Question 1

The journal entry to write-down inventory under the lower-of-cost-or-market (LCM)rule results in a decrease in both ending inventory and cost of goods sold.

Accepted Answer

Cost of goods increases when inventory is written down.

Question 2

Factory overhead manufacturing costs are a component of the cost of the work-in process inventory.

Accepted Answer

Work in process inventory includes direct materials, direct labor, and factory overhead.

Question 3

The LIFO inventory method allocates the most recent inventory purchase costs to cost of goods sold.

Accepted Answer

LIFO cost of goods sold consists of the most recent inventory acquisitions.

Question 4

The lower-of-cost-or-market (LCM)rule is used because of the conservatism constraint,which allows a departure from the historical cost principle.

Accepted Answer

GAAP requires inventories to be valued at the lower-of-cost-or-market.

Question 5

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

Accepted Answer

The LIFO conformity rule requires the use of LIFO for financial statement preparation if LIFO is used for tax purposes.

Question 6

The journal entry to write-down inventory under the lower-of-cost-or-market (LCM)rule results in a debit to cost of goods sold and a credit to inventory.

Accepted Answer

Cost of goods sold increases and inventory decreases when inventory is written down.

Question 7

Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

Accepted Answer

Items transferred from work in process inventory become finished goods inventory.

Question 8

The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

Accepted Answer

They become part of work in process inventory.

Question 9

The FIFO inventory method allocates the most recent inventory purchase costs to ending inventory.

Accepted Answer

FIFO ending inventory consists of the most recent inventory acquisitions.

Question 10

A decrease in the merchandise inventory account occurs when inventory purchases are greater than cost of goods sold.

Accepted Answer

An increase in the merchandise inventory account occurs when inventory purchases are greater than cost of goods sold.

Question 11

During periods of decreasing prices,use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

Accepted Answer

FIFO cost of goods sold is the highest among the inventory choices when prices are decreasing. A higher cost of goods sold results in a lower gross profit.

Question 12

During periods of decreasing prices,use of the LIFO inventory method will result in a larger amount of inventory than will the use of the FIFO inventory method.

Accepted Answer

LIFO ending inventory consists of the older inventory acquisitions which were at higher prices.

Question 13

Inventory inspection costs incurred at the time of purchase are reported as operating expenses on the income statement.

Accepted Answer

They are recorded as a component of the cost of the inventory.

Question 14

During periods of increasing prices,use of the LIFO inventory method will result in a lower inventory amount on the balance sheet and a lower net income than will use of the FIFO inventory method.

Accepted Answer

LIFO ending inventory consists of the older inventory acquisitions which were at lower prices. LIFO cost of goods sold reports a lower net income because of the higher cost of goods sold.

Question 15

Costs of goods available for sale ends up being allocated to both ending inventory and cost of goods sold.

Accepted Answer

Cost of goods available for sale minus ending inventory equals cost of goods sold.

Question 16

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

Accepted Answer

Cost of goods sold divided by average inventory equals inventory turnover.

Question 17

During periods of increasing prices,the LIFO inventory method results in lower income taxes.

Accepted Answer

LIFO cost of goods sold reports a lower taxable income and therefore lower income taxes because of higher cost of goods sold.

Question 18

The LIFO inventory method will result in the highest gross margin when costs are increasing in comparison to the specific identification,FIFO and weighted average inventory methods.

Accepted Answer

LIFO reports the highest cost of goods sold and therefore the lowest gross margin during periods of increasing prices.

Question 19

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

Accepted Answer

The specific identification method is used when expensive unique items are sold.

Question 20

Inventory turnover under LIFO is greater than inventory turnover under FIFO when prices are increasing.

Accepted Answer

The answer of Inventory turnover under LIFO is greater than...

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory