Question 1

The cost formula a company chooses should correspond as closely as possible to the actual physical flow of goods.

Accepted Answer

The cost formula should reflect the actual physical flow of goods to accurately assign costs to the products or services produced.

Question 2

The inventory cost formula that best matches cost and revenues is FIFO.

Accepted Answer

FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, which often aligns with the actual flow of goods and can better match current costs with current revenues.

Question 3

Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75.Subsequently, the NRV of the inventory recovered to equal its cost of $100.In this situation, the amount of the $25 ($100 - $75) prior writedown in value should be reversed.

Accepted Answer

Under IFRS, if the net realizable value of inventory increases after a write-down, the amount of the write-down should be reversed with the reversal limited to the amount of the original write-down, thus restoring the inventory to its original cost or lower.

Question 4

Consigned goods are held for sale by one party, although ownership of the goods is retained by another party.

Accepted Answer

Consigned goods are held by one party on behalf of another party who retains ownership. The consignee (the party holding the goods) has the responsibility of selling the goods and returning the proceeds to the consignor (the party who owns the goods).

Question 5

A change in the method of cost formula for inventory must be disclosed in the financial statements.

Accepted Answer

A change in the method of cost formula for inventory is a significant change in accounting policy, which must be disclosed in the financial statements to ensure transparency and comparability.

Question 6

Once goods leave the premises of the seller, they should never be added to the seller's physical inventory count.

Accepted Answer

Goods in transit that are shipped FOB (Free On Board) shipping point should not be included in the seller's inventory, but if they are shipped FOB destination, they remain in the seller's inventory until they reach the buyer's location.

Question 7

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

Accepted Answer

The answer of The first-in, first-out (FIFO) inventory cost formula...

Question 8

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the unit cost assigned to the cost of goods sold will be the same under FIFO and average cost formulas.

Accepted Answer

Since there is no beginning inventory and the unit cost remains constant throughout the year, both FIFO (First-In, First-Out) and average cost methods will assign the same unit cost to the cost of goods sold, as all units are of the same cost.

Question 9

In order to remove the cost of items sold from inventory, a unit cost must be determined.

Accepted Answer

The answer of In order to remove the cost of...

Question 10

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

Accepted Answer

The specific identification method is more suitable for companies that sell high-value, unique items rather than a large number of low-unit-cost items, as it tracks the cost of each specific item sold.

Question 11

A company may use more than one inventory cost formula if it has different types of inventory.

Accepted Answer

Different types of inventory can have different characteristics and business rationales for using specific inventory cost formulas (e.g., FIFO, LIFO, weighted average). Accounting standards allow for this flexibility as long as the method chosen is consistently applied to each type of inventory and it reflects the actual cost flow.

Question 12

All three methods of inventory cost formula will produce the same cumulative cost of goods sold over the life cycle of the business.

Accepted Answer

Different inventory costing methods (FIFO, LIFO, and Average Cost) can lead to different costs of goods sold and ending inventory values due to variations in how they account for the costs of inventory items over time, especially in periods of inflation or deflation.

Question 13

The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most businesses.

Accepted Answer

The FIFO (First-In, First-Out) inventory cost formula assumes that the first items placed in inventory are the first sold, which often closely matches the actual physical flow of goods in many businesses, especially those dealing with perishable items or products that cannot be stored for long periods.

Question 14

When using the perpetual system, the average cost formula relies on a simple average calculation.

Accepted Answer

The average cost formula under the perpetual system calculates the cost of inventory based on the weighted average cost method, which takes into account the cost of goods available for sale and the total units available, not just a simple average.

Question 15

When the value of inventory is lower than its cost, the inventory is written down to its net realizable value.

Accepted Answer

This accounting practice is in accordance with the lower of cost or market rule, which states that inventory should be reported at the lower of its historical cost or its net realizable value. This ensures that the inventory is not overstated on the financial statements.

Question 16

Approximating the physical flow of inventory is not important when selecting an inventory cost formula.

Accepted Answer

Approximating the physical flow of inventory is important when selecting an inventory cost formula because it helps ensure that the cost of goods sold (COGS) and inventory valuation on the balance sheet closely reflect the actual costs and physical flow of goods, leading to more accurate financial reporting and decision-making.

Question 17

A system of internal control is not needed when a company regularly takes a physical inventory.

Accepted Answer

A system of internal control is still needed to ensure that inventory is properly managed, accounted for, and safeguarded against theft, loss, or misuse, regardless of regular physical inventory counts.

Question 18

If prices never changed, there would be no need for alternative inventory cost formulas.

Accepted Answer

Without price changes, all inventory cost formulas (FIFO, LIFO, weighted average, etc.) would yield the same cost, eliminating the need for different methods.

Question 19

Inventory cost formulas such as FIFO and average cost, deal more with the flow of costs than with the flow of goods.

Accepted Answer

The answer of Inventory cost formulas such as FIFO and...

Question 20

If net realizable value of the inventory is lower than its cost, the total assets on the statement of financial position and net income on the statement of income will be reduced.

Accepted Answer

When the net realizable value (NRV) of inventory is lower than its cost, an impairment loss is recognized. This reduces the carrying amount of inventory on the balance sheet (thus reducing total assets) and the loss is also reflected in the income statement, reducing net income.

Quiz 6: Reporting and Analyzing Inventory