Question 1

In a period of rising prices, the costs allocated to ending inventory may be understated in the

Accepted Answer

In a period of rising prices, the LIFO (Last-in, First-out) method is the best choice for inventory costing. This is because this method assumes that the last items purchased are the first ones sold, which means the cost of goods sold will reflect the higher, more recent prices. As a result, the costs allocated to the ending inventory will be understated in the LIFO method.

Question 2

The managers of Venice Company receive performance bonuses based on the gross profit of the firm. Which inventory costing method are they likely to favor in periods of declining prices?

Accepted Answer

In periods of declining prices, LIFO (Last-In, First-Out) method of inventory costing is likely to result in a lower gross profit as it values inventory at the higher costs of older inventory items. This leads to a lower taxable income and hence managers may favor LIFO as it reduces their tax liability and increases their performance bonuses. Therefore, choice A) is the likely option for the managers of Venice Company.

Question 3

Under the LCNRV approach, inventory is valued at the lower of cost or

Accepted Answer

The LCNRV approach stands for Lower of Cost or Net Realizable Value. Therefore, inventory is valued at whichever is lower between its cost and net realizable value, also known as the estimated selling price minus the estimated costs of completion and disposal. Choice A, B, and D are not correct terms in accounting and do not relate to the LCNRV approach.

Question 4

The specific identification method of costing inventories is used when the

Accepted Answer

The specific identification method is best used when a company sells a limited quantity of high-unit cost items. This is because the method involves identifying and tracking the cost of each individual item, which is more practical and cost-effective when dealing with a limited quantity of high-cost items. For example, a car dealership may use this method to track the cost of each individual car they sell, whereas a grocery store selling large quantities of low-cost items would likely use a different cost accounting method, such as average cost.

Question 5

The accountant at Peacock Company has determined that gross profit amounted to $6,500 using the FIFO costing method. If the grossprofit is $1,060 greater than if the LIFO costing method were used, what would be the amount of gross profit under the LIFO method?

Accepted Answer

Using the FIFO method, gross profit is given as $6,500. Let the gross profit using the LIFO method be X.

According to the problem, we can form the equation:

X - $6,500 = $1,060

Solving for X, we get:

X = $7,560

Therefore, the amount of gross profit under the LIFO method would be $7,560.

Hence, the correct answer is B.

Question 6

The accountant at Elvira Company is figuring out the difference in net income depending on the choice of either FIFO or LIFO as an inventory costing method. The FIFO method will result in gross profit of $8,290. The LIFO method will result in gross profit of $26,000 and an inventory valuation that is $275 less than the FIFO inventory valuation. What is the difference in gross profit between the two methods?

Accepted Answer

The answer of The accountant at Elvira Company is figuring...

Question 7

In a period of inflation, the cost flow method that results in the lowest net income is the

Accepted Answer

During inflation, LIFO (Last-In, First-Out) method results in the lowest net income, as it assumes that the last inventory purchased is the first item sold, and the cost of the most recently purchased inventory is higher due to inflation. As a result, the cost of goods sold is higher, which reduces the net income. Therefore, LIFO is the best choice in this scenario.

Question 8

In a period of rising prices, FIFO will have

Accepted Answer

In a period of rising prices, FIFO will have a higher cost of goods sold than LIFO due to using the oldest, lower-priced inventory first. This results in a lower gross profit and higher net income for LIFO, making option A incorrect. Option C is also incorrect as it implies that FIFO will have a higher gross profit than LIFO, which is the opposite of what occurs during rising prices. Option D is irrelevant to the question and can be eliminated. Therefore, the correct answer is B.

Question 9

In a period of increasing prices, which inventory cost flow method will result in the lowest gross profit?

Accepted Answer

LIFO assumes that the most recently purchased inventory items are sold first, resulting in higher costs of goods sold and lower ending inventory values compared to FIFO and average cost methods. In a period of increasing prices, this leads to a lower gross profit under LIFO compared to the other methods.

