Question 1

The inventory turnover ratio measures the eﬃciency of inventory management.

Accepted Answer

The inventory turnover ratio is a measure of how efficiently a company manages its inventory by dividing the cost of goods sold by the average inventory during a period of time. It gives an indication of how quickly a company is selling its inventory and replacing it with new inventory. A higher inventory turnover ratio indicates more efficient inventory management.

Question 2

A large retail department store probably would use the speciﬁc identiﬁcation inventory costing method for most of the items in its inventory.

Accepted Answer

A large retail department store would likely use the FIFO (first-in, first-out) or LIFO (last-in, first-out) inventory costing method, as these methods are more practical for large inventories with many identical items. The specific identification method is better suited for smaller inventories with unique or high-value items.

Question 3

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 accurately reflects the importance of the inventory turnover ratio to analysts and creditors, as a decline in the ratio could indicate issues with demand or production management.

Question 4

In periods of falling prices, FIFO will result in a higher ending inventory valuation than the average cost formula.

Accepted Answer

In periods of falling prices, FIFO (First-In, First-Out) would result in a lower ending inventory valuation compared to the average cost formula because older, cheaper goods are sold first, leaving the newer, more expensive items in inventory.

Question 5

Approximating the physical ﬂow of inventory is not important when selecting an inventory cost formula.

Accepted Answer

Approximating the physical flow of inventory is important when selecting an inventory cost formula as it determines the cost of goods sold, ending inventory, and ultimately impacts the financial statements. Different cost formulas such as FIFO, LIFO, and average cost will result in different inventory valuations and cost of goods sold depending on the method chosen to track the physical flow of inventory.

Question 6

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

Accepted Answer

Ending inventory is a key component of calculating the cost of goods sold and the value of inventory on the balance sheet. If the ending inventory is understated, then the cost of goods sold will be overstated, which in turn will cause the net income to be understated and assets to be understated.

Question 7

The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most businesses.

Accepted Answer

The FIFO (first-in, first-out) inventory cost formula assumes that the first items purchased or produced are the first to be sold, which generally corresponds to the actual physical movement of goods in most businesses. Therefore, the statement is true.

Question 8

In periods of falling prices, FIFO will result in the same ending inventory valuation as the average cost formula.

Accepted Answer

In periods of falling prices, FIFO will result in a higher ending inventory valuation compared to the average cost formula. This is because under FIFO, the newer, higher-priced inventory is assumed to be sold first, leaving the lower-priced inventory in the ending inventory. However, the average cost formula will assign a cost to the ending inventory that reflects the average cost of all inventory purchased throughout the period, which will be lower due to the falling prices.

Question 9

A low inventory turnover ratio indicates that minimal funds are tied up in inventory.

Accepted Answer

A low inventory turnover ratio indicates that inventory is not selling quickly, which means more funds are tied up in inventory for a longer period of time. This can lead to cash flow problems and potentially outdated or unsellable inventory.

Question 10

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

Accepted Answer

During a period of falling prices, the older and higher-cost inventory will be sold first under FIFO, resulting in a higher cost of goods sold compared to the average cost formula, which spreads the cost of inventory evenly over all units sold.

Question 11

Inventory turnover measures the liquidity (nearness to cash) of inventory.

Accepted Answer

Inventory turnover is a ratio that measures the number of times inventory is sold and replaced within a specific period. It indicates how quickly a company can turn its inventory into sales and cash, thus measuring the liquidity or nearness to cash of inventory.

Question 12

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 13

If prices never changed, there would be no need for alternative inventory cost formulas.

Accepted Answer

Without price changes, all inventory cost formulas (FIFO, LIFO, weighted average, etc.) would yield the same cost, eliminating the need for different methods.

Question 14

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

Accepted Answer

The method of inventory cost determination that best matches costs and revenues is LIFO (Last-In, First-Out), especially during periods of inflation, as it matches the most recent costs to current revenues.

Question 15

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

Accepted Answer

A change in accounting policy, such as the method of cost determination for inventory, must be disclosed in the financial statements as it can significantly impact the reported financial results. This is in accordance with Generally Accepted Accounting Principles (GAAP).

Question 16

Inventory turnover is computed as cost of goods sold divided by average inventory.

Accepted Answer

This is the correct formula for calculating inventory turnover.

Question 17

The selection of a method of inventory costing is important because it will affect reported proﬁt, income tax expense (and, hence, cash ﬂow), and the inventory valuation reported on the statement of ﬁnancial position.

Accepted Answer

The selection of inventory costing method affects reported profit, income tax expense, and inventory valuation on the balance sheet. Therefore, it is important to choose the appropriate method of inventory costing.

Question 18

An error that understates the ending inventory will cause the cost of goods sold for the period to be understated.

Accepted Answer

An error that understates the ending inventory will cause the cost of goods sold for the period to be overstated, not understated, because the cost of goods sold is calculated as beginning inventory plus purchases minus ending inventory.

Question 19

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

Accepted Answer

The specific identification method of costing inventories is used for goods that are not interchangeable, as each unit is identified and assigned a specific cost.

Question 20

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 the ending inventory causes an overstatement of current assets and profit, but it results in an understatement of the cost of goods sold for the same year.

Quiz 7: Inventory and Cost of Goods Sold