Question 1

During a period of declining prices,a company would report a lower gross margin using the FIFO cost flow method than with LIFO.

Accepted Answer

During a period of declining prices, cost of goods sold will include the lower, most recent prices when LIFO is used, resulting in higher gross margin.

Question 2

If a company uses the LIFO cost flow method,it is not required by generally accepted accounting principles to apply the lower-of-cost-or-market rule.

Accepted Answer

The lower-of-cost-or-market rule must be applied regardless of the inventory cost flow method in use.

Question 3

The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also uses LIFO for financial reporting.

Accepted Answer

The Internal Revenue Service requires that companies using LIFO for income tax purposes must also use LIFO for financial reporting.

Question 4

Warner Company purchased two units of a product for $36 and later purchased one more for $40.If the company uses the weighted average cost flow method,and it sold one unit of the product for $60,its gross margin would be $22.00.

Accepted Answer

Average cost per unit = Cost of goods available for sale of [(2 × $36) + (1 × $40)] ÷ Units available for sale of 3 = $37.33 per unit
Selling price of $60 ? Cost of goods sold of $37.33 = $22.66

Question 5

A loss resulting from application of the lower-of-cost-or-market rule is included in cost of goods sold if the loss is material in amount.

Accepted Answer

The loss resulting from application of the lower-of-cost-or-market rule is only included in cost of goods sold if the amount is immaterial.

Question 6

During a period of rising inventory prices,a company's cost of goods sold would be higher using the LIFO cost flow method than with FIFO.

Accepted Answer

During a period of rising inventory prices, cost of goods sold will include the higher, most recent prices when LIFO is used.

Question 7

Generally accepted accounting principles restrict or limit a company's freedom to change inventory cost flow methods from one year to the next.

Accepted Answer

A change in inventory cost flow method must be justified by reasons other than earnings management.

Question 8

[The following information applies to the questions displayed below.]
Singleton Company's perpetual inventory records included the following information:
 
-If Singleton uses the LIFO cost flow method,its ending inventory would be $1,260.

Accepted Answer

The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Units in ending inventory = Units available for sale of (200 + 150 + 350) ? Units sold of 520 = 180
Ending inventory = 180 units × January 1 unit cost of $7.00 = $1,260

Question 9

During a period of rising inventory prices the LIFO cost flow method will result in higher total assets than FIFO.

Accepted Answer

FIFO will report lower cost of goods sold (older, lower prices), and higher ending inventory (newer, higher prices).

Question 10

If a company applies the lower-of-cost-or-market rule to the entire stock of inventory in the aggregate,its write-down of inventory is likely to be greater than if it applies the rule to individual items of inventory.

Accepted Answer

If a company applies the lower-of-cost-or-market rule to the entire stock of inventory in the aggregate, items of inventory with higher market values compared to cost will offset items with lower market values. As a result, the write-down is likely to be lower, if it is needed at all.

Question 11

International Financial Reporting Standards (IFRS)do not permit the use of the LIFO inventory cost flow method.

Accepted Answer

This is a difference between IFRS and U.S. GAAP.

Question 12

[The following information applies to the questions displayed below.]
Singleton Company's perpetual inventory records included the following information:
 
-If Singleton uses the FIFO cost flow method,its cost of goods sold would be $4,490.

Accepted Answer

The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Cost of goods sold = (200 units × $7.00 per unit) + (150 × $8.00 per unit) + (170 × $9.00 per unit) = $4,130

Question 13

If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting.

Accepted Answer

The requirement to match cost flow for income tax reporting and financial reporting applies only to the LIFO inventory cost flow method.

Question 14

During a period of rising inventory prices,the amount of ending inventory reported on the balance sheet will be lower using the LIFO cost flow method than with FIFO.

Accepted Answer

During a period of rising inventory prices, ending inventory will include the lower, older prices when using LIFO.

Question 15

If the replacement cost of inventory is greater than its historical cost,the increase in value does not affect the company's financial statements.

Accepted Answer

If the replacement cost is greater than the historic cost, no adjustment is made. Adjustments are only made if the replacement cost is lower than the historic cost.

Question 16

Generally accepted accounting principles often allow companies to account for the same types of events in different ways.

Accepted Answer

The different cost flow methods-FIFO, LIFO, weighted average, and specific identification-are examples of alternative accounting procedures allowed by GAAP.

Question 17

A company's gross margin reported on the income statement is not affected by the inventory cost flow method it uses.

Accepted Answer

The selection of cost flow method impacts cost of goods sold, which impacts gross margin.

Question 18

[The following information applies to the questions displayed below.]
Singleton Company's perpetual inventory records included the following information:
 
-If Singleton uses the weighted-average cost flow method,its average cost per unit would be $8.00.

Accepted Answer

Average cost per unit = Cost of goods available for sale of [(200 × $7.00) + (150 × $8.00) + (350 × $9.00)] ÷ Units available for sale of 700 = $8.21 per unit

Question 19

In a period of rising inventory prices,use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO.

Accepted Answer

In a period of rising inventory prices, FIFO will produce the lowest cost of goods sold, resulting in the highest net income and the highest income tax expense.

Question 20

A company uses a cost flow method (such as LIFO or FIFO)to allocate product costs between cost of goods sold and beginning inventory.

Accepted Answer

The selection of cost flow method allocates product costs between cost of goods sold and ending, not beginning, inventory.

Quiz 5: Accounting for Inventories