Deck 9: Inventories

Question 1

In a periodic inventory system the ending inventory must be determined by physical count.

Answer 1

True

Question 2

The choice of method for allocating the cost of goods available for sale between ending inventory and cost of goods sold represents the major issue in inventory accounting.

Answer 2

True

Question 3

A periodic inventory system is preferable if avoiding "stock-outs" is of paramount importance-for example in manufacturing firms that use just-in-time systems.

Answer 3

False

Question 4

If the cost of inventory never changed,all three cost flow assumptions (i.e.,LIFO,FIFO and weighted average)would yield the same financial statement result.

Question 5

Inventory carrying cost includes storage costs.

Question 6

In the perpetual inventory system inventory losses must be recorded in the accounts.

Question 7

Inventory carrying cost includes transportation costs paid by the purchaser.

Question 8

Periodic inventory systems provide a greater degree of management control over inventory.

Question 9

Under a periodic inventory system,no entry is made at the time of sale to reflect cost of goods sold.

Question 10

Cost of goods available for sale is always the same regardless of the inventory cost flow assumption in use.

Question 11

A periodic system of inventory is used when inventory volumes are low and per unit costs are high.

Question 12

Under a periodic inventory system,cost of goods sold automatically includes the cost of inventory "shrinkage."

Question 13

The advent of widely used computerized optical scanning equipment has led to the adoption of perpetual systems in high-volume settings where such systems were previously not cost effective.

Question 14

Beginning inventory plus inventory purchases equals cost of goods sold.

Question 15

Under a periodic inventory system,purchases are debited to a purchases account.

Question 16

Inventory shipped on consignment is owned by the consignee.

Question 17

Although many firms use the LIFO cost flow assumption,no examples exist in which the real physical flow of units sold is also last-in,first-out.

Question 18

All inventory items to which the firm has legal title should be included in the inventory account although most firms record inventory only when they physically receive it.

Question 19

Under a perpetual inventory system,purchases are debited to a purchases account.

Question 20

The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as unrealized holding gains.

Question 21

Under absorption costing all production costs are inventoried.

Question 22

Variable costing includes only variable costs of production in inventory.

Question 23

Generally accepted accounting principles do not allow variable costing to be used in external financial statements because absorption costing makes it easier for financial statement users to interpret year-to-year changes in reported income.

Question 24

Product costs,i.e.raw material,labor,and certain overhead items,are assigned to inventory and treated as assets until the inventory is sold.

Question 25

GAAP requires that inventory costs should also include the costs of the purchasing department and other general administrative costs associated with the acquisition and distribution of inventory.

Question 26

The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions.

Question 27

FIFO matches current costs with current revenues.

Question 28

Companies frequently disclose the effects of absorption costing on reported net income.

Question 29

Absorption costing makes it difficult for financial statement users to interpret year-to-year changes in reported income when inventory levels change between one year and the next.

Question 30

Variable costing is an acceptable costing method for GAAP.

Question 31

Variable costs are those that do not change in proportion to the level of production and include raw materials,direct labor,and the salaries of factory supervisors.

Question 32

GAAP does not require the cost flow assumption to conform to the actual physical flow of the goods.

Question 33

When variable costing is used,fixed production costs are included as part of inventory cost.

Question 34

GAAP requires the cost flow assumption to correspond to the actual physical flow of inventory.

Question 35

"Vendor allowances" should be used by the recipient to lower the carrying cost of inventory and thus ultimately to lower cost of goods sold.

Question 36

A cash purchase discount that is lost because of a late payment should be recorded as interest expense rather than as a cost of acquiring inventory.

Question 37

Analysts must be aware that with the use of absorption costing,as inventory absorbs more fixed costs,reported income tends to decrease.

Question 38

The FIFO method of inventory valuation assumes that the first unit purchased is the first unit sold.

Question 39

When inventory increases under absorption costing it absorbs more fixed cost and increases net income.

Question 40

When physical inventory levels are decreasing,absorption cost income tends to rise since fixed overhead that was previously in inventory gets charged against income as part of the cost of goods sold.

Question 41

The formula to convert the cost of goods sold under LIFO to an estimate of the cost of goods sold under FIFO is: Cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO.

Question 42

Under GAAP,current cost (replacement cost)accounting may be used at the discretion of management.

Question 43

The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost.

