Question 1

If a company applies the lower-of-cost-or-market rule on an aggregate basis, its write-down of inventory is likely to be lower than if it applies the rule to individual items of inventory.

Accepted Answer

If a company applies the lower-of-cost-or-market rule on an aggregate basis, items of inventory with higher market values compared to cost will offset items with lower market values. As a result, the write-down is likely to be lower, if it is needed at all.

Question 2

In an inflationary environment,

Accepted Answer

In an inflationary environment, prices are rising. FIFO will produce the lowest cost of goods sold (earliest purchases) compared with LIFO, and a higher net income.

Question 3

When prices are falling:

Accepted Answer

When prices are falling, LIFO will produce a low cost of goods sold (most recent purchases) and a high ending inventory (earliest purchases), compared to FIFO, which will produce a high cost of goods sold (earliest purchases) and low ending inventory (most recent purchases).

Question 4

A loss resulting from application of the lower-of-cost-or-market rule is included in Cost of Goods Sold if the loss is material in amount.

Accepted Answer

The loss resulting from application of the lower-of-cost-or-market rule is only included in cost of goods sold if the amount is immaterial.

Question 5

At a time of declining prices, which cost flow assumption will result in the highest ending inventory?

Accepted Answer

In a period of declining prices, LIFO will result in the lowest cost of goods sold (most recent purchases) and the highest ending inventory (earliest purchases).

Question 6

International Financial Reporting Standards (IFRS) do not permit the use of the LIFO cost flow assumption.

Accepted Answer

This is a difference between IFRS and U.S. GAAP.

Question 7

Kenya Co. uses the perpetual inventory method. Kenya purchased 400 units of inventory that cost $6.00 each. At a later date the company purchased an additional 600 units of inventory that cost $8.00 each. If Kenya uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be:

Accepted Answer

(400 x $6.00) + (300 x $8.00) = $4,800

Question 8

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

Accepted Answer

When prices are rising, FIFO will produce the lowest cost of goods sold compared with other methods because it is based on the earliest, lowest priced, purchases.

Question 9

A discount merchandiser is likely to have a higher inventory turnover than more upscale stores with higher merchandise prices.

Accepted Answer

A discount merchandiser operates at lower margin, and relies on higher inventory turnover to make a profit.

Question 10

If a company uses the LIFO cost flow method, it is not required by generally accepted accounting principles to apply the lower-of-cost-or-market rule.

Accepted Answer

Selection of cost flow assumption has no bearing on the lower-of-cost-or-market rule.

Question 11

If a company overstates its Inventory balance at the end of 2013 due to an error, its Retained Earnings will also be overstated on the 2013 balance sheet.

Accepted Answer

Overstating inventory will understate cost of goods sold, resulting in higher net income and higher retained earnings in the current year.

Question 12

Company A and Company B are similar retailing businesses. A uses FIFO, and B uses LIFO. In a period of rising prices, A should have a higher inventory turnover than
B.In a period of rising prices, FIFO will result in lower cost of goods sold (earlier, lower prices) and higher ending inventory (more recent, higher prices). The lower cost of goods sold divided by the higher inventory will produce a lower inventory turnover.

Accepted Answer

In a period of rising prices, FIFO results in lower cost of goods sold and higher ending inventory, leading to a lower inventory turnover ratio compared to LIFO, which results in higher cost of goods sold and lower ending inventory.

Question 13

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?

Accepted Answer

LIFO will produce cost of goods sold that is based on the most recent purchases.

Question 14

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?

Accepted Answer

When prices are rising, LIFO will result in the highest cost of goods sold (most recent purchases), and therefore will result in the lowest income tax expense. Income tax expense is the only cash flow affected by cost flow assumption.

Question 15

The gross margin method of estimating inventory can be used to help detect inventory fraud.

Accepted Answer

The gross margin method can be used to anticipate what the ending inventory balance should be, and when compared with physical ending inventory, can detect fraud.

Question 16

Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and the item purchased second cost $15.00. Benson sold one of the items for $24.00. Which of the following statements is true?

Accepted Answer

The answer of Benson Company purchased two identical inventory items....

Question 17

Bowden Company paid cash to purchase two identical inventory items. The first purchase cost $16.00 cash and the second cost $18.00 cash. Bowden sold one inventory item for $28.00 cash. Based on this information alone, without considering the effect of income tax,:

Accepted Answer

The cash flow from operating activities is determined by the actual cash transactions, which include the cash outflow for purchasing inventory and the cash inflow from sales. The cost flow assumption (FIFO, LIFO, or weighted average) affects the cost of goods sold and inventory valuation, but not the cash flow itself.

Question 18

If the replacement cost of inventory is greater than its historical cost, the increase in value does not affect the company's financial statements.

Accepted Answer

If the replacement cost is greater than the historic cost, no entry is made. Entries are only made if the replacement cost is lower than the historic cost.

Question 19

When the cost of inventory is rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

Accepted Answer

When prices are rising, FIFO will produce the lowest cost of goods sold (earliest purchases) compared with LIFO which will be based on more recent, higher priced purchases. Weighted average will be somewhere in between.

Question 20

Haley Company purchased two identical inventory items. The item purchased first cost $32.00. The item purchased second cost $35.00. Haley sold one of the inventory items for $60.00. Based on this information:

Accepted Answer

If Haley uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $32.00. If Haley uses weighted average, the weighted average cost per unit is $33.50. Therefore, gross margin will be $26.50 ($60.00 Sales - $33.50 Cost of goods sold).

Quiz 5: Accounting for Inventories