Question 1

Explain the effects of an understatement of ending inventory on both the present year's net income and the following year's net income.What is the effect of this error on the inventory balance at the end of the following year?

Accepted Answer

Understating ending inventory would cause the following effects in the first year: an overstatement of cost of goods sold and an understatement of gross margin,net income,retained earnings and total assets.In the following year the error would reverse itself.Beginning inventory would be understated,cost of goods sold would be understated and gross margin and net income would be overstated.Retained earnings and total assets would be correctly stated at the end of the second year.

Question 2

Define the terms FIFO and LIFO.

Accepted Answer

FIFO = First-in,first-out: This cost flow assumption designates the cost of the first goods purchased as the cost of the first goods sold.
LIFO = Last-in,first-out: This cost flow assumption designates cost of the last goods purchased as the cost of the first goods sold.

Question 3

What accounting steps would a firm normally take when it discovers a material difference between a physical inventory count and the book inventory figure? Assume that the company uses a perpetual inventory system.

Accepted Answer

If a material difference is detected between the physical and book inventories,an inventory adjustment is normally made.For example,if the physical count is less than the book figure,cost of goods sold (or an inventory loss account)would be increased and the inventory account would be decreased.

Question 4

In an inflationary period,which inventory cost flow method,FIFO or LIFO,is more desirable from a tax standpoint? Why?

Accepted Answer

The answer of In an inflationary period,which inventory cost flow...

Question 5

How would the sale affect the financial statements if Stan's Surf Shack uses the FIFO inventory cost flow method?

Accepted Answer

The answer of How would the sale affect the financial...

Question 6

In an inflationary period,which cost flow method of accounting for inventory will produce the smallest amount of net income?

Accepted Answer

The answer of In an inflationary period,which cost flow method...

Question 7

In relation to inventory,differentiate between the flow of cost and the physical flow of goods.

Accepted Answer

The answer of In relation to inventory,differentiate between the flow...

Question 8

Explain the computation of the inventory amount if the lower-of-cost-or-market rule is applied using the individual inventory item approach.

Accepted Answer

The answer of Explain the computation of the inventory amount...

Question 9

In a world with inflation,but no income tax,how does the choice between LIFO and FIFO affect a company's cash flows? Would the presence of an income tax system cause a difference in the amount of cash outflow when using FIFO versus LIFO?

Accepted Answer

The answer of In a world with inflation,but no income...

Question 10

Stan's Surf Shack uses the FIFO inventory cost flow method.When its income tax is paid,what is the effect of the entry on the financial statements? Note that no tax liability had been accrued.

Accepted Answer

The answer of Stan's Surf Shack uses the FIFO inventory...

Question 11

How would the sale affect the financial statements if Stan's Surf Shack uses the LIFO inventory cost flow method?

Accepted Answer

The answer of How would the sale affect the financial...

Question 12

Explain the meaning of "cost" and "market" as used in the application of the lower-of-cost-or-market rule.

Accepted Answer

The answer of Explain the meaning of "cost" and "market"...

Question 13

Assume that Stan's Surf Shack made the second purchase for cash.How would that purchase affect the financial statements?

Accepted Answer

The answer of Assume that Stan's Surf Shack made the...

Question 14

If Bowman Company is using FIFO,how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Accepted Answer

The answer of If Bowman Company is using FIFO,how would...

Question 15

Kincaid Camera Shop applies the lower-of-cost-or-market rule to individual items of inventory.In 2016,some of Kincaid's inventory lost value due to obsolescence.Other items increased in market value.In total,the market value of Kincaid's inventory was higher at the end of 2016 than the cost of the inventory.Would Kincaid have an adjustment to make at the end of 2016 due to the lower-of-cost-or-market rule? Would the answer be any different if Kincaid applied the rule in aggregate rather than to individual items?

Accepted Answer

The answer of Kincaid Camera Shop applies the lower-of-cost-or-market rule...

Question 16

In an inflationary period,which cost flow method,LIFO or FIFO,results in the larger dollar amount of assets on the balance sheet?

Accepted Answer

The answer of In an inflationary period,which cost flow method,LIFO...

Question 17

Use the following information for questions 1-5:
Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.
Stan's Surf Shack purchased 5 surfboards for $200 each.Later it purchased 2 more surfboards for $250 each.Stan's uses the perpetual inventory system.Assume that 6 surfboards were sold during the period for $350 cash each.
 
-Assume that Stan's Surf Shack purchased the first five surfboards on account.How would the purchase transaction affect its financial statements?

Accepted Answer

The answer of Use the following information for questions 1-5:
Indicate...

Question 18

Sierra Company uses the weighted average inventory cost flow method.How would Sierra's accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Accepted Answer

The answer of Sierra Company uses the weighted average inventory...

Question 19

If Bowman Company is using LIFO,how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Accepted Answer

The answer of If Bowman Company is using LIFO,how would...

Question 20

If some inventory items have declined in value from damage or obsolescence,what effect will the lower-of-cost-or-market rule have on the amount of inventory shown on the balance sheet?

Accepted Answer

The answer of If some inventory items have declined in...

Quiz 5: Accounting for Inventories