Question 1

If inventories are valued using the LIFO cost assumption they should not be classified as a current asset on the balance sheet.

Accepted Answer

Inventories valued using LIFO are still considered current assets on the balance sheet. However, their carrying value may not reflect their current replacement cost if inflation has occurred.

Question 2

Goods out on consignment should be included in the inventory of the consignor.

Accepted Answer

Goods out on consignment remain the property of the consignor until they are sold by the consignee, hence they should be included in the inventory of the consignor.

Question 3

Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

Accepted Answer

Accountants believe that the write down from cost to market should be made in the period in which the price decline occurs to accurately reflect the value of the assets or inventory on the balance sheet. This is known as applying the lower of cost or market (LCM) rule.

Question 4

If a company changes its inventory valuation method the effect of the change on net income should be disclosed in the financial statements.

Accepted Answer

According to generally accepted accounting principles (GAAP), a company must disclose the effect of any change in accounting principle, such as a change in inventory valuation method, on its financial statements. This is typically done through a disclosure note accompanying the financial statements.

Question 5

Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Accepted Answer

LIFO (Last In, First Out) inventory valuation method primarily affects the cost of goods sold and inventory valuation on the balance sheet, rather than directly creating paper or phantom profits. It can lead to higher cost of goods sold during inflationary periods, potentially lowering reported profits, not inflating them with phantom profits.

Question 6

If the unit price of inventory is increasing during a period a company using the LIFO inventory method will show less gross profit for the period than if it had used the FIFO inventory method.

Accepted Answer

This is because LIFO assumes that the most recent inventory purchases are sold first, so the cost of goods sold reflects the higher, more recent prices. As a result, the cost of goods sold will be higher and the gross profit will be lower when unit prices are increasing, compared to FIFO which assumes the opposite.

Question 7

Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.

Accepted Answer

Raw materials inventories are the materials and components that a manufacturer has acquired but have not yet been processed into finished goods. They are typically used in production processes to create the finished products that will eventually be sold to customers.

Question 8

Under the lower-of-cost-or-market basis market is defined as current replacement cost.

Accepted Answer

Under the lower-of-cost-or-market basis, the market value is defined as the current replacement cost. This means that if the current replacement cost is less than the original cost of the inventory, then the inventory must be adjusted down to its market value.

Question 9

The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Accepted Answer

The specific identification method involves identifying and tracking the cost of each specific unit of inventory, allowing for a precise calculation of the cost of goods sold and ending inventory. This method is based on actually identifying and tracking the flow of specific units of inventory.

Question 10

Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Accepted Answer

Management can choose any inventory costing method (e.g., FIFO, LIFO, average cost) for financial reporting purposes, but the choice does not need to match the physical movement of goods. The decision is often based on financial, tax, or operational considerations.

Question 11

If a company has no beginning inventory and the unit cost of inventory items does not change during the year the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Accepted Answer

If there is no beginning inventory and the unit cost of inventory items does not change during the year, then the cost of goods sold and the ending inventory will be the same under both LIFO and average cost methods. Therefore, the value assigned to the ending inventory will also be the same.

Question 12

A company may use more than one inventory costing method concurrently.

Accepted Answer

A company may use different inventory costing methods for different types of inventory or for different purposes (such as for financial reporting and tax purposes). For example, a company may use the first-in, first-out (FIFO) method to calculate its cost of goods sold for financial reporting, but use the last-in, first-out (LIFO) method for tax purposes to minimize its tax liability.

Question 13

The first-in first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

Accepted Answer

The FIFO method assumes that the oldest items purchased or manufactured are sold first, leaving the most recently acquired items in inventory, thus valuing the ending inventory at the most recent costs.

Question 14

The more inventory a company has in stock the greater the company's profit.

Accepted Answer

Having too much inventory can lead to increased storage and holding costs, as well as potential obsolescence or spoilage of goods. In addition, tying up too much capital in inventory can limit a company's ability to invest in other areas that could improve profitability.

Question 15

An error that overstates the ending inventory will also cause net income for the period to be overstated.

Accepted Answer

Overstating ending inventory means that the cost of goods sold will be understated, which in turn will result in higher net income. Therefore, an error that overstates ending inventory will also cause net income for the period to be overstated.

Question 16

Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.

Accepted Answer

Transactions that affect inventories on hand, such as purchases, sales, and adjustments, will impact the balance sheet by increasing or decreasing the inventory asset account. They will also affect the income statement by changing the cost of goods sold and gross profit.

Question 17

The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

Accepted Answer

The expense recognition principle (or matching principle) requires that expenses be matched with the revenues they help to generate, not against the ending merchandise inventory. The cost of goods sold is matched against revenues to determine gross profit, not income determination by matching with ending inventory.

Question 18

The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

Accepted Answer

The specific identification method of inventory valuation is most desirable when a company sells a small number of high-unit cost items, where it is feasible and practical to individually track and assign costs to each item sold. For companies with a large number of low-unit cost items, the cost of individually tracking and assigning costs can outweigh the benefits. Therefore, the FIFO or LIFO methods are typically used instead.

Question 19

If a company has no beginning inventory and the unit price of inventory is increasing during a period the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

Accepted Answer

The cost of goods available for sale is the same under both LIFO and FIFO because it is calculated as the sum of the beginning inventory and purchases, and since there is no beginning inventory, it only depends on the purchases made during the period.

Question 20

Goods that have been purchased FOB destination but are in transit should be excluded from a physical count of goods.

Accepted Answer

FOB destination means the seller retains ownership until the goods reach the buyer's location, so they should not be included in the buyer's inventory count while in transit.

Quiz 6: Inventories