Anal 2 Chapter 9 TF
1. Periodic inventory systems provide a greater degree of management control over inventory.
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12. A periodic inventory system is preferable if avoiding "stock-outs" is of paramount importance—for example in manufacturing firms that use just-in-time systems.
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14. Inventory shipped on consignment is owned by the consignee.
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16. Inventory carrying cost includes transportation costs paid by the seller.
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18. GAAP requires that inventory costs should also include the costs of the purchasing department and other general administrative costs associated with the acquisition and distribution of inventory.
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22. Variable costing is an acceptable costing method for GAAP.
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23. Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported income tends to decrease.
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25. Variable costs are those that do not change in proportion to the level of production and include raw materials, direct labor, and the salaries of factory supervisors.
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26. When variable costing is used, fixed production costs are included as part of inventory cost.
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27. Generally accepted accounting principles do not allow variable costing to be used in external financial statements because absorption costing makes it easier for financial statement users to interpret year-to-year changes in reported income.
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30. Companies frequently disclose the effects of absorption costing on reported net income.
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31. When physical inventory levels are decreasing, absorption cost income tends to rise since fixed overhead that was previously in inventory gets charged against income as part of the cost of goods sold.
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35. FIFO matches current costs with current revenues.
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37. Under GAAP, current cost accounting may or may not be used at the discretion of management.
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39. A recent survey of six hundred companies indicated that the specific identification method of inventory accounting is the most prevalent.
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4. A periodic system of inventory is used when inventory volumes are low and per unit costs are high.
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41. FIFO charges the oldest costs against revenues on the income statement thus matching the current cost of replacing the units with current revenues.
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43. Current cost accounting is preferred by the FASB because it records holding gains on financial statements as they arise.
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46. Some analysts argue that by merging current cost profits and realized holding gains, LIFO gives misleading signals about the sustainable operating profits of the company.
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51. The LIFO-to-FIFO adjustment for a company that uses LIFO for only a portion of its inventory is different than the method used when a company uses LIFO for its entire inventory.
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52. GAAP prescribes a standardized format for disclosing the LIFO reserve.
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53. Current ratio distortion under LIFO inventory costing may be adjusted by subtracting the LIFO reserve from current assets.
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56. The SEC requires that the 10-K report discloses the dollar impact of LIFO dipping whenever it occurs.
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57. Midyear LIFO liquidations receive the same accounting treatment regardless of whether they are deemed to be temporary or permanent.
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59. The LIFO conformity rule was promulgated by the SEC to insure that all firms in a given industry use LIFO if a majority of the firms in the industry opt to do so.
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6. GAAP requires the cost flow assumption to correspond to the actual physical flow of inventory.
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60. LIFO's tax advantage is that it provides a lower income number than FIFO during periods of rising prices and decreasing inventory quantities.
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62. During periods of rising inventory costs, LIFO cost of goods sold is understated because of the inventory holding gains that have occurred during the period.
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64. An overstatement of ending inventory leads to an overstatement of cost of goods sold.
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65. Errors in computing inventory are fairly commonplace.
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70. The use of the lower of cost or market method to value inventory for reporting purposes employs the accounting principle of matching.
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74. The time at which initial adoption of dollar-value LIFO takes place is called the past period.
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8. Under a perpetual inventory system, purchases are debited to a purchases account.
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10. Under a periodic inventory system, no entry is made at the time of sale to reflect cost of goods sold.
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11. Under a periodic inventory system, cost of goods sold automatically includes the cost of inventory "shrinkage."
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13. Historically, periodic systems were used when inventory volumes were high and per-unit costs were low. However, the advent of widely used computerized optical scanning equipment has led to the adoption of perpetual systems in high volume settings where such systems were previously not cost-effective.
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15. Inventory carrying cost includes storage costs.
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17. All inventory items to which the firm has legal title should be included in the inventory account although most firms record inventory only when they physically receive it.
