Chapter 8 practice problems

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the perpetual inventory system provides a continuous record of the balances in both the inventory account and the cost of goods sold account

true

Which of the following inventory methods comes closest to stating ending inventory at replacement costs?

a; FIFO

Costs which are inventoriable include all of the following except:

d; selling costs of a sales department

A LIFO reserve account is generally used when a company uses LIFO for tax and external reporting purposes but uses another method for internal purposes.

true

A change in inventory methods requires that the change be explained and its effect be disclosed in the financial statements.

true

If LIFO is used for tax purposes, it must also be used for financial reporting purposes.

true

In a period of rising prices, LIFO yields a larger cost of goods sold than does FIFO.

true

Tax benefits are the major reason why LIFO has become popular.

true

The ending inventory under a FIFO periodic inventory system will be the same as under a FIFO perpetual inventory system.

true

The use of a Purchase Discounts Lost account indicates that purchases are being recorded net of purchase discounts.

true

To alleviate the LIFO liquidation problems and to simplify the accounting, goods can be combined into pools.

true

Under dollar-value LIFO, there will never be a layer for a particular year unless the quantity of inventory increased during that year.

true

a physical inventory should be taken at least annually, even when a perpetual inventory system is used

true

if the gross method is employed, purchase discounts should be reported as a deduction from purchases on the income statement

true

in the determination of cost of goods sold, cost of goods manufactured is to a manufacturing concern what cost of goods purchased is to a merchandising concern

true

the cost of goods sold is the excess of the cost of goods available for sale during the period less the cost of goods on hand at the end of the period

true

The following items were included in Voigt Corporation's inventory account at December 31, 2020: Goods held on consignment by Voigt $ 7,000 Merchandise out on consignment, at sales price, including 30% mark-up on selling price 12,000 Goods purchased, in transit, shipped f.o.b. shipping point 9,000 Voigt's inventory account at December 31, 2020, should be reduced by:

a; 10,600

Which of the following interest costs should be capitalized?

a; assets constructed for internal use

Just prior to a period of rising prices, Brooks Company changed its inventory measurement method from FIFO to LIFO. What would be the effect in the next period?

a; decrease the current ratio ad increase inventory turnover

Which of the following statements is not true as it relates to the dollarvalue LIFO inventory method?

a; it is easier to erode LIFO layers using dollar value LIFO techniques than it is with specific goods pooled LIFO

The ending inventory of the Bonie Company is understated in year one by $20,000. This error is not corrected in year one or in year two. What impact will this error have on total net income for years one and two combined?

a; no effect on total net income for the two years

The amount of inventory purchased during a particular year is accumulated in a Purchases account under

a; periodic inventory system

Which of the following is not considered an advantage of LIFO when prices are rising?

a; the inventory will be overstated

Goods in transit at the balance sheet date should be included in the purchaser's inventory if they are shipped:

b; FOB shipping point

The acquisition cost of a heavily used raw material changes frequently. The inventory amount of this material at year end will be the same if perpetual records (units and costs) are kept as it would be under a periodic inventory method only if the inventory amount is computed under the:

b; first in, first out method

The purchase of inventory items on account using the perpetual inventory method:

b; has no effect on working capital but probably changes the current ratio

The use of LIFO under a perpetual inventory system (units and costs):

b; may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily rising

In periods of rising prices, use of LIFO rather than the FIFO inventory method will most likely have what effect on the following items?

b; net income is lower; cost of goods sold is higher, working capital is lower

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?

b; prices decreased

Difficulties relating shipping charges and storage costs, leading to a "breakdown" in the precision of costing is associated with which method?

b; specific identification

The Slowe Company has been using the LIFO cost method of inventory valuation for 8 years. Its 2020 ending inventory was $135,000 but it would have been $180,000 if FIFO had been used. Thus, if FIFO had been used, Slowe's net income before income taxes would have been:

c: $45,000 greater over the 8 year period

Amidei Company adopts dollar-value LIFO inventory on 12/31/20 when its inventory at current price is $45,000. The inventory value on 12/31/21 at current 2021 prices is $65,000. If prices increased by 30% during 2021, what is the dollarvalue LIFO inventory at 12/31/21?

c; 51,500

The dollar-value inventory method is an improvement over the traditional LIFO pool approach because:

c; increases and decreases in a pool are determined and measured in terms of total dollar value rather than the physical quantity of the goods in the inventory pool

Valuation of inventories requires the determination of all of the following except:

c; the cost of goods held on consignment from other companies

One argument against the use of the specific identification inventory method is:

c; the potential for the manipulation of net income by selecting costs to match against revenues

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in

d; an understatement of liabilities and an overstatement of owner's equity

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

d; dollar value LIFO

The traditional LIFO approach which tends to emphasize specific goods in costing LIFO inventories is often unrealistic because:

d; erosion of the LIFO inventory can easily occur which often leads to distortions of net income and large tax payments

The use of a Purchase Discounts Lost account implies that the recorded cost of a purchased inventory item is its:

d; invoice price less the purchase discount allowable, whether or not taken

A major argument in favor of the FIFO method of inventory costing is that current costs are matched against current revenues.

false

All companies using the dollar-value LIFO method are required to use the same price index.

false

An understatement of the ending inventory will cause cost of goods sold to be understated and net income to be overstated for that period.

false

LIFO comes closer than FIFO to stating inventory on the balance sheet at current costs.

false

LIFO would probably be preferable where prices tend to lag behind costs.

false

Under the average cost method, beginning inventory should be included in the total units available but not in the total cost of goods available in computing the average cost per unit.

false

When a company selects a cost flow assumption (FIFO, LIFO, average cost, etc.), it must be consistent with the actual physical movement of goods through the company.

false

goods held on consignment should be included in the consignee's inventory reported on the balance sheet

false

period costs and product costs are both inventoriable costs that relate to manufactured rather than purchased inventory

false

when goods are shipped FOB shipping point, title passes only when the seller receives full payment for the merchandise

false

costs associated with getting inventories ready for sale usually are included in the cost of the inventory

false; interest costs associated with getting inventories ready for sale usually are expensed as incurred


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