Question 1

The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Accepted Answer

The statement is false. The LIFO (Last In, First Out) method is commonly used in inventory accounting, especially for companies that sell perishable goods or items subject to rapid price changes. It assumes that the last inventory purchased by a company is the first to be sold, which can help reduce taxable income by matching higher-priced inventory with current revenue. However, the use of LIFO can be limited by tax regulations or accounting standards in some countries.

Question 2

In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

Accepted Answer

In periods of falling prices, LIFO will result in a larger net income than the FIFO method as the most recent, and therefore highest priced, inventory will be reported as sold first under LIFO. This results in a lower cost of goods sold and a higher net income when prices are falling.

Question 3

The FIFO reserve is a required disclosure for companies that use FIFO.

Accepted Answer

The answer of The FIFO reserve is a required disclosure...

Question 4

The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

Accepted Answer

This is a correct statement. The LIFO reserve is used to adjust inventory values from LIFO to FIFO for financial reporting purposes. It represents the amount by which LIFO inventory is understated compared to FIFO inventory.

Question 5

The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

Accepted Answer

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Question 6

Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

Accepted Answer

Accountants believe that the write down from cost to market should be made in the period in which the price decline occurs to ensure that financial statements accurately reflect the current value of assets. This is known as the principle of conservatism.

Question 7

Computers has made the periodic inventory system more popular and easier to apply.

Accepted Answer

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Question 8

The inventory turnover is calculated as cost of goods sold divided by ending inventory.

Accepted Answer

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Question 9

Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Accepted Answer

LIFO (Last In, First Out) inventory valuation method primarily affects the cost of goods sold and inventory valuation on the balance sheet, rather than directly creating paper or phantom profits. It can lead to higher cost of goods sold during inflationary periods, potentially lowering reported profits, not inflating them with phantom profits.

Question 10

The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle.

Accepted Answer

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Question 11

A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

Accepted Answer

Since FIFO (first-in, first-out) assumes that the oldest inventory is sold first, in times of inflation when inventory costs increase, the cost of goods sold will be higher and the income will be lower, thus magnifying the effects of the business cycle on business income.

Question 12

In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

Accepted Answer

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Question 13

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 LIFO and FIFO inventory methods.

Accepted Answer

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Question 14

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 Generally Accepted Accounting Principles (GAAP), companies are required to disclose the effect of any change in accounting principles or estimates, such as the inventory valuation method, on the financial statements. The disclosure should detail the nature, reason, and impact of the change on the company's financial results.

Question 15

An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

Accepted Answer

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Question 16

The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

Accepted Answer

The lower-of-cost-or-market rule requires a company to value their inventory at the lower of its cost or its current market value, whichever is lower. This ensures that inventory is not carried on the balance sheet at a value that exceeds its potential selling price. This principle is commonly used in accounting to help businesses accurately report the value of their inventory and avoid overvaluing their assets.

Question 17

A company may use more than one inventory cost flow method at the same time.

Accepted Answer

A company may use different inventory cost flow methods for different products or product lines. For example, a company may use first-in, first-out (FIFO) for one product and last-in, first-out (LIFO) for another product. This allows the company to better match the cost of goods sold with the revenue earned for each product line. However, companies must disclose the different methods used in their financial statements.

Question 18

Under the LCM basis, market is defined as selling price, not current replacement cost.

Accepted Answer

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Question 19

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

Accepted Answer

This is because under LIFO, the most recently purchased (and usually more expensive) inventory items are assumed to be sold first, resulting in a higher cost of goods sold and therefore lower gross profit.

Question 20

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

Accepted Answer

This is known as the lower of cost or market (LCM) method of inventory valuation. It ensures that inventory is reported at the lower of its cost or market value on the balance sheet.

Quiz 6: Reporting and Analyzing Inventory