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19. A cash purchase discount that is lost because of a late payment should be recorded as interest expense rather than as a cost of acquiring inventory.
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2. In the perpetual inventory system inventory losses must be recorded in the accounts.
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20. Product costs, i.e. raw material, labor, and certain overhead items, are assigned to inventory and treated as assets until the inventory is sold.
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21. Under absorption costing all costs are inventoried.
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24. Variable costing includes only variable costs of production in inventory.
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28. Absorption costing makes it difficult for financial statement users to interpret year-to-year changes in reported income when inventory levels change between one year and the next.
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29. When inventory increases under absorption costing it absorbs more fixed cost thus making income go up.
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3. In a periodic inventory system the ending inventory must be determined by physical count.
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32. "Vendor allowances" should be used by the recipient to lower the carrying cost of inventory and thus ultimately to lower cost of goods sold.
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33. Beginning inventory plus inventory purchases equals cost of goods sold.
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34. GAAP does not require the cost flow assumption to conform to the actual physical flow of the goods.
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36. The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as unrealized holding gains.
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38. The primary difference between FIFO and LIFO is that each method makes a different choice regarding which element is shown at the out of date cost.
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40. International accounting standards permit the use of either the FIFO or weighted average cost flow assumption, but prohibit the use of LIFO.
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42. When purchases and sales occur continuously, the most recently incurred costs will be virtually identical to current replacement cost so LIFO provides a good match between current costs and current revenues.
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44. Under either LIFO or FIFO it is impossible to simultaneously reflect both the balance sheet inventory and cost of goods sold at current cost.
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45. By charging the oldest costs to the income statement, FIFO automatically includes in income the holding gain on the unit that was sold.
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47. The formula to convert the cost of goods sold under LIFO to an estimate of the cost of goods sold under FIFO is cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO.
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48. Firms that use LIFO must disclose the dollar magnitude of the difference between LIFO and FIFO cost.
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49. The SEC rule (Regulation S-X) requires firms to disclose "the excess of replacement cost or current cost over stated LIFO value . . ." rather than the difference between inventory book value at LIFO and inventory book value at FIFO.
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5. The FIFO method of inventory valuation assumes that the first unit purchased is the first unit sold.
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50. The LIFO reserve disclosure was intended to remedy the difficulty investors face when trying to compare LIFO versus FIFO firms in a meaningful manner.
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54. When a LIFO firm liquidates old LIFO layers, the net income number under LIFO can be seriously distorted because the older costs in the LIFO layers that are liquidated are matched against sales dollars that are stated at higher current prices.
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55. When LIFO dipping occurs, inventory holding gains that were previously ignored get recognized.
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58. U.S. tax rules specify that if LIFO is used for tax purposes, the external financial statements must also use LIFO.
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61. Managers can avoid the negative tax ramifications of LIFO dipping by purchasing enough inventory by year-end to bring inventory up to beginning of year levels.
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63. The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the severity of input cost changes and the rapidity of physical inventory turnover.
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66. Management occasionally deliberately overstates inventory. If the economic adversity that motivated the initial deliberate overstatement continues, the inventory overstatements must continue as well.
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67. LIFO can be applied on either a periodic or perpetual basis, however using the perpetual method defeats the purpose of LIFO.
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68. To avoid providing an incentive for managers to engage in intentional LIFO dipping, bonus contracts should subtract out LIFO dipping profits.
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69. In the lower of cost or market determination, the ceiling is the inventory's net realizable value.
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7. The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions.
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71. Under the lower of cost or market method, the floor provides a lower bound for write-downs in situations where input replacement cost and selling price do not move together.
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72. The lower of cost or market method is based on the assumption that input costs and selling prices generally move together.
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73. A price index is a ratio which compares prices during the current year with prices during a base period.
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75. Dollar-value LIFO avoids much of the detailed recordkeeping required under standard LIFO.
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9. Under a periodic inventory system, purchases are debited to a purchases account.
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