chapter 6

The accountant at Almira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $5,460. The LIFO method will result in income before taxes of $4,860

$180

Cost of goods sold is computed from the following equation

beginning inventory + cost of goods purchased - ending inventory

Inventories affect

both the balance sheet and the income statement

Freight terms of FOB shipping point mean that the

buyer must bear the freight costs.

The more inventory a company has in stock, the greater the company's profit.

false

The retail inventory method requires a company to value its inventory on the balance sheet at retail prices.

false

The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items

false

Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory.

false

The factor which determines whether or not goods should be included in a physical count of inventory is

legal title

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions

true

The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

true

The lower-of-cost-or-market basis is an example of the accounting concept of conservatism.

true

Under the lower-of-cost-or-market basis, market is defined as current replacement cost.

true

Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods of the buyer.

true

If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

true

Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2012 are as follows: Units Per unit price Total Balance, 1/1/12 200 $5.00 $1,000 Purchase, 1/15/12 100 5.30 530 Purchase, 1/28/12 100 5.50 550 An end of the month (1/31/12) inventory showed that 140 units were on hand. How many units did the company sell during January, 2012?

260

In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the

FIFO Method

For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except:

determine ownership of the goods

An auto manufacturer would classify vehicles in various stages of production as

work in process