Chapter 6 MC

Which items should be included in Tidwell's inventory at December 31?

1 & 4

Which of the following companies would most likely have the highest inventory turnover?

A bakery.

Which of the following statements is true regarding inventory cost flow assumptions?

A company may use more than one costing method concurrently.

Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method?

Companies may not have quantities to meet customer demand.

Which statement is false?

Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

Which of the following terms best describes the assumption made in applying the four inventory methods?

Cost flow

In periods of rising prices, which is an advantage of using the LIFO inventory costing method?

Cost of goods sold will include latest (most recent) costs and thus will be more realistic.

Which of these would cause the inventory turnover ratio to increase the most?

Decreasing the amount of inventory on hand and increasing sales.

Which inventory costing method should a gasoline retailer use?

Either LIFO or FIFO.

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using?

FIFO

Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most?

FIFO

Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost?

FIFO

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using?

FIFO because ending inventory represents the latest costs.

In a perpetual inventory system,

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

In periods of inflation, phantom or paper profits may be reported as a result of using the

FIFO costing assumption.

In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory?

FIFO method

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.

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using

FIFO will have the highest ending inventory.

Which of the following items will increase inventoriable costs for the buyer of goods?

Freight charges paid by the purchaser

Which of the following should not be included in the physical inventory of a company?

Goods held on consignment from another company.

Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count?

Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

Of the following companies, which one would not likely employ the specific identification method for inventory costing?

Hardware store

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?

LIFO

The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?

LIFO

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using?

LIFO because cost of goods sold represents the latest costs.

In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure?

LIFO method

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?

LIFO reserve

The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the

LIFO reserve.

Which of the following is not a common cost flow assumption used in costing inventory?

Middle-in, first-out

A low number of days in inventory may indicate all of the following except

Sales opportunities may be lost because of inventory shortages.

Which of the following is an inventory costing method?

Specific identification

Given equal circumstances, which inventory method would probably be the most time consuming?

Specific identification.

All of the following statements are true regarding the LIFO reserve except:

The equation (LIFO inventory - LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO.

When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory?

To check the accuracy of the perpetual inventory records

Which of the following statements is correct with respect to inventories?

Under FIFO, the ending inventory is based on the latest units purchased.

Which statement concerning lower of cost or market (LCM) is incorrect?

Under the LCM basis, market does not apply because assets are always recorded and maintained at cost.

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by

a decline in the value of the inventory.

Independent internal verification of the physical inventory process occurs when

a second employee counts the inventory and compares the result to the count made by the first employee.

To adjust a company's LIFO cost of goods sold to FIFO cost of goods sold

an increase in the LIFO reserve is subtracted from LIFO cost of goods sold.

An overstatement of ending inventory in one period results in

an understatement of net income of the next period.

An overstatement of the beginning inventory results in

an understatement of net income.

The inventory turnover is calculated by dividing cost of goods sold by

average inventory.

An assumption about cost flow is used

because prices usually change, and tracking which units have been sold is difficult.

The specific identification method of costing inventories is used when the

company sells a limited quantity of high-unit cost items.

The consistent application of an inventory costing method enhances

comparability.

The lower of cost or market basis of valuing inventories is an example of

conservatism.

If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the

cost of goods purchased during the year will be identical.

Inventory costing methods place primary reliance on assumptions about the flow of

costs.

When applying the lower of cost or market rule to inventory valuation, market generally means

current replacement cost.

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

determine ownership of the goods.

An employee assigned to counting computer monitors in boxes should

determine that the box contains a monitor.

When is a physical inventory usually taken?

end of the fiscal year

The term "FOB" denotes

free on board

Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except Johnson Company:

is increasing the amount of inventory on hand relative to sales.

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

legal title

An aircraft company would most likely have a

low inventory turnover.

A problem with the specific identification method is that

management can manipulate income.

The selection of an appropriate inventory cost flow assumption for an individual company is made by

management.

The specific identification method of inventory costing

may enable management to manipulate net income.

Manufacturers usually classify inventory into all the following general categories except:

merchandise inventory

Goods held on consignment are

never owned by the consignee

The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is

nonexistent; that is, there is no such accounting requirement.

After the physical inventory is completed,

quantities are listed on inventory summary sheets.

The LIFO reserve is

the difference between the value of the inventory under LIFO and the value under FIFO.

The LIFO inventory method assumes that the cost of the latest units purchased are

the first to be allocated to cost of goods sold.

Selection of an inventory costing method by management does not usually depend on

the fiscal year end.

Days in inventory is calculated by dividing 365 days by

the inventory turnover

If goods in transit are shipped FOB destination

the seller has legal title to the goods until they are delivered.

Manufactured inventory that has begun the production process but is not yet completed is

work in process