique of inventory valuation.

Accepted Answer

FIFO (First-In-First-Out) assumes that the goods sold are from the oldest inventory available, leading to higher cost of goods sold (COGS). This results in lower reported profits during times of rising prices. Therefore, firms would prefer to use the FIFO technique during these periods to report more attractive profits.

Question 7

One of the problems with current accounting procedures is that there is no way for firms to systematically write off the costs of property and equipment over time.

Accepted Answer

This statement is false. Current accounting procedures allow for firms to systematically write off the costs of property and equipment over time through depreciation expenses.

Question 8

When a firm sells merchandise from its inventory,the cost of goods sold it reports will depend on which inventory valuation method it uses.

Accepted Answer

The cost of goods sold will depend on which inventory valuation method the firm uses. Different inventory valuation methods, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Average Cost, will result in different cost of goods sold calculations.

Question 9

FIFO is a method of inventory valuation that assumes that the most recent items received in inventory are sold first.

Accepted Answer

FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, not the most recent ones.

Question 10

If the goal of a business is to pay lower taxes on its income during an inflationary period,it is likely to use the FIFO inventory costing method.

Accepted Answer

The LIFO (Last-In, First-Out) inventory costing method is generally used during an inflationary period in order to reduce a business's taxable income.

Question 11

Generally accepted accounting practices (GAAP)allow firms to choose among different methods of amortization and inventory valuation.

Accepted Answer

GAAP provide a framework for accounting practices, but within that framework, companies have some flexibility in choosing specific methods for certain accounting procedures such as amortization and inventory valuation.

Question 12

(p.507.)If the economy began experiencing a prolonged period of deflation in which the costs of most goods were actually falling,many firms would find that the LIFO method of inventory valuation would result in higher reported profits.

Accepted Answer

When prices are falling, LIFO results in higher reported profits because the cost of goods sold is based on the most recent purchases, which are at lower prices. This results in a lower cost of goods sold and higher reported profits.

Question 13

During a period of rising prices,the FIFO technique of inventory valuation will result in a lower net income figure than would the LIFO technique.

Accepted Answer

During a period of rising prices, the LIFO technique of inventory valuation will result in a lower net income figure than the FIFO technique.

Question 14

The net income of a firm can change significantly depending upon the specific accounting procedures that are used for amortization and inventory valuation.

Accepted Answer

The net income of a firm is highly dependent on the accounting procedures used for amortization and inventory valuation. Different methods can lead to significantly different results, which can impact the overall profitability of the firm. As such, it is essential for businesses to carefully consider the accounting standards they apply and make well-informed decisions about these methods to achieve the most accurate and informative financial statements possible.

Question 15

Readers of financial statements usually have no way of knowing which amortization and inventory valuation methods a firm uses,a fact which makes interpretation of the information very difficult.

Accepted Answer

Financial statements typically include notes that disclose the accounting policies used by a firm, including amortization and inventory valuation methods, allowing readers to understand and interpret the information accurately.

Question 16

When a firm sells merchandise from its inventory,there are different techniques used to calculate the cost of goods sold.

Accepted Answer

This is true. Different techniques such as FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted average cost are used to calculate the cost of goods sold.

Question 17

When valuing items in inventory for financial reporting purposes,generally accepted accounting practices require firms to value the cost of goods sold by assuming that the items that have been in inventory the longest are the ones that are sold.

Accepted Answer

The statement describes the Last-In, First-Out (LIFO) method, but generally accepted accounting principles (GAAP) allow for multiple inventory valuation methods, including First-In, First-Out (FIFO), LIFO, and weighted average cost. FIFO assumes the oldest inventory items are sold first, not LIFO.

Question 18

In businesses that handle a lot of perishable items (such as supermarkets)the actual movement of goods through inventory most closely resembles the assumed movement in the LIFO inventory valuation technique.

Accepted Answer

In businesses with perishable items, the actual movement of goods is typically FIFO (First-In, First-Out) to ensure older stock is sold before it spoils, unlike LIFO (Last-In, First-Out).

Question 19

FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows.

Accepted Answer

FIFO (First In First Out) is a method used to track inventory, not compute net cash flows. Net cash flows are typically calculated by subtracting cash outflows from cash inflows.

Question 20

If prices of inventory are unchanged throughout the year,LIFO and FIFO inventory valuation methods will produce the same reported net income.

Accepted Answer

If inventory prices remain constant, both LIFO and FIFO methods will result in the same reported net income. This is because the difference between the two methods lies in the order in which inventory costs are recorded, a distinction that is only significant when inventory prices fluctuate.

Quiz 16: Understanding Accounting and Financial Information