Question 1

During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method.

Accepted Answer

During periods of increasing costs, the first-in, first-out (FIFO) method of costing inventory assumes that older inventory costs have been sold first, resulting in a lower cost of goods sold and a higher ending inventory value. This leads to a greater amount of net income than the last-in, first-out (LIFO) cost method, which assumes that newer inventory costs have been sold first and results in higher cost of goods sold and a lower ending inventory value.

Question 2

A purchase order establishes an initial record of the receipt of the inventory.

Accepted Answer

A purchase order is a document sent from a buyer to a supplier requesting goods or services, not a record of the receipt of inventory. The receipt of inventory is typically documented through a receiving report or goods received note.

Question 3

When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.

Accepted Answer

When using the FIFO inventory costing method, the oldest costs are assigned to the cost of goods sold, while the most recent costs are assigned to the inventory balance.

Question 4

Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.

Accepted Answer

Under the periodic inventory system, the merchandise inventory account is only updated periodically, typically at the end of each accounting period, and therefore does not continuously disclose the amount of inventory on hand.

Question 5

The average cost method will always yield results between FIFO and LIFO.

Accepted Answer

This is because the average cost method calculates the average cost of all units in inventory, which includes both old and new units. This results in a cost per unit that falls between the cost per unit under FIFO (which uses the cost of the oldest units first) and LIFO (which uses the cost of the newest units first).

Question 6

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.

Accepted Answer

Under the periodic inventory system, physical inventory is taken periodically to determine the cost of the inventory on hand and the cost of merchandise sold.

Question 7

Inventory controls start when the merchandise is shelved in the store area.

Accepted Answer

Inventory controls start before the merchandise is shelved in the store area, at the point of receiving and recording the goods.

Question 8

The selection of an inventory costing method has no significant impact on the financial statements.

Accepted Answer

The selection of an inventory costing method can have a significant impact on the financial statements, specifically on the amounts reported for inventory, cost of goods sold, and gross profit. Different costing methods such as first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average can result in different valuations of inventory and cost of goods sold, which in turn affect the reported gross profit and net income.

Question 9

The specific identification inventory method should be used when the inventory consists of identical, low cost units that are purchased and sold frequently.

Accepted Answer

The specific identification inventory method is used for items that are unique or have high value, such as art, antiques, or luxury goods. For identical, low cost units that are purchased and sold frequently, methods such as first-in, first-out (FIFO) or average cost method are more appropriate.

Question 10

FIFO is the inventory costing method that follows the physical flow of the goods.

Accepted Answer

FIFO (First-In-First-Out) assumes that the first unit of inventory purchased is the first one to be sold. This method follows the physical flow of the goods, as the oldest items are sold before the newer ones.

Question 11

Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.

Accepted Answer

Under the LIFO (Last In, First Out) inventory costing method, the most recent costs are assigned to the cost of goods sold, while the older costs remain in ending inventory.

Question 12

A perpetual inventory system is an effective means of control over inventory.

Accepted Answer

In a perpetual inventory system, inventory records are constantly updated to reflect the most accurate information. This allows for better tracking of inventory levels and reduces the risk of stockouts or overstocking. It also allows for more accurate inventory costing and helps to identify inventory discrepancies or theft. Overall, a perpetual inventory system is an effective means of control over inventory.

Question 13

The three inventory costing methods will normally each yield different amounts of net income.

Accepted Answer

The cost of goods sold and ending inventory amounts will differ under each method, which will ultimately affect the calculation of net income.

Question 14

Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first.

Accepted Answer

LIFO stands for "last-in, first-out". This means that the most recent purchases are assumed to be sold first, and therefore the cost of goods sold is charged based on these most recent costs. This leaves older inventory costs still remaining in inventory, and can result in different cost of goods sold and ending inventory values compared to other costing methods such as FIFO and average cost.

Question 15

The average cost inventory method is the rarely used with a perpetual inventory system.

Accepted Answer

The answer of The average cost inventory method is the...

Question 16

A physical inventory should be taken at the end of every month.

Accepted Answer

A physical inventory can be taken as frequently as needed, depending on the nature and size of the business. Some businesses may require daily inventory checks while others may only need to do it once a year. It ultimately depends on the inventory management system and the frequency of sales and restocking.

Question 17

A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.

Accepted Answer

A subsidiary inventory ledger allows for more detailed tracking and analysis of inventory levels, which can help identify when replenishment is needed and prevent overstocking or stockouts.

Question 18

Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the inventory.

Accepted Answer

Controlling inventory helps in safeguarding it from theft, damage or misuse. Proper reporting of inventory ensures accuracy of financial statements and helps in making informed business decisions. Therefore, both these reasons justify the need for inventory control.

Question 19

If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise.

Accepted Answer

In the perpetual inventory system, the Merchandise Inventory account is debited for purchases of merchandise.

Question 20

One of the two internal control procedures over inventory is to properly report inventory on the financial statements.

Accepted Answer

Properly reporting inventory on the financial statements is an important internal control procedure to ensure accurate financial reporting. This involves valuing inventory correctly and ensuring that it is accurately recorded on the balance sheet.

Quiz 6: Inventories