Question 1

The necessary financial statement disclosure is accomplished if the amount presented is properly calculated.

Accepted Answer

Proper calculation alone may not provide sufficient information for proper financial statement disclosure. Additional information may be required to ensure that the financial statement disclosure is complete and accurate.

Question 2

The assignment of costs to cost of goods sold and inventory using (moving) weighted average usually gives different results depending on whether a perpetual or periodic system is used.

Accepted Answer

In a perpetual system, each transaction affecting inventory and cost of goods sold is recorded as it occurs, while in a periodic system, inventory and cost of goods sold are calculated periodically (usually at the end of an accounting period). This difference in timing can lead to different results when using (moving) weighted average to assign costs to inventory and cost of goods sold.

Question 3

The consistency principle means that one costing method, such as FIFO or moving weighted average, has to be used exclusively.

Accepted Answer

The consistency principle requires that a company should stick to one costing method to ensure consistency in financial reports and decision-making. It is not appropriate to use different methods for different products or periods.

Question 4

When preparing the financial statements, management can choose the inventory cost flow assumption it will use for a particular year in order to impact the reported net income.

Accepted Answer

The answer of When preparing the financial statements, management can...

Question 5

The inventory cost flow assumption that assigns the highest cost to cost of goods sold in a period of rising prices is FIFO.

Accepted Answer

In a period of rising prices, the LIFO (Last In, First Out) inventory cost flow assumption assigns the highest cost to the cost of goods sold because the most recently acquired (and presumably more expensive) inventory items are sold first.

Question 6

The FIFO method assumes that costs for the most recently purchased items are recovered first.

Accepted Answer

The FIFO (First-In, First-Out) method assumes that the costs for the oldest inventory items are recovered first, not the most recently purchased items.

Question 7

The inventory cost flow assumption that is used cannot have a material impact on the financial statements.

Accepted Answer

The inventory cost flow assumption that is used can have a material impact on the financial statements, particularly on the balance sheet and income statement. The choice of cost flow assumption can affect the valuation of inventory, cost of goods sold, and gross profit, as well as the accuracy of financial ratios and analysis. Therefore, it is important for companies to choose a cost flow assumption that reflects the actual flow of goods and best aligns with their business operations.

Question 8

An error in valuing inventory will cause an error in the amount of cost of goods sold.

Accepted Answer

An error in valuing inventory will directly affect the cost of goods sold since cost of goods sold is calculated by subtracting the cost of ending inventory from the cost of goods available for sale. If the value of inventory is incorrect, it will result in an incorrect calculation of cost of goods sold.

Question 9

The necessary financial statement disclosure is accomplished if the amount disclosed is properly calculated and the costing method used is stated.

Accepted Answer

Proper calculation and disclosure of the costing method are essential for transparency and compliance with accounting standards in financial statements.

Question 10

When purchase prices do not change, the choice of an inventory costing method is unimportant.

Accepted Answer

If purchase prices do not change, the cost of goods sold and ending inventory values will remain the same regardless of the inventory costing method used. Therefore, the choice of an inventory costing method is unimportant. However, if purchase prices do change, the choice of inventory costing method can have a significant impact on the cost of goods sold and ending inventory values reported on the financial statements.

Question 11

The decline in merchandise inventory from cost to NRV is recorded in an adjusting entry at the end of the period.

Accepted Answer

This is true as the decline in merchandise inventory from cost to NRV is recognized as a loss and hence is recorded in an adjusting entry at the end of the period.

Question 12

Trekking Company has inventory with a net realizable value of $217,000 and a cost of $241,000. According to the guidance provided by the principle of faithful representation, the inventory should be written down to $217,000.

Accepted Answer

According to the principle of faithful representation, assets should be reported at their net realizable value, which is $217,000 in this case. Therefore, the inventory should be written down to this amount to accurately reflect its value on the balance sheet.

Question 13

In applying LCNRV, net realizable value is defined as the sales price less costs incurred to make the sale.

Accepted Answer

This is the correct definition of net realizable value under LCNRV. It takes into account the estimated selling price of an inventory item, minus any costs incurred in order to sell the item (such as transportation or marketing expenses).

Question 14

Trekking Company's total cost of inventory was $305,000. The net realizable value is $297,000. Under LCNRV, the amount reported should be $305,000.

Accepted Answer

Under LCNRV, the inventory should be reported at the lower of cost or net realizable value. In this case, the net realizable value is lower at $297,000, so the inventory should be reported at that amount instead of the original cost of $305,000.

Question 15

The consistency principle helps ensure that financial statements are comparable across periods.

Accepted Answer

The consistency principle requires that once accounting methods and principles are selected, they should be consistently applied across different periods to ensure comparability of financial statements. This enhances the usefulness of financial statements in making informed business decisions.

Question 16

The materiality principle requires that the inventory valuation method follow the flow of goods.

Accepted Answer

The materiality principle focuses on the significance of financial information's impact on decision-making, not on the requirement for inventory valuation methods to follow the physical flow of goods.

Question 17

The principle of faithful representation requires that information be complete, neutral and free from error so that assets and income are not overstated and liabilities and expenses are not understated.

Accepted Answer

The principle of faithful representation indeed requires that information presented in financial statements is complete, neutral, and free from error. This helps ensure that financial statements accurately reflect the financial position of the entity and ensure that assets and income are not overstated while liabilities and expenses are not understated.

Question 18

Trekking Company's cost of inventory was $317,500. Due to phenomenal demand the net realizable value has increased to $323,000. Trekking Company should write up the value of inventory under the LCNRV rule.

Accepted Answer

Under the Lower of Cost or Net Realizable Value (LCNRV) rule, inventory is written down to its net realizable value when the market value falls below its cost, but it is not written up if the market value increases above cost.

Question 19

The choice of an inventory cost flow assumption can have a dramatic impact on amounts in financial statements.

Accepted Answer

The inventory cost flow assumption affects how costs are allocated to inventory and ultimately affects the cost of goods sold and gross profit, which in turn affects the balance sheet and income statement. Different assumptions, such as FIFO, LIFO, and average cost, can result in significantly different financial statement amounts.

Question 20

The inventory cost flow assumption that assigns the highest cost to ending inventory in a period of rising prices is moving weighted average.

Accepted Answer

The inventory cost flow assumption that assigns the highest cost to ending inventory in a period of rising prices is actually the FIFO (first-in, first-out) method, not moving weighted average. The moving weighted average method calculates a new average cost each time a purchase is made, and therefore does not assign a specific cost to the ending inventory.

Quiz 6: Inventory Costing and Valuation