Question 1

During periods of falling prices, LIFO ending inventory will be less than FIFO ending inventory.

Accepted Answer

During periods of falling prices, LIFO ending inventory will be higher than FIFO ending inventory because LIFO assumes the most recently acquired items are sold first, leaving older, lower-cost items in inventory.

Question 2

Physical counts of inventory are never made with perpetual inventory systems.

Accepted Answer

Perpetual inventory systems track inventory levels in real-time, but physical counts are still necessary to ensure accuracy and identify any discrepancies between the system and actual inventory on hand.

Question 3

Inventory costing methods are merely means by which costs are allocated between ending inventory and cost of goods sold.

Accepted Answer

Inventory costing methods are used to allocate costs between ending inventory and cost of goods sold. They are not used to determine the overall profitability of a company or to determine actual costs incurred.

Question 4

In a perpetual inventory system, the cost of purchases is debited to:
A) Purchases.
B) Cost of goods sold.
C) Inventory.
D) Accounts payable.

Accepted Answer

In a perpetual inventory system, the cost of purchases is debited directly to the Inventory account, as the system is designed to keep a continuous record of inventory levels and their associated costs. This allows for more accurate tracking of inventory costs and helps to prevent errors in calculating cost of goods sold.

Question 5

The main difference between perpetual and periodic inventory systems is the timing of the allocation of costs between inventory and cost of goods sold.

Accepted Answer

In a perpetual inventory system, costs are allocated to inventory and cost of goods sold continuously and in real time, while in a periodic inventory system, costs are allocated only at the end of a particular accounting period. This leads to differences in the accuracy and timing of inventory and cost of goods sold calculations.

Question 6

Cost of goods on consignment is included in the consignee's inventory until sold.

Accepted Answer

Cost of goods on consignment remains in the consignor's inventory until sold, as the consignor retains ownership until the goods are sold by the consignee.

Question 7

The gross profit ratio is calculated by dividing gross profit by average inventory.

Accepted Answer

The gross profit ratio is calculated by dividing gross profit by net sales, not average inventory.

Question 8

In a perpetual inventory system, which of the following is recorded at the time of the sale?
A) Sales revenue only.
B) Both sales revenue and cost of goods sold.
C) Cost of goods sold only.
D) Neither sales revenue or cost of goods sold.

Accepted Answer

In a perpetual inventory system, both sales revenue and cost of goods sold are recorded at the time of the sale, as the system continuously updates inventory records to accurately calculate the cost of goods sold. This allows for real-time tracking of inventory levels and costs, as well as the ability to make informed decisions about pricing, ordering, and operations.

Question 9

A company that prepares its financial statements according to International Financial Reporting Standards (IFRS) can use all of the same inventory valuation methods as a company that prepares its statements under U.S. GAAP.

Accepted Answer

Under IFRS, the Last-In, First-Out (LIFO) inventory valuation method is not allowed, whereas it is permissible under U.S. GAAP.

Question 10

LIFO periodic and LIFO perpetual always produce the same dollar amounts for ending inventory.

Accepted Answer

LIFO periodic and LIFO perpetual can produce different dollar amounts for ending inventory because the timing of when costs are assigned to cost of goods sold and ending inventory can differ under each method, especially in an environment with fluctuating prices.

Question 11

The choice of cost flow assumption (FIFO, LIFO, or average) does not depend on the actual physical flow of the product.

Accepted Answer

The choice of cost flow assumption is a method used for accounting purposes and does not affect the actual physical flow of the product.

Question 12

Shipping charges on outgoing goods are included in either cost of goods sold or selling expenses.

Accepted Answer

Shipping charges on outgoing goods can be classified as part of the cost of goods sold if they are directly linked to the production process, or as selling expenses if they are associated with the distribution and sale of the product.

Question 13

In a perpetual inventory system, the cost of inventory sold is:
A) Debited to accounts receivable.
B) Credited to cost of goods sold.
C) Debited to cost of goods sold.
D) Not recorded at the time goods are sold.

Accepted Answer

In a perpetual inventory system, the cost of inventory sold is debited to the cost of goods sold account. This updates the inventory balance and directly reflects the cost of goods sold on the income statement. Therefore, option C -- Debited to cost of goods sold is the correct choice.

Question 14

Net purchases are reduced for discounts taken whether the net method is used or the gross method is used.

Accepted Answer

Discounts taken reduce the amount of net purchases, regardless of whether the gross method or net method is used to record purchases.

Question 15

Unit LIFO is more costly to implement than dollar-value LIFO.

Accepted Answer

Unit LIFO requires tracking and valuing each individual unit separately, whereas dollar-value LIFO groups items by their cost and inventory quantity, making it easier and less costly to implement.

Question 16

Dollar-value LIFO eliminates the risk of LIFO liquidations.

Accepted Answer

Dollar-value LIFO does not eliminate the risk of LIFO liquidations; it reduces the risk by grouping goods into pools based on their dollar value rather than on a unit-by-unit basis, but if the dollar value of the inventory decreases, LIFO liquidation can still occur.

Question 17

In a periodic inventory system, the cost of purchases is debited to:
A) Purchases.
B) Cost of goods sold.
C) Inventory.
D) Accounts payable.

Accepted Answer

In a periodic inventory system, the cost of purchases is debited to the Purchases account, which is used to accumulate the cost of inventory bought during the period. At the end of the accounting period, the balance in the Purchases account is used to calculate the cost of goods sold.

Question 18

FIFO periodic and FIFO perpetual always produce the same dollar amounts for cost of goods sold.

Accepted Answer

This is true because both FIFO periodic and FIFO perpetual use the same method for calculating cost of goods sold, which is to assume that the earliest inventory on hand is sold first. The difference between the two methods lies in the way inventory quantities and costs are tracked and updated throughout the accounting period.

Question 19

LIFO usually provides a better match of revenue and expense than does FIFO.

Accepted Answer

The answer of LIFO usually provides a better match of...

Question 20

LIFO liquidation profits occur when inventory quantity declines and costs are rising.

Accepted Answer

LIFO (last-in, first-out) method assumes that the most recent inventory purchased or produced is sold first. During periods of rising costs, older inventory with lower costs will remain unsold leading to LIFO liquidation. LIFO liquidation profits occur when the cost of goods sold is calculated using older, lower cost inventory while current replacement costs are higher. This leads to higher gross profits and taxable income in periods of inventory decline.

Quiz 8: Inventories: Measurement