ACCT201 Chapter 5

During a period of steadily rising costs, the inventory valuation method that yields the highest reported net income is:

FIFO

Advantage of LIFO (last in first out)

assigns an amount to cost of goods sold on the income statement that approximates its current cost; it also better matches current costs with revenues in computing gross profit

Damaged and obsolete goods that can't be sold

don't include in inventory

Damaged and obsolete goods that can be sold at a reduced price

include in inventory at net realizable value

Generally accepted accounting principles require that the inventory of a company be reported at:

lower of cost or market

Consignor (shipper)

owner of the goods

Consistency concept

prescribes that a company use the same accounting methods period after period so that financial statements are comparable across periods

-A company overstated its ending inventory for Year 1. If the error was not detected, total assets would be _____ for Year 2. -A company overstated its ending inventory for Year 1. If the error was not detected, equity would be _____ for Year 2.

Correctly stated

Goods in transit shipped by Abbey (seller) FOB shipping point

Exclude from inventory count

Goods on consignment (Abbey is consignee)

Exclude from inventory count

When to count inventory: Goods in transit shipped to Abbey (purchaser) FOB Destination

Exclude from inventory count

-During a period of steadily rising costs, the method results in the highest amount of inventory reported on the balance sheet. -The prescribes that a company use the same accounting methods period after period so that financial statements are comparable across periods.

FIFO

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:

FIFO

Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

FIFO and weighted average cost

The costs of goods purchased will vary under the different inventory methods of specific identification, FIFO, LIFO, and weighted average.

False, choice of inventory costing method is irrelevant to the cost of purchases

Goods in transit shipped by Abbey (seller) FOB destination

Include in inventory count

Goods in transit shipped to Abbey (purchaser) FOB shipping point

Include in inventory count

Goods on consignment (Abbey is consignor)

Include in inventory count

-During a period of regularly rising purchase costs, the method yields the highest reported cost of goods sold amount on the income statement. -During a period of regularly rising purchase costs, the method yields the lowest income tax expense

LIFO

IFRS reporting currently does not allow which method of inventory costing?

LIFO

A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be _____ for Year 2.

Overstated

A company overstated its ending inventory for Year 1. If the error was not detected, equity would be _____ for Year 1

Overstated

A company overstated its ending inventory for Year 1. If the error was not detected, total assets would be _____ for Year 1.

Overstated

Most grocery and department stores use the ________ method of inventory costing

Perpetual

In which of the following situations would the product flow resemble last in, first out inventory costing

Sale of stone in a gravel pit. Why? Gravel pits operate by making large piles of stones of similar size. Customers come and take their order from the top of the pile. New stone is added. The bottom layer of stone may not be sold for many years, if ever.

If a company failed to include inventory in their count, how will that effect this years balance sheet?

Total equity and assets will be understated.

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

True

The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used.

True. Why? Ending inventory and COGS will likely be different depending on whether costs/inventory are recalculated after every sale or once at the end of the period.

A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be _____ for Year 1.

Understated

A company overstated its ending inventory at the end of Year 1. If the error was not detected, net income would be _____ for Year 2.

Understated

When using LIFO inventory costing, does the product flow actually mimic the cost flow?

Unlikely. Assumptions are made about cost flows.

Generally speaking, will the values for ending inventory and COGS be different depending on whether periodic or perpetual inventory costing methods are used?

Yes, except when FIFO is used

If a perpetual inventory system is in use

a physical inventory count should be taken at least annually

Advantage of FIFO (first in first out)

assigns an amount to inventory on the balance sheet that approximates its current cost; it also mimics the actual flow of goods for most businesses

LIFO

assumes costs flow in the *reverse* order incurred

FIFO

assumes costs flow in the order incurred physical flow and cost flow do not need to be the same

the understatement of the ending inventory balance causes what to be overstated and understated?

cost of goods sold to be overstated and net income to be understated

Inventory turnover ratio

cost of goods sold/average inventory

Weighted flow

costs flow at an average of costs available

In applying the lower of cost or market method to inventory valuation, market is defined as:

current replacement cost

Full Disclosure Principle

prescribes that the notes to the statements report this type of change, its justification, and its effect on income

Net Realizable Value (NRV)

sales price - cost of making sale

A consignee (receiver)

seller of the goods

The inventory valuation method that identifies each item in ending inventory with a specific purchase and invoice is the

specific identification method

Advantage of weighted average

tends to smooth out erratic changes in costs