Question 1

The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle.

Accepted Answer

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Question 2

If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Accepted Answer

When a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements in order to provide transparency and to help users understand the impact of the change on the company's financial performance. This is required by accounting standards and is considered an important disclosure.

Question 3

The inventory turnover is calculated as cost of goods sold divided by ending inventory.

Accepted Answer

The answer of The inventory turnover is calculated as cost...

Question 4

Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

Accepted Answer

Accountants follow the principle of conservatism, which means that when faced with uncertainty, they tend to choose the option that results in a lower profit or a higher liability. In the case of inventory, if the market price of the inventory falls below the cost, the accountant should write down the inventory from cost to market value in the period in which the decline occurs. This ensures that the financial statements reflect the true and fair value of the inventory, and the company does not overstate its profits. Therefore, the statement in the question is false.

Question 5

The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

Accepted Answer

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Question 6

The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

Accepted Answer

As per the lower-of-cost-or-market rule, inventory should be valued at the lower of its cost or market value. If the market value is less than the cost, then the inventory should be written down to its market value to reflect its decreased value. This rule ensures that inventory is reported at a realistic value and not at an inflated cost that exceeds its market value.

Question 7

In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

Accepted Answer

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Question 8

Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Accepted Answer

LIFO (Last In, First Out) inventory valuation method primarily affects the cost of goods sold and inventory valuation on the balance sheet, rather than directly creating paper or phantom profits. It can lead to higher cost of goods sold during inflationary periods, potentially lowering reported profits, not inflating them with phantom profits.

Question 9

If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

Accepted Answer

This is because under LIFO, the most recent and typically more expensive inventory is assumed to be sold first, resulting in a higher cost of goods sold and therefore lower gross profit. In contrast, FIFO assumes that the oldest and typically cheaper inventory is sold first, resulting in a lower cost of goods sold and therefore higher gross profit.

Question 10

A company may use more than one inventory cost flow method at the same time.

Accepted Answer

A company may use different inventory cost flow methods for different products or inventory categories. For example, they may use FIFO for one set of inventory and LIFO for another.

Question 11

Computers have made the periodic inventory system more popular and easier to apply.

Accepted Answer

Computers have made the perpetual inventory system more popular and easier to apply, as they allow for real-time tracking of inventory levels.

Question 12

An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

Accepted Answer

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Question 13

If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

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Question 14

Under the LCM basis, market is defined as selling price, not current replacement cost.

Accepted Answer

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Question 15

The FIFO reserve is a required disclosure for companies that use FIFO.

Accepted Answer

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Question 16

The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

Accepted Answer

This is the correct definition of the LIFO reserve. It represents the amount by which the value of inventory is lower under LIFO compared to FIFO.

Question 17

When the market value of inventory is lower than its cost, the inventory is written down to its market value.

Accepted Answer

This is known as the lower of cost or market rule and is required by accounting standards.

Question 18

A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

Accepted Answer

This is because during periods of inflation, costs increase, leading to a decrease in gross margins and net income under the FIFO method. Similarly, during periods of deflation, costs decrease, leading to an increase in gross margins and net income under the FIFO method. This magnification of the effects of the business cycle on income can make it difficult for companies to accurately assess their profitability and financial performance.

Question 19

In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

Accepted Answer

In periods of falling prices, LIFO will result in a larger net income than the FIFO method, as LIFO values the most recent (and therefore typically lower-priced) inventory as sold, resulting in a higher cost of goods sold and a lower taxable income.

Question 20

The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Accepted Answer

The statement is incorrect. The LIFO (Last In, First Out) method is commonly used in certain industries, such as the grocery and retail sectors, where the products have a short shelf life and the need to sell the most recently purchased goods is high. However, it is not allowed under International Financial Reporting Standards (IFRS), except under certain circumstances.

Quiz 5: Reporting and Analyzing Inventory