Question 1

An advantage of the weighted-average inventory method is that it tends to smooth out the effects of price changes.

Accepted Answer

The weighted-average inventory method takes into account the cost of all units in inventory, regardless of when they were purchased. This can help to mitigate the impact of sudden price changes on the overall inventory valuation.

Question 2

Goods in transit are automatically included in a company's inventory account.

Accepted Answer

Goods in transit are not yet received by the company, so they should not be included in the inventory account until they are actually received.

Question 3

The matching principle is used by some companies to avoid allocating incidental inventory costs to cost of goods sold.

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the related revenues. Allocating incidental inventory costs to cost of goods sold is consistent with the matching principle.

Question 4

A company can change its inventory costing method without mentioning this change in its financial statements since it is a decision made by internal management.

Accepted Answer

A change in inventory costing method is considered a significant accounting policy change and must be disclosed in the financial statements. This is required by accounting standards and helps ensure the comparability and transparency of financial statements over time.

Question 5

Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.

Accepted Answer

Net realizable value for damaged or obsolete goods is equal to the estimated selling price less the estimated cost of completion and disposal. So, it is the sales price minus the cost of making the sale.

Question 6

Whether prices are rising or falling, FIFO always will yield the highest gross profit and net income.

Accepted Answer

FIFO (First-In-First-Out) assumes that the first inventory items purchased are the first ones sold, which may not always be the case. In certain situations, such as when prices are decreasing, LIFO (Last-In-First-Out) may actually yield higher gross profit and net income.

Question 7

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

Accepted Answer

LIFO (last in, first out) assumes that the most recent items purchased are the first ones sold, meaning that older inventory costs are used to calculate the value of remaining inventory. As a result, LIFO inventory value may be lower than the replacement cost since it is based on older, potentially lower purchase costs.

Question 8

When taking a physical count of inventory, the use of prenumbered inventory tickets assists in the control process.

Accepted Answer

Prenumbered inventory tickets help to track each item accurately during the physical count, increasing control over the process.

Question 9

Incidental costs most commonly added to the costs of inventory include import duties, freight, storage, and insurance.

Accepted Answer

Incidental costs such as import duties, freight, storage, and insurance are commonly added to the costs of inventory.

Question 10

If obsolete or damaged goods can be sold, they will be included in inventory at their net realizable value.

Accepted Answer

According to generally accepted accounting principles (GAAP), obsolete or damaged goods can be included in inventory at their net realizable value. This means that the inventory will be recorded at the estimated selling price, minus any expected costs of completion or disposal.

Question 11

In a period of rising prices, FIFO usually gives a lower taxable income, which leads to an advantage when it comes to paying income tax.

Accepted Answer

In a period of rising prices, FIFO leads to higher taxable income since the cost of goods sold is calculated using the older, lower-cost items. This results in a higher profit margin and thus a higher taxable income, which could result in a disadvantage when it comes to paying income tax.

Question 12

Goods on consignment are goods shipped by their owner, called the consignee, to another party called the consignor.

Accepted Answer

Goods on consignment are goods shipped by their owner, called the consignor, to another party called the consignee.

Question 13

If damaged and obsolete goods cannot be sold, they are not included in inventory.

Accepted Answer

Damaged and obsolete goods are not considered part of inventory as they cannot be sold for their intended purpose. They may be recorded separately as a loss or as an asset write-off.

Question 14

LIFO is the preferred inventory costing method when costs are rising and managers have incentives to report higher income. When income is higher, managers may earn bonuses and have more job security and a better reputation.

Accepted Answer

LIFO is not the preferred inventory costing method when costs are rising and managers have incentives to report higher income. LIFO would result in higher costs of goods sold and lower net income, which would not benefit managers in terms of earning bonuses or enhancing their job security and reputation. Instead, managers may prefer to use FIFO or weighted average methods to achieve higher reported income.

Question 15

The consistency concept requires a company to use the same accounting methods period after period, so that financial statements are comparable across periods.

Accepted Answer

The consistency concept states that a company should use the same accounting methods from period to period to ensure that financial statements are comparable. This helps users of financial statements make meaningful comparisons between different periods and assess the company's performance and financial position over time.

Question 16

The cost of an inventory item includes its invoice cost and any added or incidental costs necessary to make it saleable less any discount.

Accepted Answer

The cost of an inventory item includes its invoice cost as well as any added or incidental costs required to make it salable, minus any discount that may apply.

Question 17

All incidental costs of inventory acquisition and handling, whether necessary or not, are assigned to inventory.

Accepted Answer

The answer of All incidental costs of inventory acquisition and...

Question 18

Not many companies take a physical count of inventory each year as they rely primarily on inventory records alone to determine the inventory value.

Accepted Answer

Many companies still take a physical count of inventory each year in addition to relying on inventory records to ensure accuracy and prevent discrepancies.

Question 19

If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

Accepted Answer

When the seller is responsible for paying freight charges, it means they are responsible for the delivery of the goods to the buyer's location. Ownership of the inventory passes to the buyer when the goods arrive at their destination because the seller has fulfilled their obligation to deliver the goods.

Question 20

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each individual product.

Accepted Answer

The answer of The Inventory account is a controlling account...

Quiz 5: Accounting for Inventories