Question 1

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Accepted Answer

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Question 2

The lower of cost or market rule for inventory valuation must be applied to each individual unit separately and not to major categories of inventory or to the entire inventory.

Accepted Answer

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Question 3

When units are purchased at different costs over time, it is simple to determine the cost per unit assigned to inventory.

Accepted Answer

When units are purchased at different costs over time, it becomes challenging to determine the cost per unit assigned to inventory. This is because the cost of inventory may be impacted by factors such as inflation, changes in market prices or discounts, transportation costs, shrinkage, etc. Therefore, inventory costing methods such as FIFO, LIFO, average cost, or specific identification are used to allocate costs consistently and fairly to the inventory.

Question 4

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.

Accepted Answer

According to generally accepted accounting principles (GAAP), market value for inventory valuation purposes is defined as the current replacement cost. Therefore, the lower of cost or market method compares the original cost of inventory with its current replacement cost, and the inventory is reported at the lower of the two amounts.

Question 5

The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.

Accepted Answer

The allocation of costs between cost of goods sold and inventory under the FIFO method is the same whether using a perpetual or periodic inventory system.

Question 6

The conservatism constraint requires that when more than one estimate of the amounts that are to be received or paid in the future exist and these estimates are about equally likely, then the less optimistic amount is used.

Accepted Answer

This statement accurately describes the conservatism constraint. It ensures that financial statements are not overstated and that uncertainties and risks are taken into account.

Question 7

In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

Accepted Answer

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Question 8

The matching principle requires that the inventory valuation method follow the physical flow of inventory.

Accepted Answer

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Question 9

The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

Accepted Answer

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Question 10

The dollar value assigned to goods purchased will differ under the different inventory valuation methods of specific identification, FIFO, LIFO, and weighted average.

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Question 11

A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.

Accepted Answer

According to the lower of cost or market rule, inventory should be written down to its market value if that value is lower than its original cost. In this case, the market value of the inventory is $217,000, which is lower than its cost of $241,000. Therefore, the inventory should be written down to $217,000, as stated in option A.

Question 12

LIFO assumes that inventory costs flow in the order they were incurred.

Accepted Answer

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Question 13

Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statement dates.

Accepted Answer

Interim statements are prepared between the traditional annual statement dates, such as monthly or quarterly statements.

Question 14

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption.

Accepted Answer

These three variables are the main factors that determine the dollar value of inventory. The inventory quantity refers to the number of units or items in stock, the costs of inventory include the purchase or production costs, and the cost flow assumption determines how these costs are assigned to the inventory units sold.

Question 15

The assignment of costs to cost of goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems.

Accepted Answer

Under specific identification method, the exact cost of each specific item sold or remaining in inventory is identified and assigned to either cost of goods sold or inventory. This method is applied in a similar manner for both perpetual and periodic inventory systems.

Question 16

When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.

Accepted Answer

When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases for the period, rather than at the point of each sale.

Question 17

Under LIFO, the most recent costs are assigned to ending inventory.

Accepted Answer

Under LIFO (Last In, First Out), the most recent costs are assigned to the cost of goods sold, while the older costs remain in ending inventory.

Question 18

The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

Accepted Answer

The inventory valuation method chosen affects the cost of goods sold (COGS), which in turn affects gross profit. Different methods like FIFO, LIFO, and weighted average cost may result in varying COGS and thus gross profit. Therefore, the choice of inventory valuation method can significantly impact the financial statements and profitability of a company.

Question 19

A company's cost of inventory was $317,500. Due to phenomenal demand for this product, the market value of its inventory increased to $323,000. According to the consistency principle, this company should write up the value of its inventory.

Accepted Answer

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Question 20

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

Accepted Answer

In a perpetual inventory system, the weighted average cost is continuously updated with each purchase and sale, so it will result in a different cost of goods sold and ending inventory value compared to a periodic inventory system where costs are only calculated at the end of the accounting period.

Quiz 5: Accounting for Inventories