Chapter 8

Goods in transit at the balance sheet date should be included in the purchaser's inventory if they are shipped: F.O.B. Destination F.O.B. Shipping Point A. No No B. No Yes C. Yes No D. Yes Yes

(B) Goods shipped f.o.b. (free on board) shipping point in transit at the end of the year belong to the buyer and should be shown in the buyer's records.

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. B. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one pool. C. Several pools are commonly employed in using the dollar-value LIFO inventory method. D. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in terms of total dollar value, not physical quantity.

(A) A major reason for the use of dollar-value LIFO concerns the difficulty in eroding the LIFO layers. The entire inventory under dollar-value LIFO can be in one pool or in numerous pools. Also, as the name implies, inventory pools are determined and measured in terms of total dollar value.

Which of the following inventory methods comes closest to stating ending inventory at replacement costs? A. FIFO. B. LIFO. C. Weighted-average. D. Base stock.

(A) Because the oldest costs in inventory are charged against income under the FIFO inventory method, the inventory valuation shown on the balance sheet represents the most recent inventory costs. Thus, FIFO comes closest to stating inventory at replacement costs when compared to the other three methods listed.

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 and increase inventory turnover. B. Increase both the current ratio and inventory turnover. C. Decrease both the current ratio and inventory turnover. D. Increase the current ratio and decrease inventory turnover.

(A) If prices are increasing, the inventory value determined using LIFO would be less than that determined by using FIFO. This is so because the oldest prices, in this case, would be used to value inventory. A smaller inventory value would result in decreasing the current ratio (current assets/current liabilities) and increasing the inventory turnover ratio (cost of goods sold/average inventory).

The amount of inventory purchased during a particular year is accumulated in a Purchases account under a: Periodic Inventory System Perpetual Inventory System A. Yes No B. Yes Yes C. No Yes D. No No

(A) Purchases of inventory are debited to the inventory account under a perpetual inventory system. The only time the purchases account is used is when a periodic inventory system is in place.

Which of the following interest costs should be capitalized? Assets Constructed for Internal Use Assets Produced as Discrete Projects for Sale or Lease A. Yes Yes B. Yes No C. No Yes D. No No

(A) The FASB has rules that interest costs related to assets constructed for internal use or assets produced as discrete projects (such as ships or real estate projects) for sale or lease should be capitalized.

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) The following reductions should be made in Voigt's inventory: Goods held on consignment $ 7,000* Gross profit included in merchandise out on consignment (.30 × $12,000) 3,600** $10,600

Which of the following is not considered an advantage of LIFO when prices are rising? A. The inventory will be overstated. B. The more recent costs are matched against current revenues. C. There will be a deferral of income tax. D. A company's future reported earnings will not be affected substantially by future price declines.

(A) The major advantages of LIFO are (1) the more recent costs are matched against current revenues to provide a better measure of current earnings; (2) as long as the price level increases and inventory quantities do not decrease, a deferral of income tax occurs in LIFO; (3) because of the deferral of income tax, there is improvement of cash; and (4) a company's future reported earnings will not be affected substantially by future price declines. A major disadvantage of LIFO when prices are rising is that inventories will be understated because the older (lower) costs are reflected in inventory

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. B. Overstate total income by $20,000. C. Understate total income by $20,000. D. Overstate net income for year one by $20,000 and year two by $20,000 for a total overstatement of $40,000.

(A) This is an example of a counterbalancing error. The income in year one will be understated by $20,000 because of the ending inventory error. However, in the second year the beginning inventory will be understated by $20,000 which will cause an overstatement of net income by the same amount. Thus, the effect of the error on total income over the two year period is zero.

Difficulties relating shipping charges and storage costs, leading to a "breakdown" in the precision of costing is associated with which method? A. Dollar-value LIFO. B. Specific identification. C. FIFO. D. Average-cost.

(B) Difficulties relating shipping charges and storage costs to a given inventory item can result in allocating these costs arbitrarily, leading to a "breakdown" in the precision of the specific identification method.

The use of LIFO under a perpetual inventory system (units and costs): A. may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily falling. B. may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily rising. C. always yields the same inventory valuation as LIFO under a periodic inventory system. D. can never yield the same inventory valuation as LIFO under a periodic inventory system.

(B) In a period of steadily rising prices, LIFO under a periodic inventory system will find the highest inventory cost being charged against revenue. Under the same set of circumstances, the use of LIFO under a perpetual inventory system (units and costs) might find inventory purchases made subsequent to the final sale. If such is the case, the perpetual method would yield a higher ending inventory valuation.

In periods of rising prices, use of LIFO rather than the FIFO inventory method will most likely have what effect on the following items? Net Income Cost of Goods Sold Working Capital A. Higher Lower Lower B. Lower Higher Lower C. Higher Higher Higher D. Lower Higher Higher

(B) In periods of rising prices, the LIFO method will find the higher costs being charged to income resulting in a higher cost of goods sold and a lower net income. Also, with the higher costs being charged to net income, the ending inventory will be lower under LIFO than under FIFO. Thus, other things being equal, the working capital (current assets minus current liabilities) should be 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? A. Prices increased. B. Prices decreased. C. Prices remained unchanged. D. Price trend cannot be determined from the information given.

(B) LIFO charges the most recent purchases to cost of goods sold. Therefore, if cost of goods sold is less under LIFO than FIFO, prices must be decreasing.

The purchase of inventory items on account using the perpetual inventory method: A. changes working capital and the current ratio. B. has no effect on working capital but probably changes the current ratio. C. has no effect on the current ratio but probably changes working capital. D. has no effect on working capital or the current ratio.

