Accounting Chapter 6 Quiz

Under IFRSs, if inventory that previously had been written down to market subsequently increases in value, the write down should:

Be reversed.

When inventory prices are decreasing, which of the following will result in the highest amount of income tax expense?

LIFO

When a firm uses the LIFO method on its GAAP financial statements because it wants to use the LIFO method on its annual tax returns, such a procedure is an application of the:

LIFO conformity rule.

Heavenly Interiors had beginning merchandise inventory of $75,000. It made purchases of $160,000 and recorded sales of $220,000 during November. Its estimated gross profit on sales was 30%. On November 30, the store was destroyed by fire. What was the value of the merchandise inventory loss?

$81,000.

When the weighted average method of perpetual inventory tracking is used, at what point is the new average cost calculated?

After each new purchase of the same inventory item.

Beginning inventory is $50,000 and ending inventory is $70,000. Net sales totals $600,000 and cost of goods sold is $360,000. What is the inventory turnover ratio?

6.0

Which of the following objectives are legitimate reasons for taking a physical inventory count?

Both A and B.

A company's ending inventory amount is overstated by $10,000. What will be the effect of this overstatement on Cost of Goods Sold and Net Income?

Cost of Goods Sold is understated by $10,000 and Net Income is overstated by $10,000.

A merchandising business discovers that its ending inventory is overstated by $5,000. If the company does not correct this error, what will the effect be on the company's Cost of Goods Sold and Net Income?

Cost of goods sold is understated and net income is overstated.

When the cost of buying an item of inventory from a supplier is steadily increasing or steadily decreasing, it is possible to make some generalizations as to what the effects on cost of goods sold will be, given the use of any particular cost flow assumption. In periods of rising prices, which of the following statements is true?

LIFO will assign higher inventory costs to cost of goods sold than will FIFO, and LIFO will assign lower inventory costs to the ending inventory than will FIFO.

In theory, when a periodic system is in use, which inventory cost flow assumption could assign inventory cost to cost of goods sold even though the inventory has not yet been purchased by the merchandiser?

LIFO.

Under the periodic inventory system, which accounts are adjusted at the end of the period?

Merchandise Inventory, Income Summary

A company understates its ending inventory by $5,000. It never discovers this error. The company is a sole proprietorship. Which statement accurately describes the company's permanent situation?

Net income for the current year is understated. Net income for the next year will be overstated by $5,000, but the balance in the owner's equity account will be correct at the end of year 2.

Even though the amount of cost of goods sold and the amount of ending inventory can vary dramatically depending on which inventory cost flow assumption is used, which one of the following amounts will always be the same, regardless of which inventory cost flow assumption is used?

The amount of cost of goods available for sale.

A merchandising business discovers that its ending inventory is understated by $6,000. If the company does not correct this error, what will the effect be on the company's Total Expenses and Net Income?

Total expenses are overstated and net income is understated.