Question 1

The International Accounting Standards Board requires the specific identification method when unit price is low, inventory turnover is high, and inventory quantities are large.

Accepted Answer

The International Accounting Standards Board does not require the specific identification method under any specific circumstances. Different inventory costing methods may be used based on the company's specific circumstances and objectives.

Question 2

In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used.

Accepted Answer

FIFO (First In, First Out) assumes that the first inventory items purchased are the first ones sold. Therefore, whether a perpetual or periodic system is used, the same oldest inventory items will be sold first and the same cost of goods sold will be calculated.

Question 3

Both merchandising and manufacturing companies normally have multiple inventory accounts.

Accepted Answer

False

Question 4

The cost flow assumption adopted must be consistent with the physical movement of the goods.

Accepted Answer

The cost flow assumption (e.g., FIFO, LIFO, or average cost) used for accounting purposes does not need to match the physical movement of goods in inventory.

Question 5

The International Accounting Standards Board (IASB) requires the specific identification method of inventory costing where individual items of inventory can be identified and costed.

Accepted Answer

The statement is true. The IASB requires the specific identification method of inventory costing where individual items of inventory can be identified and costed. However, if specific identification is not possible, alternative methods such as first-in, first-out (FIFO) or weighted average cost may be used.

Question 6

Interest costs incurred to manufacture large quantities of inventory that are produced routinely should be capitalized.

Accepted Answer

Interest costs incurred during the production of inventory that is manufactured routinely should not be capitalized according to generally accepted accounting principles (GAAP); they should be expensed in the period incurred. Capitalization of interest costs is typically reserved for assets that are constructed or developed over a period of time and not for routine inventory production.

Question 7

IFRS requires manufacturers to disclose their inventory components on the statement of financial position or in related notes.

Accepted Answer

IFRS does require manufacturers to disclose their inventory components on the statement of financial position or in related notes. This is in order to provide useful information to users of the financial statements regarding the nature and composition of the inventory held by the company.

Question 8

When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.f.o.b.destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

Accepted Answer

In a f.o.b. destination arrangement, the title passes to the buyer when the goods reach the buyer's location, not when delivered to the common carrier.

Question 9

Companies must allocate the cost of all the goods available for sale (or use) between the income statement and the statement of financial position.

Accepted Answer

This statement is true. The cost of goods sold is reported on the income statement, while the cost of goods not yet sold is reported on the statement of financial position as inventory. The allocation of these costs is necessary for accurate financial reporting.

Question 10

Freight costs incurred by the seller to ship merchandise to the purchaser are accounted for by the seller as part of inventory on the statement of financial position.

Accepted Answer

Freight costs incurred by the seller to ship merchandise to the purchaser are typically recorded as a selling expense, not as part of inventory. Inventory costs include costs that are directly related to bringing the inventory to its present location and condition, such as purchase price, freight-in, and handling costs, not the costs of selling or shipping the product to the customer.

Question 11

Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory.

Accepted Answer

Freight charges on goods are considered part of the cost of inventory and are included in the total cost of the goods purchased.

Question 12

Under IFRS, agricultural inventories, such as wheat, oranges, etc., are recorded at their fair value less estimated selling costs at the point of harvest.

Accepted Answer

Under IFRS, agricultural inventories are recorded at their fair value less estimated selling costs at the point of harvest. This is different from the accounting treatment of agricultural inventories under US GAAP, which generally values them at cost, less any write-downs for declines in value.

Question 13

A trade discount that is granted as an incentive for a first-time customer or as a reward for large order should be accounted for by the purchaser as revenue.

Accepted Answer

Trade discounts are deducted from the list price before the invoice is sent to the customer. They are not considered revenue but a reduction in the cost of goods sold. Therefore, they should not be accounted for as revenue by the purchaser.

Question 14

A manufacturing concern would report the cost of units only partially processed as inventory in the statement of financial position.

Accepted Answer

This is because partially processed units (also known as work-in-process inventory) represent costs incurred by the manufacturing concern that have not yet been completed and transferred to finished goods inventory. As such, they are considered a part of the manufacturing process and are classified as inventory until they are fully completed and ready for sale.

Question 15

Abnormal freight costs are not included on the statement of financial position as part of the cost of inventory.

Accepted Answer

Abnormal freight costs are considered as period expenses and are not included in the cost of inventory that is shown on the statement of financial position.

Question 16

Goods in transit, shipped FOB shipping point, are included in the buyer's statement of financial position at the time of delivery to the common carrier.

Accepted Answer

Goods in transit are considered a part of the buyer's inventory because the risk of loss or damage is transferred to the buyer at the point of shipment. Therefore, they should be included in the buyer's statement of financial position at the time of delivery to the common carrier.

Question 17

If a supplier ships goods

Accepted Answer

The statement is incomplete and does not provide enough information to determine its truth value.

Question 18

If both purchases and ending inventory are overstated by the same amount, net income is not affected.

Accepted Answer

When both purchases and ending inventory are overstated by the same amount, the overstatement in purchases increases the cost of goods sold, but the overstatement in ending inventory decreases the cost of goods sold by the same amount. Therefore, these effects cancel each other out, leaving net income unaffected.

Question 19

Purchase Discounts Lost is a financial expense and is reported in the "other income and expense" section of the income statement.

Accepted Answer

Purchase Discounts Lost is considered a financial expense because it represents the cost of not taking advantage of discounts offered by suppliers for early payment. It is reported in the "other income and expense" section of the income statement as it is not directly related to the primary operations of the business.

Question 20

Tang, Inc.sells collectible jewelry on consignment from various manufacturers and should include this consigned inventory on its statement of financial position.

Accepted Answer

Tang, Inc. should not include consigned inventory on its statement of financial position because consigned goods remain the property of the consignor (manufacturers) until sold.

Quiz 8: Valuation of Inventories: a Cost-Basis Approach