Question 1

An error that overstates the ending inventory will cause profit for the period to be understated.

Accepted Answer

Overstating the ending inventory will overstate the assets and, as a result, will overstate the profit for the period.

Question 2

Purchases discounts should be recorded as an addition to the cost of purchases in the calculation of cost of goods sold.

Accepted Answer

Purchases discounts should be recorded as a deduction from purchases, not as an addition to the cost of purchases. This is because purchases discounts represent a reduction in the cost of the goods purchased. Therefore, purchases discounts should be subtracted from the cost of purchases in the calculation of cost of goods sold.

Question 3

A change in the method of cost determination for inventory must be disclosed in the financial statements.

Accepted Answer

According to accounting standards, a change in the method of cost determination for inventory must be disclosed in the financial statements. This is so that users of the financial statements can understand the impact of the change on the company's financial performance and position. The disclosure should include a description of the nature of the change, the reason for the change, and the effect of the change on the financial statements.

Question 4

The method of inventory cost determination that best matches cost and revenues is FIFO.

Accepted Answer

FIFO (first-in, first-out) matches the cost of goods sold with the oldest purchases first, which often corresponds with the lower cost of inventory. This better matches these costs with the revenues earned during the same time period.

Question 5

Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75. Subsequently, the NRV of the inventory recovered to equal its cost of
$100. In this situation, the amount of the $25 ($100 - $75) prior write-down in value should be reversed.

Accepted Answer

According to the lower of cost or market (LCM) method of inventory valuation, once inventory is written down to its NRV, any subsequent increase in NRV should be recognized by reversing the previous write-down. Therefore, the $25 write-down should be reversed in this situation.

Question 6

When the value of inventory is lower than its cost, the inventory is written down to its net realizable value.

Accepted Answer

This statement is true. When the value of inventory is lower than its cost, it is written down to its net realizable value, which is the estimated selling price of the inventory minus any costs associated with selling it. This write-down is necessary to reflect the true value of the inventory on the balance sheet.

Question 7

When a periodic inventory system is used, a sales transaction requires two journal entries, while under the perpetual system, a sales transaction requires only one journal entry.

Accepted Answer

Under the perpetual inventory system, a sale transaction requires two journal entries: one to record the sale and one to update the inventory account. Under the periodic inventory system, the inventory account is only updated at the end of the accounting period, so a sale transaction only requires one journal entry to record the sale.

Question 8

Analysts and creditors watch the inventory turnover ratio because a sudden decline in this ratio may mean that a company is facing an unexpected decline in demand for its products or is becoming sloppy in its production management.

Accepted Answer

This statement is true. The inventory turnover ratio measures how efficiently a company manages its inventory by calculating how many times it sells and replaces its inventory during a given period. A sudden decline in this ratio could indicate that the company is having trouble selling its products, which could be due to a variety of factors such as a decrease in demand or poor production management.

Question 9

The qualitative characteristic, reliability, is the primary consideration to a business considering changing its inventory costing method.

Accepted Answer

The primary qualitative characteristic considered when changing inventory costing methods is relevance, not reliability. Relevance ensures the financial information meets the users' needs for decision-making, while reliability focuses on the dependability of that information.

Question 10

The specific identification method of costing inventories is often used for goods that are interchangeable.

Accepted Answer

The specific identification method is used for goods that are not interchangeable and can be individually identified, such as unique or custom-made products. It is not suitable for interchangeable goods.

Question 11

An overstatement of the ending inventory causes an overstatement of current assets and profit, as well as an overstatement of cost of goods sold for the same year.

Accepted Answer

An overstatement of ending inventory causes an overstatement of current assets and profit, but it results in an understatement of cost of goods sold, not an overstatement.

Question 12

Purchases, returns and allowances should be added to the cost of purchases on the income statement, assuming the periodic inventory system is used.

Accepted Answer

Purchases are added to the cost of purchases, but returns and allowances are subtracted from the cost of purchases on the income statement under the periodic inventory system.

Question 13

The higher the inventory turnover ratio, the higher the average days it takes to sell inventory.

Accepted Answer

The higher the inventory turnover ratio, the faster a company is selling its inventory. Therefore, the average days it takes to sell inventory would be lower.

Question 14

An inventory write down from cost to net realizable value should not be made in the period in which the price decline occurs.

Accepted Answer

An inventory write down from cost to net realizable value should be made in the period in which the price decline occurs. This is in accordance with the principle of conservatism, which states that when there are alternative accounting treatments, the one that results in the lower amount of net income or asset value should be chosen. By recognizing the loss in the period in which it occurs, the financial statements provide users with more relevant and reliable information.

Question 15

In periods of falling prices, FIFO will result in a higher cost of goods sold than the average cost formula.

Accepted Answer

In periods of falling prices, using the FIFO method will result in older, higher-cost inventory being sold first. As a result, the cost of goods sold will be higher than using the average cost formula, which takes into account the total cost of all inventory items divided by the total number of units.

Question 16

The lower of cost and net realizable value should be applied to the total inventory, rather than to individual inventory items.

Accepted Answer

The lower of cost and net realizable value (LCNRV) rule is typically applied to individual inventory items, not to the total inventory, to more accurately reflect the value of each item and prevent overstatement of inventory value.

Question 17

The appearance of a purchases account in a trial balance usually indicates that the company is using a periodic inventory system.

Accepted Answer

In a periodic inventory system, the cost of purchases is not recorded directly in the inventory account. Instead, it is recorded in a purchases account, which is then used to update the inventory account at the end of the accounting period. Therefore, the appearance of a purchases account in a trial balance usually indicates that the company is using a periodic inventory system.

Question 18

Ownership of goods passes from the seller to the buyer after the buyer has paid for the goods.

Accepted Answer

Ownership of goods can pass from the seller to the buyer before payment is made, depending on the terms of the contract between them.

Question 19

An error that understates the ending inventory will cause assets to be understated.

Accepted Answer

Understating the ending inventory means that less value is assigned to the inventory on the balance sheet, which in turn understates the total assets.

Question 20

When the average cost formula is applied in a periodic inventory system, the sale of goods during the year will change the unit cost used for calculating ending inventory.

Accepted Answer

In a periodic inventory system, the average cost formula calculates the unit cost based on the total cost of goods available for sale and the total units available at the end of the period, not affected by sales during the year.

Quiz 8: Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources