Question 1

A grocery store probably would use the specific identification inventory costing method for most of the items in its inventory.

Accepted Answer

A grocery store would likely use the FIFO (First-In, First-Out) method for inventory costing, as perishable items need to be sold before their expiration date. The specific identification method may be used for specialty or high-value items, but would not be practical for a bulk of the inventory.

Question 2

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

Accepted Answer

False

Question 3

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a decrease in both ending inventory and cost of goods sold.

Accepted Answer

The journal entry to write-down inventory under the LCM rule decreases ending inventory and increases cost of goods sold.

Question 4

The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

Accepted Answer

The use of raw materials in the manufacturing process is reported as a cost of goods sold, which is a deduction from revenue on the income statement.

Question 5

Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

Accepted Answer

Manufactured goods that have been completed and transferred out of work in process are indeed reported as finished goods on the balance sheet.

Question 6

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

Accepted Answer

The LIFO inventory method allocates the newest inventory purchase costs to cost of goods sold, not the oldest.

Question 7

During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

Accepted Answer

The answer of During periods of decreasing unit costs, use...

Question 8

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a credit to cost of goods sold and a debit to inventory.

Accepted Answer

The journal entry to write-down inventory under the LCM rule results in a debit to cost of goods sold and a credit to inventory, reflecting the loss in inventory value.

Question 9

The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory.

Accepted Answer

The FIFO (First-In, First-Out) inventory method allocates the earliest inventory purchase costs to the cost of goods sold, not to ending inventory.

Question 10

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

Accepted Answer

During periods of increasing unit costs, the LIFO inventory method will result in a lower inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

Question 11

A decrease in the merchandise inventory account occurs when units of inventory purchased are greater than units of goods sold.

Accepted Answer

A decrease in the merchandise inventory account occurs when units of goods sold are greater than units of inventory purchased. This is because the inventory account is reduced to reflect the goods that have been sold.

Question 12

Direct material costs are a component of the cost of the work-in process inventory.

Accepted Answer

Direct material costs are a direct cost of producing a product and are added to the work-in-process inventory.

Question 13

During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher amount of ending inventory than will the use of the FIFO inventory method.

Accepted Answer

The answer of During periods of decreasing unit costs, use...

Question 14

The lower of cost or market (LCM) rule is used due to the conservatism constraint, and therefore an inventory calculation may result in a departure from the historical cost principle.

Accepted Answer

The LCM rule is used to ensure that inventory is not overstated and follows the conservatism constraint. This may result in the use of a market value that is below historical cost, leading to a departure from the historical cost principle.

Question 15

The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing.

Accepted Answer

The answer of The FIFO inventory method will result in...

Question 16

Inventory inspection costs are reported as operating expenses on the income statement.

Accepted Answer

The answer of Inventory inspection costs are reported as operating...

Question 17

Goods available for sale are allocated to both ending inventory and cost of goods sold.

Accepted Answer

Goods available for sale need to be allocated to both ending inventory and cost of goods sold as per the matching principle of accounting. The ending inventory is the value of goods that remain unsold at the end of an accounting period, while the cost of goods sold is the cost of goods that were sold during the accounting period.

Question 18

During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

Accepted Answer

LIFO assumes that the last units purchased are the first ones sold, leading to a higher cost of goods sold and lower ending inventory during periods of increasing unit costs. This results in lower taxable income and lower income taxes.

Question 19

The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a debit to cost of goods sold and a credit to inventory.

Accepted Answer

This is correct. When inventory is written down under the lower of cost or market (LCM) rule, the cost of goods sold account is debited and the inventory account is credited. This is done to account for the decrease in the value of the inventory, which is necessary to properly reflect the company's financial position.

Question 20

The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are decreasing.

Accepted Answer

The LIFO inventory method will result in the highest cost of goods sold and lowest net income when unit costs are increasing. When unit costs are decreasing, the LIFO method will result in a lower cost of goods sold and higher gross profit compared to the FIFO method. Therefore, the statement in the question is false.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory