Question 1

During December 2016,Crowe Company sold 125 units @ $225 each.Cash selling and administrative expenses for the year were $11,000.All transactions were cash transactions.The following information is also available:
The company's income tax rate is 30%.
Required:
  
a)Prepare an income statement for Crowe Company for 2016 assuming:
1)FIFO inventory cost flow
2)LIFO inventory cost flow
b)Prepare the operating activities section of the statement of cash flows for 2016 assuming:
1)FIFO inventory cost flow
2)LIFO inventory cost flow

Accepted Answer

The answer of During December 2016,Crowe Company sold 125 units...

Question 2

A discount merchandiser is likely to have a higher inventory turnover than more upscale stores with higher merchandise prices.

Accepted Answer

Discount merchandisers typically have lower profit margins and higher volume of sales, requiring them to have a faster turnover rate to maintain profitability. Upscale stores with higher merchandise prices may have a lower volume of sales but a higher profit margin, allowing them to have a slower turnover rate.

Question 3

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

Using the weighted average cost flow method, the cost of goods sold (COGS) is calculated by taking the weighted average of the unit costs. 
The weighted average cost per unit is (2*$36 + $40)/3 = $37.33. 
Therefore, the COGS for selling one unit at $60 is $37.33 and the gross margin would be $22.67.

Question 4

Use the following information for questions 
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 5

Use the following information for questions 
Singleton Company's perpetual inventory records included the following information:
 
-If Singleton uses the weighted-average cost flow method,its weighted-average cost per unit would be $8.00.

Accepted Answer

To determine if the weighted-average cost per unit is $8.00, we need the total cost and total units available for sale. Without this information, we cannot confirm the cost per unit.

Question 6

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

This statement is true. The IRS requires a company to use LIFO for income tax purposes if it is also using LIFO for financial reporting. This ensures consistency in inventory valuation between financial reporting and tax reporting.

Question 7

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

According to generally accepted accounting principles (GAAP), the LIFO cost flow method requires companies to apply the lower-of-cost-or-market (LCM) rule, which means that inventory should be valued at the lower of its cost or market value.

Question 8

If a company overstates its Inventory balance at the end of 2015 due to an error,its Retained Earnings will also be overstated on the 2015 balance sheet.

Accepted Answer

Inventory is an asset on the balance sheet, and an overstatement of inventory will result in an overstatement of assets. Retained earnings, on the other hand, are part of equity and are not affected by changes in assets. However, if the overstatement of inventory results in an overstatement of net income for the year, then retained earnings will also be overstated.

Question 9

The gross margin method of estimating inventory is not useful in detecting inventory fraud.

Accepted Answer

The gross margin method of estimating inventory can be useful in detecting inventory fraud. If the inventory balance is manipulated or overstated, it will result in an inaccurate gross margin calculation. This can indicate that inventory has been intentionally and fraudulently misstated. However, it should be noted that the gross margin method is not foolproof and should be used in combination with other inventory auditing techniques.

Question 10

Generally accepted accounting principles would allow a company to use FIFO for part of its inventory and the weighted-average cost flow assumption for the rest of its inventory.

Accepted Answer

Generally accepted accounting principles allow a company to use different cost flow assumptions for different segments of its inventory based on their respective characteristics or nature. FIFO and weighted-average cost flow assumptions are both acceptable methods under GAAP. Therefore, a company can use FIFO for one part of its inventory and the weighted-average cost flow assumption for the rest of its inventory, as long as it discloses the accounting policy consistently in its financial statements.

Question 11

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

Accepted Answer

Generally accepted accounting principles require consistency in accounting methods, so companies are often limited in their ability to change methods from year to year without providing a valid reason and properly disclosing the change.

Question 12

During a period of rising 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

LIFO (Last-In, First-Out) method assumes that the most recently purchased items are sold first. Therefore, during a period of rising prices, the cost of those items will be higher than those purchased earlier, resulting in lower ending inventory and higher cost of goods sold. On the other hand, FIFO (First-In, First-Out) method assumes that the items purchased first are sold first, resulting in higher ending inventory and lower cost of goods sold. Therefore, during a period of rising prices, the LIFO method will result in a lower amount of ending inventory reported on the balance sheet than using the FIFO method.

Question 13

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

Accepted Answer

IFRS does not allow the use of LIFO as a cost flow assumption. Instead, it requires either the first-in, first-out (FIFO) or weighted average cost method to be used.

Question 14

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

Accepted Answer

A company can use different cost flow methods for income tax return and financial reporting. However, they need to disclose the different methods used and their impact on financial statements in the footnotes of financial statements.

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 entry is made.Entries are only made if the replacement cost is lower than the historic cost.

Question 16

Singh Company sold 75 units @ $350 each on October 31,2016.The following information is also available:
Required:
  
a)Determine the amount of cost of goods sold using:
FIFO
LIFO
Weighted Average
b)Determine the amount of ending inventory using:
FIFO
LIFO
Weighted Average

Accepted Answer

The answer of Singh Company sold 75 units @ $350...

Question 17

In a period of rising 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 prices, FIFO will result in a higher cost of goods sold and a lower net income compared to LIFO. This results in a higher taxable income and more taxes being paid by the company when using the FIFO method. Therefore, the statement is true.

Question 18

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

Accepted Answer

The answer of If a company applies the lower-of-cost-or-market rule...

Question 19

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

A loss from the lower-of-cost-or-market rule is typically reported as a separate line item in the income statement if it is material, not included in Cost of Goods Sold.

Question 20

Use the following information for questions 
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

Since LIFO assumes that the most recent costs are sold first, the ending inventory would be based on the oldest costs, which are likely to be lower. Therefore, the ending inventory value would be lower and closer to historical cost, making the statement true.

Quiz 5: Accounting for Inventories