Question 1

One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings.When inventory costs are rising,LIFO provides greater tax savings.

Accepted Answer

When inventory costs are rising, LIFO (Last In, First Out) results in greater tax savings compared to FIFO (First In, First Out). This is because LIFO assumes that the last inventory purchased is the first one sold, resulting in a higher cost of goods sold and a lower taxable income. Therefore, the statement in the question is incorrect.

Question 2

Using LIFO,the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system.The amount reported for ending inventory (or cost of goods sold)will differ.

Accepted Answer

Under LIFO (Last-In, First-Out), the amount reported for ending inventory can differ between a periodic system and a perpetual system due to the timing of when costs are allocated to cost of goods sold versus remaining in inventory. In a periodic system, the LIFO calculation is made at the end of the period, potentially incorporating more recent costs into the cost of goods sold. In contrast, a perpetual system updates inventory and cost of goods sold continuously, which can lead to different allocations of costs between sold and unsold inventory throughout the period.

Question 3

The inventory turnover ratio equals cost of goods sold divided by average inventory.

Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory.

Question 4

The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting.

Accepted Answer

The use of the lower of cost and net realizable value for inventory reporting is an example of conservatism, which is a principle in accounting that requires companies to choose the accounting option that is least likely to overstate assets and income.

Question 5

When the net realizable value of inventory falls below its cost,no adjustment to the accounting records is needed.Companies are required to record an adjustment when net realizable value falls below cost.The adjustment has the effect of reducing assets and increasing expenses.

Accepted Answer

When the net realizable value of inventory falls below its cost, companies are required to record an adjustment to reflect the lower value of inventory. This adjustment reduces assets and increases expenses.

Question 6

At the time inventory is sold,cost of goods sold is recorded under the perpetual inventory system.

Accepted Answer

In a perpetual inventory system, cost of goods sold is recorded at the time of sale, hence the statement is true.

Question 7

A periodic inventory system does not continually modify inventory amounts,but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.

Accepted Answer

A periodic inventory system relies on physical counts at the end of the reporting period to adjust inventory amounts, rather than continually updating inventory levels throughout the period.

Question 8

When the value of inventory falls below its cost,companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value.Companies must report inventory at the lower of cost and net realizable value.

Accepted Answer

The answer of When the value of inventory falls below...

Question 9

A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25.The inventory turnover ratio equals cost of goods sold ($2,000)divided by average inventory ($500),which equals 4.0 in this example.

Accepted Answer

The inventory turnover ratio is calculated as cost of goods sold divided by average inventory, which in this case equals 4.0, not 0.25.

Question 10

The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory.

Accepted Answer

When inventory is written down from cost to lower net realizable value, it means that its value has decreased and it is not worth as much as originally thought. This means that the cost of the goods sold will need to be adjusted downwards to reflect their lower value, which is accomplished through a debit to Cost of Goods Sold. At the same time, the Inventory account will need to be credited to reflect the lower value of the items still in stock.

Question 11

The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales.

Accepted Answer

The gross profit ratio, also known as gross margin ratio, is calculated by dividing gross profit by net sales. It indicates the amount of profit generated by each dollar of sales after considering the cost of goods sold.

Question 12

The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting.The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use it for financial reporting.

Accepted Answer

The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting, not to use LIFO for financial reporting.

Question 13

Freight-in is included in the cost of inventory.

Accepted Answer

Freight-in refers to the cost of transportation and handling of goods purchased from suppliers. It is added to the cost of inventory and therefore included in the total cost of the goods.

Question 14

For inventory that is shipped FOB destination,title transfers from the seller to the buyer once the seller ships the inventory.For FOB destination,title transfers once the inventory reaches the buyer (destination).

Accepted Answer

For FOB destination, title transfers from the seller to the buyer once the inventory reaches the buyer (destination).

Question 15

The LIFO difference (reserve)is the additional amount of inventory a company would report if it used FIFO instead of LIFO.

Accepted Answer

The statement is true. The LIFO reserve is the difference between inventory reported under LIFO and inventory that would have been reported under FIFO, representing the additional amount of inventory that a company would report if it used FIFO instead of LIFO.

Question 16

For inventory that is shipped FOB shipping point,title transfers from the seller to the buyer once the seller ships the inventory.

Accepted Answer

FOB shipping point means that the buyer is responsible for the inventory once it leaves the seller's shipping point, and title transfers to the buyer at that point.

Question 17

Generally,a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory.

Accepted Answer

This is because a higher inventory turnover ratio means that a company is selling its inventory quickly and efficiently, which can lead to increased profits and cash flow. It also indicates that the company is not carrying excess inventory, which can be costly and reduce the company's overall profitability.

Question 18

Generally,a lower gross profit ratio reflects positively on a company's ability to manage its inventory.A higher ratio is generally a stronger signal about the company's successful management of inventory.

Accepted Answer

A higher gross profit ratio indicates that the company is making a higher profit margin on its inventory, which can be a signal of successful inventory management. A lower ratio may indicate that the company is not making as much profit on its inventory, which could reflect poor inventory management or other factors such as low pricing or high costs of goods sold. Therefore, a higher gross profit ratio generally reflects positively on a company's ability to manage its inventory.

Question 19

Using a perpetual inventory system,the purchase of inventory is recorded with a debit to the Purchases account,which is a temporary account closed to cost of goods sold at the end of the period.The debit is to the Inventory account.

Accepted Answer

In a perpetual inventory system, the purchase of inventory is recorded with a debit to the Inventory account, not the Purchases account. The Purchases account is used in a periodic inventory system.

Question 20

Overstating ending inventory in the current year causes net income in the current year to be overstated.

Accepted Answer

Overstating ending inventory in the current year would increase the value of inventory on the balance sheet, which affects the cost of goods sold (COGS) calculation. COGS = Beginning inventory + Purchases - Ending inventory. If ending inventory is overstated, then COGS will be understated, which will lead to an overstatement of gross profit and net income.

Quiz 6: Inventory and Cost of Goods Sold