Question 1

"Market," as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner.

Accepted Answer

"Market" in the phrase "lower of cost or market" refers to the current replacement cost of the inventory, not the selling price.

Question 2

Merchandise Inventory is presented on the balance sheet in the current assets section.

Accepted Answer

Merchandise Inventory is a current asset and is presented on the balance sheet in the current assets section.

Question 3

The net realizable value is used for purposes of valuing out of date merchandise in inventory.

Accepted Answer

The net realizable value (NRV) is the estimated selling price of inventory minus any estimated costs of completion, disposal, and transportation. NRV is used to value inventory at the lower of cost or market, which means that if the NRV is lower than the original cost, the inventory must be written down to the NRV value. This is done to accurately reflect the actual value of inventory on the balance sheet.

Question 4

The FIFO method of costing inventory is based on the assumption that costs should be charged against revenues in the order in which they were incurred.

Accepted Answer

The FIFO (First-In, First-Out) method assumes that the oldest inventory items are sold first, and therefore the costs associated with those items should be charged against revenues first, in the order in which they were incurred.

Question 5

During inflationary periods, 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 method of costing inventory.

Accepted Answer

During inflationary periods, the FIFO (First In, First Out) method assigns the older, lower-cost items to cost of goods sold, resulting in a lower cost of goods sold and a higher gross margin compared to the LIFO (Last In, First Out) method, which assigns the newer, higher-cost items to cost of goods sold. This leads to a greater amount of net income under FIFO during inflation.

Question 6

A note receivable due in five years is listed on the balance sheet under the caption:

Accepted Answer

A note receivable due in five years is considered a long-term investment and falls under the category of investments on the balance sheet.

Question 7

In reference to a promissory note, the person who is to receive payment is called the:

Accepted Answer

The payee is the person who is to receive payment on a promissory note. The maker is the person who makes the promise to pay, the seller is the person selling the goods or services, and the payer is not a term typically used in reference to a promissory note.

Question 8

Average cost is a method of inventory valuation.

Accepted Answer

Average cost is a legitimate method of inventory valuation, which calculates the average cost of the items in inventory to determine the cost of goods sold and ending inventory.

Question 9

The amount of the promissory note plus the interest earned on the due date is called the:

Accepted Answer

The maturity value is the total amount owed on a promissory note on the due date, including the principal amount borrowed and the interest accrued. The market value refers to the current value of an asset, which may differ from its maturity value. The face value is the original amount borrowed, and the discounted value is the present value of future cash flows, which may not apply to a promissory note that has a fixed repayment schedule.

Question 10

Of the three widely used inventory costing methods (FIFO, LIFO, and average), the FIFO method of costing inventory is based on the assumption that costs are charged against revenues in the order in which they were incurred.

Accepted Answer

The statement is correct. FIFO stands for "first in, first out," and it assumes that the oldest inventory items are sold first. Therefore, the cost of goods sold reflects the cost of the oldest units, and the ending inventory reflects the cost of the newest units. This method is based on the assumption that costs flow through the income statement in the order they were incurred.

Question 11

During inflationary periods, the value of inventory that appears on the balance sheet using FIFO method will be more than its current replacement cost.

Accepted Answer

During inflationary periods, the FIFO (First In, First Out) method results in the oldest costs being allocated to the cost of goods sold, leaving the most recent, higher costs in inventory. Therefore, the value of inventory on the balance sheet will be closer to current replacement cost or possibly even higher, not less.

Question 12

During inflationary periods, the use of the LIFO method of costing inventory will result in a lesser amount of net income than would result from the use of the average method of inventory costing.

Accepted Answer

During inflationary periods, LIFO (last-in, first-out) method of inventory costing assumes that the most recently purchased items are sold first, while the older, lower-priced items remain in inventory. This results in a higher cost of goods sold and a lower ending inventory, which in turn results in a lesser amount of net income compared to the average method of inventory costing.

Question 13

Credit purchase is taken into account while calculating accounts receivable turnover ratio.

Accepted Answer

Credit purchase is not considered in the accounts receivable turnover ratio; this ratio is calculated by dividing net credit sales by the average accounts receivable, focusing on the efficiency of collecting receivables, not on purchases.

Question 14

The use of the lower-of-cost-or-market method of inventory valuation increases the gross profit for the period in which the inventory replacement price declined.

Accepted Answer

The lower-of-cost-or-market method of inventory valuation results in a decrease in the ending inventory value and an increase in the cost of goods sold when the market value declines, which in turn decreases gross profit for the period.

Question 15

A written promise to pay a sum of money on demand or at a definite time is called a(n):

Accepted Answer

A promissory note is a written promise to pay a sum of money on demand or at a definite time. A letter of credit is a financial agreement used in international trade, a deferred note is not a commonly recognized financial instrument, and a credit memorandum is a record of a credit issued by a seller to a buyer.

Question 16

In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct cost of disposal.

Accepted Answer

Net realizable value is calculated by subtracting any direct cost of disposal from the estimated selling price of damaged merchandise.

Question 17

In reference to a promissory note, the person who makes the promise to pay is called the:

Accepted Answer

The person who makes the promise to pay is called the maker. The payee is the person to whom the payment is promised to be made. The seller and receiver are not necessarily involved in a promissory note.

Question 18

The balance of the allowance for doubtful accounts is added to accounts receivable on the balance sheet.

Accepted Answer

The allowance for doubtful accounts is a contra asset account that is subtracted from accounts receivable on the balance sheet to present the net realizable value of accounts receivable.

Question 19

Lower-of-cost-or-market is a method of inventory valuation.

Accepted Answer

Lower-of-cost-or-market (LCM) is a method of valuing inventory in which the inventory is stated at the lower of its cost or its market value as of the financial statement date. This means that if the market value of the inventory is less than its cost, the inventory must be written down to its market value, resulting in a loss to the company's income statement.

Question 20

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

Accepted Answer

During deflation, prices decrease over time. LIFO (Last In, First Out) results in older, higher-cost inventory being used up first, leaving lower-cost inventory on the balance sheet, which increases net income compared to FIFO (First In, First Out), where older, higher-cost inventory remains on the balance sheet.

Quiz 6: Receivables and Inventories