Question 1

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost of the same inventory items in the usual manner.

Accepted Answer

The statement is correct. Market is defined as the current replacement cost of the same inventory items in the usual manner when using the lower of cost or market method for inventory valuation. This means that if the market price is lower than the cost of the inventory, the inventory should be written down to its market price to reflect the decrease in value. This method helps to ensure that inventory is not overstated on the company's financial statements.

Question 2

When units are purchased at different costs over time, it is simple to determine the cost per unit assigned to inventory.

Accepted Answer

When units are purchased at different costs over time, it becomes complex to determine the cost per unit assigned to inventory. This is because the cost of inventory not only includes the cost of the product but also the cost of transportation, handling, storage, etc. Therefore, a cost flow assumption such as FIFO or LIFO is used to determine the cost per unit assigned to inventory.

Question 3

The assignment of costs to cost of goods sold and ending inventory using specific identification is the same for both the perpetual and periodic systems.

Accepted Answer

The assignment of costs using specific identification method is independent of the inventory system used, and will be the same for both perpetual and periodic systems. This method involves tracking the cost of each individual item sold or remaining in inventory, and assigning this specific cost to the corresponding item.

Question 4

When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases.

Accepted Answer

LIFO (Last-in, First-out) assigns costs of goods sold from the most recent purchases, which is the opposite of FIFO (First-in, First-out) which assigns costs of goods sold from the oldest purchases. When using the periodic inventory system, physical inventory counts are done at the end of the period to determine the cost of goods sold and ending inventory.

Question 5

The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.

Accepted Answer

The assignment of costs to the cost of goods sold and to inventory under the FIFO (First-In, First-Out) method is the same for both the perpetual and periodic inventory systems. In both methods, the oldest cost of inventory is assumed to be sold first, while the most recent cost is assumed to remain in the inventory. Therefore, the cost assigned to the cost of goods sold will be based on the oldest cost of inventory available, while the cost assigned to the ending inventory will be based on the most recent cost of inventory.

Question 6

The conservatism constraint prescribes that the most optimistic amount is used when more than one estimate of the amount to be received or paid in the future exists and these estimates are about equally likely.

Accepted Answer

The conservatism constraint prescribes using the least optimistic estimate when multiple estimates are equally likely, to avoid overstating assets or income.

Question 7

The lower of cost or market rule for inventory valuation must be applied to only individual items of inventory, not to major categories of inventory or to the entire inventory.

Accepted Answer

The statement is false. The lower of cost or market rule can be applied to major categories of inventory or the entire inventory if the categories have similar characteristics and cost structures. This is known as the "group method" of applying the lower of cost or market rule.

Question 8

LIFO assumes that inventory costs flow in the order they were incurred.

Accepted Answer

LIFO (Last In, First Out) assumes that the most recently incurred inventory costs are the first to be used or sold, not in the order they were incurred.

Question 9

The assignment of costs to cost of goods sold and inventory using weighted average yields the same results depending on whether a perpetual or periodic system is used.

Accepted Answer

In a perpetual system, the weighted average cost is recalculated after each purchase, while in a periodic system, it is calculated at the end of the period, leading to different results.

Question 10

A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.

Accepted Answer

According to the lower of cost or market rule, inventory should be written down to its market value if it is lower than its cost. In this case, the market value is $217,000, which is lower than the cost of $241,000. Therefore, the inventory should be written down to $217,000.

Question 11

The cost of goods purchased will differ under the four inventory valuation methods of specific identification, FIFO, LIFO, and weighted average.

Accepted Answer

The cost of goods purchased remains the same regardless of the inventory valuation method used; what differs is the cost of goods sold and ending inventory valuation.

Question 12

The matching principle requires that the inventory valuation method used match the physical flow of inventory.

Accepted Answer

The matching principle requires expenses to be recorded in the same period as the revenues they help generate, not that the inventory valuation method matches the physical flow of inventory.

Question 13

A company's cost of inventory was $317,500. Due to phenomenal demand for this product, the market value of its inventory increased to $323,000. According to the consistency principle, this company should write up the value of its inventory.

Accepted Answer

The consistency principle requires that companies use the same accounting methods over time, but it does not allow for writing up inventory to market value. Inventory is typically recorded at the lower of cost or market value, according to the lower of cost or market rule.

Question 14

The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

Accepted Answer

The FIFO (First-In, First-Out) inventory method assumes that the costs of the earliest purchased items are the first to be charged to the cost of goods sold.

Question 15

Under LIFO, the most recent costs are assigned to ending inventory.

Accepted Answer

Under LIFO (Last In, First Out), the most recent costs are assigned to the cost of goods sold, while the older costs remain in ending inventory.

Question 16

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Accepted Answer

The answer of The retail inventory method estimates the cost...

Question 17

Monthly or quarterly statements are called interim statements because they are prepared for periods of less than one year.

Accepted Answer

Interim statements are prepared for a shorter period, usually monthly or quarterly, as opposed to annual statements that cover a full year.

Question 18

In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

Accepted Answer

The answer of In applying the lower of cost or...

Question 19

The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

Accepted Answer

The inventory valuation method affects the cost of goods sold and, therefore, gross profit. Different methods such as FIFO, LIFO, and weighted average can result in different value allocations for the same inventory items, leading to varying profit margins.

Question 20

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption.

Accepted Answer

These three variables are indeed key factors that determine the dollar value of inventory. Inventory quantity refers to the amount of goods on hand, while costs of inventory include the direct and indirect costs associated with obtaining, storing, and handling inventory. Cost flow assumption refers to the method used to allocate costs to inventory units sold and those still on hand. All three of these factors affect the overall value of inventory in dollars.

Quiz 5: Reporting and Analyzing Inventories