Question 1

The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are decreasing.

Accepted Answer

The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are increasing, not decreasing. This is because LIFO assigns the most recent (and usually higher) unit costs to goods sold, resulting in a lower gross profit.

Question 2

A grocery store probably would use the specific identification inventory costing method for most of the items in its inventory.

Accepted Answer

A grocery store typically has a high volume of similar items in its inventory, making it impractical to use the specific identification method. Instead, most grocery stores use the FIFO (first-in, first-out) or weighted average cost method for inventory costing.

Question 3

During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

Accepted Answer

LIFO assumes that the most recent inventory items are sold first, which means that during times of inflation and increasing unit costs, the cost of goods sold will reflect the higher costs of the most recent inventory items. This results in a lower taxable income and, therefore, lower income taxes.

Question 4

Direct material costs are a component of the cost of the work-in process inventory.

Accepted Answer

Direct material costs are materials that can be traced to a specific product or job. These costs are included in the work-in process inventory as a component of the total cost.

Question 5

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

Accepted Answer

The LIFO inventory method allocates the newest or most recently purchased inventory costs to cost of goods sold, not the oldest.

Question 6

Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

Accepted Answer

Finished goods are the products that have been completed and are ready for sale, and are reported as an asset on the balance sheet. When goods are transferred out of work in process, they are considered completed and ready for sale, hence they are reported as finished goods on the balance sheet.

Question 7

The lower of cost or market (LCM) rule is used due to the conservatism constraint, and therefore an inventory calculation may result in a departure from the historical cost principle.

Accepted Answer

The lower of cost or market (LCM) rule requires inventory to be valued at the lower of its historical cost or market value. This is done to reflect conservatism in financial reporting, and may result in a departure from the historical cost principle if the market value of inventory falls below its original cost.

Question 8

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a debit to cost of goods sold and a credit to inventory.

Accepted Answer

This is correct. When writing down inventory to the lower of cost or market under the LCM rule, the cost of the inventory is reduced by debiting cost of goods sold and the inventory account is also reduced by crediting it.

Question 9

Inventory inspection costs are reported as operating expenses on the income statement.

Accepted Answer

The answer of Inventory inspection costs are reported as operating...

Question 10

The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing.

Accepted Answer

The answer of The FIFO inventory method will result in...

Question 11

During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

Accepted Answer

The answer of During periods of decreasing unit costs, use...

Question 12

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

Accepted Answer

During periods of increasing unit costs, the LIFO inventory method will result in a lower inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

Question 13

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

Accepted Answer

The answer of A company can use the LIFO inventory...

Question 14

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a decrease in both ending inventory and cost of goods sold.

Accepted Answer

The answer of The journal entry to write-down inventory under...

Question 15

A decrease in the merchandise inventory account occurs when units of inventory purchased are greater than units of goods sold.

Accepted Answer

A decrease in the merchandise inventory account occurs when units of inventory sold are greater than units of goods purchased. This is because the inventory account is being depleted and less inventory is left on hand.

Question 16

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a credit to cost of goods sold and a debit to inventory.

Accepted Answer

The answer of The journal entry to write-down inventory under...

Question 17

During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher amount of ending inventory than will the use of the FIFO inventory method.

Accepted Answer

The answer of During periods of decreasing unit costs, use...

Question 18

The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

Accepted Answer

The use of raw materials in the manufacturing process is reported as a cost of goods sold or cost of sales on the income statement, not as an operating expense.

Question 19

Goods available for sale are allocated to both ending inventory and cost of goods sold.

Accepted Answer

This is true as goods available for sale includes both the beginning inventory and the purchases made during a period. The total cost of these goods must be allocated between ending inventory and cost of goods sold based on certain methods such as FIFO, LIFO, or weighted average.

Question 20

The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory.

Accepted Answer

The First-In, First-Out (FIFO) method assumes that the first units purchased are the first ones sold, and therefore the cost of the earliest purchased inventory items are allocated to ending inventory.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory

The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are decreasing.

A grocery store probably would use the specific identification inventory costing method for most of the items in its inventory.

During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

Direct material costs are a component of the cost of the work-in process inventory.

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

The lower of cost or market (LCM) rule is used due to the conservatism constraint, and therefore an inventory calculation may result in a departure from the historical cost principle.

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a debit to cost of goods sold and a credit to inventory.

Inventory inspection costs are reported as operating expenses on the income statement.

The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing.

During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a decrease in both ending inventory and cost of goods sold.

A decrease in the merchandise inventory account occurs when units of inventory purchased are greater than units of goods sold.

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a credit to cost of goods sold and a debit to inventory.

During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher amount of ending inventory than will the use of the FIFO inventory method.

The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

Goods available for sale are allocated to both ending inventory and cost of goods sold.

The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory.