Question 1

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

Accepted Answer

Accountants typically recommend that the write-down from cost to net realizable value should be made in the period in which the price decline occurs in order to accurately reflect the current value of inventory on the financial statements. Delaying the write-down could result in an overstatement of inventory value and overstatement of profits in the current period.

Question 2

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

Accepted Answer

Inventory turnover is calculated as cost of goods sold divided by average inventory, not ending inventory.

Question 3

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

Accepted Answer

The LIFO method is commonly used in many industries, especially those with products that have a short shelf life or are subject to price inflation. It assumes that the last inventory items purchased are the first to be sold, which may be more applicable to certain businesses.

Question 4

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

Accepted Answer

FIFO assumes that the first items purchased are the first items sold. This means that during periods of rising prices, the cost of goods sold will be lower than the actual cost of the goods sold, resulting in higher profits. Conversely, during periods of falling prices, the cost of goods sold will be higher than the actual cost of the goods sold, resulting in lower profits. This magnification of the effects of the business cycle on business income is a major criticism of the FIFO inventory method.

Question 5

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

Accepted Answer

The answer of The LIFO inventory method tends to smooth...

Question 6

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

Accepted Answer

The FIFO reserve is a required disclosure for companies that use LIFO (Last In, First Out) inventory accounting, not FIFO (First In, First Out).

Question 7

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

Accepted Answer

Companies can use different inventory cost flow methods for different types of inventory or in different subsidiaries, as long as they are consistent in their application and disclose the methods used in their financial statements.

Question 8

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

Accepted Answer

The LIFO (Last In, First Out) inventory method does not typically match the actual physical flow of goods, as most businesses sell their oldest inventory first, which aligns more with the FIFO (First In, First Out) method.

Question 9

Technology has made the periodic inventory system more popular and easier to apply.

Accepted Answer

Technology has made the perpetual inventory system more popular and easier to apply, as it allows for real-time tracking of inventory levels.

Question 10

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

Accepted Answer

The LIFO reserve is an accounting measure that reflects the difference between the inventory reported under the LIFO method and what it would be under the FIFO method.

Question 11

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

According to Generally Accepted Accounting Principles (GAAP), any change in accounting principle or estimate that has a material impact on the financial statements must be disclosed. The change in inventory valuation method could potentially affect cost of goods sold, gross profit, and net income, therefore it should be disclosed in the financial statements.

Question 12

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.

Accepted Answer

The answer of If a company has no beginning inventory...

Question 13

When the cost of inventory is higher than its net realizable value, the inventory is written down to its net realizable value.

Accepted Answer

When the cost of inventory exceeds its net realizable value, accounting standards require the inventory to be written down to reflect the lower value, ensuring that financial statements are not overstated.

Question 14

The lower-of-cost-or-net-realizable-value rule implies that it is unacceptable to report inventory at a cost that is in excess of its net realizable value.

Accepted Answer

The lower-of-cost-or-net-realizable-value rule requires inventory to be reported at the lower of its historical cost or its net realizable value, ensuring that inventory is not overstated on financial statements.

Question 15

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

Accepted Answer

When prices are rising, LIFO results in higher cost of goods sold and lower ending inventory values compared to FIFO, leading to lower gross profit.

Question 16

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

Accepted Answer

A high inventory turnover can suggest that a company is selling through its inventory quickly, which might lead to stockouts and missed sales if the company cannot replenish inventory in time.

Question 17

Under the LCNRV basis, net realizable value is defined as current replacement cost.

Accepted Answer

Under the LCNRV (Lower of Cost or Net Realizable Value) basis, net realizable value is defined as the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation, not the current replacement cost.

Question 18

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 19

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

Accepted Answer

The answer of In periods of falling prices, LIFO will...

Question 20

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 FIFO because the cost of goods sold will be lower under LIFO, as it uses older, cheaper inventory costs.

Quiz 6: Reporting and Analyzing Inventory