Question 1

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 2

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 3

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 4

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 5

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 6

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 7

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 8

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.

Question 9

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 10

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 11

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 12

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 13

Generally accepted accounting principles often allows 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 14

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 15

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 16

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 17

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 18

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 19

Generally accepted accounting principles do not allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.

Accepted Answer

Companies do not need to select a cost flow method that matches the physical flow of goods.

Question 20

In most businesses,the physical flow of goods occurs on a FIFO basis,but a different cost flow method is allowed under generally accepted accounting principles.

Accepted Answer

Most companies rotate their inventory so as to sell the oldest inventory first.However,the company is free to choose other cost flow methods.

Quiz 5: Accounting for Inventories

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.