Test bank Chapter 6
Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.
False
In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.
False
The matching principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.
False
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
A company may use more than one inventory costing method concurrently.
True
If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.
True
In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method.
True
In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold.
True
The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.
True
The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.
True
The lower-of-cost-or-market basis is an example of the accounting concept of conservatism.
True
The pool of inventory costs consists of the beginning inventory plus the cost of goods purchased.
True
The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.
True
Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.
True
Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold.
True
Under the lower-of-cost-or-market basis, market is defined as current replacement cost.
True
Inventory turnover is calculated as cost of goods sold divided by ending inventory.
False
Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.
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
Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.
False
Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.
False
Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale.
True
Goods out on consignment should be included in the inventory of the consignor.
True
Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.
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
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
If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.
True
If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.
True
If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet.
True
Inventories are reported in the current assets section of the balance sheet immediately below receivables.
True
An error that overstates the ending inventory will also cause net income for the period to be overstated.
True
