Financial Accounting- Chapter #6
Which inventory method writes inventory down when its net realizable value drops below its historical cost?
ALL
Identify the inventory method that you would use if inventory costs have been stable for several years, and you expect costs to remain stable for the indefinite future.
ANY
How is cost of goods sold classified in the financial statements?
As an expense
Identify the inventory method that you would use if your company prefers to use an inventory costing method that avoids extremes.
Average-cost method
Which inventory method provides a middle-ground measure of ending inventory and cost of goods sold?
Average-cost method
An error understated Power Corporation's December 31, 2018, ending inventory by $54,000. What effect will this error have on total assets and net income for 2018?
Both will be understated
The sum of ending inventory and cost of goods sold is_____________________________.
Cost of goods available (or cost of goods available for sale)
Identify the inventory method that you would use if inventory costs are decreasing, and your company's board of directors wants to minimize income taxes.
FIFO method
Identify the inventory method that you would use if inventory costs are increasing, and the company prefers to report high income.
FIFO method
Which inventory method maximizes reported income?
FIFO method
Which inventory method results in a cost of ending inventory that is close to the current cost of replacing the inventory?
FIFO method
By having knowledge of the company's inventory method, as well as having clear, complete disclosures in the financial statements, bankers are guaranteed that the company will repay its loans. (T/F)?
False
Cost of Goods Sold is an operating expense on the income statement. (T/F)?
False
For most firms, the gross profit percentage changes significantly from year to year. (T/F)?
False
Inventory is reported on the balance sheet at the selling price of the inventory still on hand. (T/F)?
False
Service entities report cost of goods sold on the income statement. (T/F)?
False
The choice of an inventory costing method does not impact a company's balance sheet. (T/F)?
False
The gross profit method cannot be used for calculating inventory destroyed by a disaster, such as a fire. (T/F)?
False
Under U.S. GAAP, the application of the lower−of−cost−or−market rule to inventories is OPTIONAL. (T/F)?
False
When applying the lower−of−cost−or−market rule to inventory valuation in the United States, market value generally refers to the selling price of the inventory. (T/F)?
False
When inventory costs are rising, FIFO allows managers to manipulate net income by timing the purchases of inventory. (T/F)?
False
Which inventory method enables a company to buy high-cost inventory at year-end and thereby decrease reported income and income tax?
LIFO method
Which inventory method enables a company to keep reported income from dropping lower by liquidating older layers of inventory (assume rising prices)?
LIFO method
Which inventory method is generally associated with saving income taxes?
LIFO method
Which inventory method matches the most current cost of goods sold against sales revenue?
LIFO method
Which inventory method results in an old measure of the cost of ending inventory?
LIFO method
Which U.S. GAAP principle or rule would apply if the net realizable value of a company's inventory is below its original cost?
Lower-of-cost-or-market rule (LCM)
The word market as used in "the lower of cost or market" generally means____________________
Net realizable value
An error understated Golden Flash Company's December 31, 2018, ending inventory by $27,000. What effect will this error have on net income for 2019?
Overstate it
Which inventory system maintains a running record of inventory on hand, purchased, and sold?
Perpetual
Which inventory method is used to account for automobiles, jewelry, and art objects?
Specific-identification method
A purchase discount decreases the cost of the inventory. (T/F)?
True
An error in ending inventory creates errors for two accounting periods. (T/F)?
True
An inventory turnover of 3.65 means that, on average, items of inventory sat on a retailer's shelves for 100 days before being sold. (T/F)?
True
Beginning inventory and ending inventory have opposite effects on cost of goods sold. (T/F)?
True
IFRS defines market value for inventory as net realizable value. (T/F)?
True
If a company uses LIFO for tax purposes, they must use LIFO for financial reporting purposes. (T/F)?
True
If ending inventory for a year is overstated, then gross profit for that year will be overstated. (T/F)?
True
In a perpetual inventory system, a business maintains a running record of the number of units bought, sold and on hand for each inventory item. (T/F)?
True
Overstating ending inventory in the current year will understate the following year's net income. (T/F)?
True
The LIFO method assigns the most recent inventory cost to cost of goods sold. (T/F)?
True
The cost of inventory shifts from asset to expense when the seller fulfills its contract with the customer, delivers the goods to the buyer and recognizes revenue. (T/F)?
True
The disclosure principle holds that a company's financial statements should report enough information for outsiders to make informed decisions about the company. (T/F)?
True
The gross profit percentage equals net sales divided by gross profit. (T/F)?
True
The lower−of−cost−or−market rule is based on the principles of relevance and representational faithfulness. (T/F)?
True
The seller does not include consigned merchandise on hand in its balance sheet, because the seller does not own this inventory. (T/F)?
True
When inventory costs are rising, a company using the LIFO costing method will generally pay less taxes than if the company had been using the FIFO method. (T/F)?
True
When does the cost of inventory become an expense?
When inventory is delivered to a customer
An understatement of ending inventory by $2 million in one period results in___________________________.
an overstatement of gross profit by $2 million in the next period.
In a period of rising prices,
gross profit under FIFO will be higher than under LIFO
