Accounting Chapter 6

Which situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis in valuing inventory? (a)A decline in the value of the inventory. (b)An increase in selling price. (c)An increase in the value of the inventory. (d)A desire for more profit.

(a)A decline in the value of the inventory.

Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties includes in its inventory the consigned goods? (a)Cecil. (b)Neither Cecil nor Jerry. (c)Jerry. (d)Both Cecil and Jerry.

(a)Cecil.

Which of the following should not be included in the physical inventory of a company? (a)Goods held on consignment from another company. (b)Goods shipped on consignment to another company. (c)Goods in transit from another company shipped FOB shipping point. (d)All of the above should be included.

(a)Goods held on consignment from another company.

The lower-of-cost-or-market rule for inventory is an example of the application of: (a)The conservatism constraint. (b)The historical cost principle. (c)The materiality concept. (d)The economic entity assumption.

(a)The conservatism constraint.

The LIFO reserve is: (a)The difference between the value of the inventory under LIFO and the value under FIFO. (b)An amount used to adjust inventory to the lower-of-cost-or-market. (c)The difference between the value of the inventory under LIFO and the value under average-cost. (d)An amount used to adjust inventory to historical cost.

(a)The difference between the value of the inventory under LIFO and the value under FIFO.

When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when the goods reach the buyer's place of business. (a)True. (b)False.

(a)True.

Which of the following is not an inventory account? (a)Finished goods. (b)Equipment. (c)Raw materials. (d)Work in process.

(b)Equipment.

In a period of inflation, LIFO produces a higher net income than FIFO. (a)True. (b)False.

(b)False

Inventory costing methods place primary reliance on assumptions about the flow of (a)Values. (b)Goods. (c)Costs. (d)Resale prices.

(b)Goods.

In a period of falling prices, which of the following methods will give the largest net income? (a)Specific identification. (b)LIFO. (c)FIFO. (d)Average-cost.

(b)LIFO

Fran Company's ending inventory is understated by $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are: (a)Understated and overstated. (b)Overstated and understated. (c)Overstated and overstated. (d)Understated and understated.

(b)Overstated and understated.

Harold Company overstated its inventory by $15,000 at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Harold's stockholders' equity was: (a)Overstated at December 31, 2014, and understated at December 31, 2015. (b)Overstated at December 31, 2014, and properly stated at December 31, 2015. (c)Understated at December 31, 2014, and understated at December 31, 2015. (d)Overstated at December 31, 2014, and overstated at December 31, 2015.

(b)Overstated at December 31, 2014, and properly stated at December 31, 2015.

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped (a)FOB buyer. (b)FOB shipper. (c)FOB shipping point. (d)FOB destination

(c)FOB shipping point.

What is true about who owns goods in transit and consigned goods under GAAP and IFRS? (a)GAAP allows consigned goods to be included in inventory, while IFRS does not. (b)GAAP allows goods in transit to be included in inventory, while IFRS does not. (c)GAAP and IFRS agree on this issue. (d)IFRS does not allow work in process to be considered as part of inventory.

(c)GAAP and IFRS agree on this issue.

Which of the following is not an acceptable inventory costing method? (a)First-in, first-out. (b)Last-in, first-out. (c)Last-in, last-out. (d)Average cost.

(c)Last-in, last-out.

In periods of rising prices, LIFO will produce: (a)Higher net income than FIFO. (b)The same net income as FIFO. (c)Lower net income than FIFO. (d)Higher net income than average-cost.

(c)Lower net income than FIFO.

If a firm is using a perpetual inventory system and is using the average-cost method of valuation, when is a new average cost computed? (a)At the end of the month. (b)At the end of the accounting period. (c)After each sale. (d)After each purchase.

(d)After each purchase.

If the ending inventory is overstated, what occurs? (a)Assets are overstated and the net income is understated. (b)Assets are overstated and the cost of goods sold is overstated. (c)Assets are overstated and the liabilities are understated. (d)Assets are overstated and stockholders' equity is overstated.

(d)Assets are overstated and stockholders' equity is overstated.

When is a physical inventory usually taken? (a)When the company has its greatest amount of inventory. (b)When a limited number of goods are being sold or received. (c)At the end of the company's fiscal year. (d)Both (b) and (c).

(d)Both (b) and (c).

Which of these would cause inventory turnover to increase the most? (a)Increasing the amount of inventory on hand. (b)Keeping the amount of inventory on hand constant but increasing sales. (c)Keeping the amount of inventory on hand constant but decreasing sales. (d)Decreasing the amount of inventory on hand and increasing sales.

(d)Decreasing the amount of inventory on hand and increasing sales.

In a perpetual inventory system, (a)LIFO cost of goods sold will be the same as in a periodic inventory system. (b)Average costs are based entirely on unit-cost simple averages. (c)A new average is computed under the average-cost method after each sale. (d)FIFO cost of goods sold will be the same as in a periodic inventory system.

(d)FIFO cost of goods sold will be the same as in a periodic inventory system.

Which of the following is true of the FIFO inventory method? (a)It assumes that the cost of the earliest units purchased are the first to be allocated to the ending inventory. (b)It assumes that the cost of the earliest units purchased are the last to be allocated to the beginning inventory. (c)It assumes that the cost of the earliest units purchased are the last to be allocated to cost of goods sold. (d)It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

(d)It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

Considerations that affect the selection of an inventory costing method do not include: (a)Tax effects. (b)Balance sheet effects. (c)Income statement effects. (d)Perpetual versus periodic inventory system.

(d)Perpetual versus periodic inventory system.

Which of the following statements is true? (a)FIFO inventory valuation requires physical flow of goods to be representative of the cost flow. (b)All of these answer choices are correct. (c)LIFO inventory valuation requires physical flow of goods to be representative of the cost flow. (d)Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.

(d)Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.