Question 44

The LIFO reserve disclosure was intended to remedy the difficulty investors face when trying to compare LIFO versus FIFO firms in a meaningful manner.

Question 45

Current cost (replacement cost)accounting is preferred by the FASB because it records holding gains on financial statements as they arise.

Question 46

The SEC requires that the 10-K report disclose the dollar impact of LIFO liquidation whenever it occurs.

Question 47

FIFO charges the newest costs against revenues on the income statement thus matching the current cost of replacing the units with current revenues.

Question 48

By charging the oldest costs to the income statement,FIFO automatically includes in income the holding gain on the unit that was sold.

Question 49

Some analysts argue that by merging current cost profits and realized holding gains,LIFO gives misleading signals about the sustainable operating profits of the company.

Question 50

The SEC rule (Regulation S-X)requires firms to disclose "the excess of replacement cost or current cost over stated LIFO value ..." rather than the difference between inventory book value at LIFO and inventory book value at FIFO.

Question 51

The LIFO-to-FIFO adjustment for a company that uses LIFO for only a portion of its inventory is different from the method used when a company uses LIFO for its entire inventory.

Question 52

Firms that use LIFO must disclose the dollar magnitude of the difference between LIFO and FIFO cost.

Question 53

LIFO can be applied on either a periodic or perpetual basis.However,using the perpetual method defeats the purpose of LIFO.

Question 54

For ratio analysis,a distortion in the current ratio under LIFO inventory costing may be adjusted by subtracting the LIFO reserve from current assets.

Question 55

Under either LIFO or FIFO it is impossible to simultaneously reflect both the balance sheet inventory and cost of goods sold at current cost.

Question 56

When a LIFO firm liquidates old LIFO layers,the net income number under LIFO can be seriously distorted because the older costs in the LIFO layers that are liquidated are matched against sales dollars that are stated at higher current prices.

Question 57

As LIFO layers are liquidated,inventory holding gains that were previously ignored are recognized in the period of liquidation.

Question 58

When purchases and sales occur continuously,the most recently incurred costs will be virtually identical to current replacement cost so LIFO provides a good match between current costs and current revenues.

Question 59

GAAP prescribes a standardized format for disclosing the LIFO reserve.

Question 60

A recent survey of companies indicated that the specific identification method of inventory accounting is the most prevalent.

Question 61

When using LIFO,management occasionally deliberately stops normal purchases for the last few weeks of the year in an attempt to boost profits.

Question 62

Managers can avoid the negative tax ramifications of LIFO liquidation by purchasing enough inventory by year-end to bring inventory up to beginning-of-year levels.

Question 63

The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the severity of input cost changes and the rapidity of physical inventory turnover.

Question 64

Under the lower of cost or market method,the floor provides a lower bound for write-downs in situations where input replacement cost and selling price do not move together.

Question 65

Midyear LIFO liquidations receive the same accounting treatment regardless of whether they are deemed to be temporary or permanent.

Question 66

U.S.tax rules specify that if LIFO is used for tax purposes,the external financial statements must also use LIFO.

Question 67

IFRS requires the use of absorption costing.

Question 68

IFRS only permit the use of either the FIFO or weighted average cost flow assumption.

Question 69

In the lower of cost or market determination,the ceiling is the inventory's net realizable value.

Question 70

During periods of rising inventory costs,LIFO cost of goods sold is understated because of the inventory holding gains that have occurred during the period.

Question 71

Both U.S.GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory.

Question 72

The use of the lower of cost or market method to value inventory for reporting purposes employs the accounting principle of matching.

Question 73

An overstatement of ending inventory leads to an overstatement of cost of goods sold.

Question 74

LIFO's tax advantage is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.

Question 75

The lower of cost or market method is based on the assumption that input costs and selling prices generally move together.

Question 76

IFRS requires the use of direct costing for inventories.

Question 77

Errors in computing inventory are fairly commonplace.

Question 78

To avoid providing an incentive for managers to engage in intentional LIFO liquidation,bonus contracts should subtract out LIFO liquidation profits.

Question 79

The LIFO conformity rule was promulgated by the SEC to insure that all firms in a given industry use LIFO if a majority of the firms in the industry opt to do so.

Question 80

International accounting standards permit the use of either the FIFO or weighted average cost flow assumption,but prohibit the use of LIFO.