(B) The purchase of inventory on account increases both current assets (inventory) and current liabilities (accounts payable) by the same amount. This results in no change in working capital. However, if current assets and current liabilities are both increased by the same amount, the current ratio will decrease if the current ratio was greater than one, increase if the current ratio was less than one, and remain the same if the current ratio was exactly one.

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: A. weighted-average method. B. first-in, first-out method. C. last-in, first-out method. D. direct costing method.

(B) Whether inventory is priced under the periodic or perpetual method, the ending inventory valuation and cost of goods sold will be the same as long as the FIFO cost flow assumption is used.

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? A. $65,000. B. $58,000. C. $51,500. D. $48,700

(C) Ending inventory at beginning of the year prices: $65,000 ÷ 130% = $50,000 Inventory increase in beginning of year prices: $50,000 − $45,000 = $5,000 Real dollar quantity increase: $5,000 × 130% = $6,500 12/31/21 inventory valuation: First layer (Base price 100%) $45,000 Second layer (2021 increase @ 130%) 6,500 Dollar-value LIFO Inventory 12/31/21 $51,500

Valuation of inventories requires the determination of all of the following except: A. The costs to be included in inventory. B. The physical goods to be included in inventory. C. The cost of goods held on consignment from other companies. D. The cost flow assumption to be adopted.

(C) The costs, physical goods, and flow assumption are necessary elements in determining inventory valuation. Goods on consignment from other companies do not belong to the consignee and as such are not a part of the consignee's inventory valuation.

The dollar-value inventory method is an improvement over the traditional LIFO pool approach because: A. the mathematical computations are greatly simplified. B. it is easier to apply where few inventory items are employed and little change in product mix is anticipated. 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. D. dissimilar items of inventory can be grouped to form pools under the dollarvalue LIFO method.

(C) The dollar-value LIFO method not only allows increases and decreases in a pool to be determined and measured in terms of total dollar value, but also two additional advantages are noted. First, a broader range of goods may be included in a dollarvalue LIFO pool than in a regular pool. Second, in a dollar-value LIFO pool, replacement is permitted if it is similar as to type of material, or similarity in use, or interchangeability

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: A. $45,000 less in 2020. B. $45,000 more in 2020. C. $45,000 greater over the 8-year period. D. $45,000 less over the 8-year period.

(C) The effect on net income of differences in ending inventory amounts wash out over two years. The reason for this is that the ending inventory for one year is the beginning inventory for the next year. For example, an overstatement of ending inventory at December 31, 2020, will result in an overstatement of 2020's income but an understatement of 2021's income. Therefore, the only difference in the net income before taxes for the 8 year period ending December 31, 2020, would be that net income before taxes computed under FIFO would be $45,000 greater than that computed under LIFO.

One argument against the use of the specific identification inventory method is: A. actual costs are matched against actual revenues. B. estimated costs are matched against actual revenues. C. the potential for the manipulation of net income by selecting costs to match against revenues. D. that it is difficult to understand.

(C) Use of the specific identification method allows for the potential manipulation of net income when similar items that have different costs can be selected for sale. Thus, if two identical inventory items have different costs, selecting the item with the lower cost will increase net income. Alternative "A" is an advantage of the specific identification method. Alternatives "B" and "D" are not relevant alternatives.

The traditional LIFO approach which tends to emphasize specific goods in costing LIFO inventories is often unrealistic because: A. it does not result in a proper matching of costs and revenues in a particular period. B. cash flows are often distorted and can be delayed for one or two subsequent periods. C. future price declines will adversely affect the ability to accurately report future earnings. D. erosion of the LIFO inventory can easily occur which often leads to distortions of net income and large tax payments.

(D) Alternatives A, B, and C are either advantages of using the LIFO inventory method or are indications of things that can be avoided by its use. However, the traditional LIFO approach does result in the potential for LIFO liquidation which takes away some of the advantages of LIFO and can result in poor earnings results. Using the specific goods pooled LIFO method can help alleviate the liquidation problem and its attendant negative affect on earnings.

Costs which are inventoriable include all of the following except: A. costs that are directly connected with the bringing of goods to the place of business of the buyer. B. costs that are directly connected with the converting of goods to a salable condition. C. buying costs of a purchasing department. D. selling costs of a sales department.

(D) Inventoriable costs include costs that are directly connected with the bringing of goods to the place of business and converting such goods to a salable condition. The buying costs or expenses of a purchasing department are also included in the inventoriable costs. Selling costs of a sales department are considered period costs and are not inventoriable.

The use of a Purchase Discounts Lost account implies that the recorded cost of a purchased inventory item is its: A. invoice price. B. invoice price plus the purchase discount price. C. invoice price less the purchase discount allowable, when taken. D. invoice price less the purchase discount allowable, whether or not taken.

(D) The Purchase Discounts Lost account arises when the purchase of inventory is recorded net of the allowable discount and the purchaser does not pay within the discount period.

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in: A. an overstatement of assets and net income. B. an understatement of assets and net income. C. an understatement of cost of goods sold and liabilities and an overstatement of assets. D. an understatement of liabilities and an overstatement of owners' equity.

(D) The failure to record the purchases understates liabilities because the payable was not recorded. The fact that the amount of the purchase was properly included in the physical inventory but omitted from goods available for sale causes cost of goods sold to be understated. This understatement of cost of goods sold causes net income to be overstated resulting in an overstatement of owner's equity.

Estimates of price-level changes for specific inventories are required for which of the following inventory methods? A. Weighted-average cost. B. FIFO. C. LIFO. D. Dollar-value LIFO

(D) Under dollar-value LIFO inventories are maintained at current prices. Estimates of price-level changes (index numbers) are used to convert the ending inventory from year-end prices to LIFO prices.