Question 10

Inventory transactions affect

Accepted Answer

Inventory transactions affect both the balance sheet (in the inventory account) and the income statement (in the cost of goods sold account). When inventory is purchased, it is recorded as an asset on the balance sheet. When the inventory is sold, its cost is moved from the balance sheet to the income statement as cost of goods sold. This impacts the net income and ultimately affects the retained earnings on the balance sheet.

Question 11

In periods of inflation, phantom or paper profits may be reported as a result of using the

Accepted Answer

The FIFO (First-In, First-Out) costing method can lead to phantom or paper profits during inflation because it matches older, lower-cost inventory against current revenues, inflating profits.

Question 12

Roseanne Company's periodic inventory records show the following data: $\begin{array}{llrr} 
& & \underline{\text { Units }} &  \underline{\text { Unit Cost }} \
\text { Inventory, } & \text { January } 1 & 10,000 & \$ 9.00 \
\text { Purchases: } & \text { June 18 } & 9,000 & 8.20 \
& \text { November } 8 & 6,000 & 7.25
\end{array}$ A physical inventory on December 31 shows 5,000 units on hand. Under the FIFO method, the December 31 inventory is

Accepted Answer

The answer of Roseanne Company's periodic inventory records show the...

Question 13

The manager of Stone Company is given a bonus based on gross profit . Gross profit is $11,500 for FIFO and $10,100 for LIFO. The bonus rate is 15%. How much higher (lower) is the manager's bonus if FIFO is adopted instead of LIFO?

Accepted Answer

The difference in gross profit between FIFO and LIFO is $11,500 - $10,100 = $1,400. 
15% of $1,400 is $210. 
Therefore, the manager's bonus would be $210 higher if FIFO is adopted instead of LIFO.

Question 14

The consistent application of an inventory costing method is essential for

Accepted Answer

Consistent application of an inventory costing method is essential for comparability, as it ensures that similar items are consistently valued across different accounting periods, allowing for accurate comparisons of financial statements over time.

Question 15

If companies have identical inventoriable costs but use different inventory cost flow methods when the price of goods has not been constant, then the

Accepted Answer

The cost of goods available for sale will be identical because it is based on the total cost of inventory purchased, which is the same for both companies. However, the cost of goods sold and ending inventory may differ due to the different inventory cost flow methods used.

Question 16

In periods of rising prices, the inventory method that results in the inventory amount on the balance sheet that is closest to current cost is the

Accepted Answer

In periods of rising prices, the FIFO method results in the inventory amount on the balance sheet that is closest to current cost. This is because under FIFO, the oldest inventory items are sold first and therefore, the ending inventory consists of the most recently purchased (and presumably more expensive) items. This method results in a higher cost of goods sold, which lowers the reported net income and income taxes. However, it provides a more accurate valuation of inventory on the balance sheet.

Question 17

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using

Accepted Answer

If the price of goods has increased during the period, FIFO will have the highest ending inventory because it assumes that the oldest inventory is sold first, leaving the newest and most expensive inventory on hand. This results in a higher ending inventory value compared to LIFO, which assumes that the newest inventory is sold first, leaving the oldest and least expensive inventory on hand. The cost of goods sold will be lower under FIFO compared to LIFO, but the question does not ask for this information.

Question 18

The cost flow method that often parallels the actual physical flow of merchandise is the

Accepted Answer

FIFO (First-in, First-out) method assumes that the first goods bought are the first goods sold, which mirrors the physical flow of goods. This method is typically used in industries where the products have a limited shelf life, such as the food or beverage industry.

Question 19

The specific identification method of inventory costing

Accepted Answer

The specific identification method allows management to choose which specific units of inventory to sell, which may enable them to manipulate gross profit. The other answer choices are incorrect as the method does not always maximize or minimize gross profit, nor does it have no effect on gross profit.

Question 20

Selection of an inventory costing method by management does not usually depend on

Accepted Answer

The selection of an inventory costing method typically depends on factors such as income statement effects, balance sheet effects, and tax effects, rather than the fiscal year end.

Quiz 11: Inventory