Question 1

One reason a company using a perpetual inventory system must make a physical count of goods is to determine the amount of inventory on hand as of the statement of financial position date.

Accepted Answer

The physical count helps to verify the accuracy of the perpetual inventory system and ensure that the amount of inventory reported on the statement of financial position is accurate.

Question 2

IFRS requires that the cost flow assumption be consistent with the physical movement of the goods.

Accepted Answer

False

Question 3

Goods out on consignment should be included in the inventory of the consignor.

Accepted Answer

Goods out on consignment remain the property of the consignor until they are sold by the consignee, hence they should be included in the inventory of the consignor.

Question 4

If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Accepted Answer

According to accounting principles, any significant change in accounting methods must be disclosed in the financial statements along with the effect of the change on net income. This is necessary to ensure transparency and consistency in financial reporting.

Question 5

The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

Accepted Answer

The FIFO method assumes that the oldest items purchased or manufactured are sold first, leaving the most recently acquired items in inventory, thus valuing the ending inventory at the most recent costs.

Question 6

Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Accepted Answer

Management can choose any inventory costing method (e.g., FIFO, LIFO, average cost) for financial reporting purposes, but the choice does not need to match the physical movement of goods. The decision is often based on financial, tax, or operational considerations.

Question 7

The more inventory a company has in stock, the greater the company's profit.

Accepted Answer

While inventory is necessary for a company to make sales, having too much inventory can lead to costs such as storage, depreciation, and obsolescence. This can ultimately decrease profitability. It's important for a company to find a balance between having enough inventory to meet customer demand and minimizing excess inventory.

Question 8

The average cost method costs units using a weighted-average unit cost.

Accepted Answer

The average cost method calculates the cost of units by dividing the total cost of goods available for sale by the total number of units available for sale. This results in a weighted-average unit cost that is used to assign costs to inventory and cost of goods sold.

Question 9

Transactions that affect inventories on hand have an effect on both the statement of financial position and the income statement.

Accepted Answer

Transactions that affect inventories on hand such as purchases, sales, returns, and adjustments, impact both the inventory balance on the statement of financial position and the cost of goods sold and gross profit on the income statement.

Question 10

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under FIFO and average cost flow assumptions.

Accepted Answer

Since there is no beginning inventory, the only inventory items that need to be valued are those purchased during the year. Under FIFO, the most recent purchases are assumed to be sold first, leaving the oldest purchases in ending inventory. Under average cost, the total cost of all purchases is divided by the total number of units to get an average cost per unit, which is applied to both the units sold and the units remaining in ending inventory. If the unit cost does not change during the year, this average cost per unit will be the same as the cost of the most recent purchases used to value ending inventory under FIFO. Therefore, the value assigned to the ending inventory will be the same under both methods.

Question 11

Use of the FIFO inventory valuation method enables a company to report higher net income when in a period of falling prices.

Accepted Answer

The answer of Use of the FIFO inventory valuation method...

Question 12

All inventories are reported as current assets on the statement of financial position.

Accepted Answer

Inventories are considered as current assets since they are expected to be converted into cash or used up within one year or operating cycle, whichever is longer.

Question 13

Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.

Accepted Answer

The answer of Goods that have been purchased FOB destination...

Question 14

The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Accepted Answer

The statement is true. The specific identification method involves identifying and tracking each individual item of inventory and its cost. This method is typically used for high-value, unique or custom-made items, where the cost can vary significantly. It provides the most accurate reflection of the actual physical flow of inventory.

Question 15

If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the average-cost and FIFO inventory methods.

Accepted Answer

The answer of If a company has no beginning inventory...

Question 16

Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.

Accepted Answer

Raw materials inventories are actually the materials or components that a manufacturer keeps in stock to be used in the production process. They have not yet been turned into finished goods to be sold to customers.

Question 17

If the unit price of inventory is increasing during a period, a company using the average-cost inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

Accepted Answer

This is because the average-cost method takes into account the total cost of goods available for sale and divides it by the number of units to obtain the average cost per unit, which may be lower than the cost of the most recent inventory purchases. This results in a lower cost of goods sold and therefore a lower gross profit compared to FIFO, which assumes that the oldest inventory is sold first and uses the actual cost of those units.

Question 18

In a period of rising prices, if a company uses the FIFO cost flow assumption, income tax expense will be lower than if they used average-costing.

Accepted Answer

The answer of In a period of rising prices, if...

Question 19

The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

Accepted Answer

The specific identification method of inventory valuation is desirable when a company sells relatively few, high-unit cost items, not a large number of low-unit cost items.

Question 20

IFRS allows companies to cost inventory using either the LIFO or the FIFO cost flow assumption.

Accepted Answer

The answer of IFRS allows companies to cost inventory using...

Quiz 6: Inventories