acg ch 6

A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 understatement of the ending inventory. The effect of this error in the current period is that (i) gross profit is _________________ and (ii) retained earnings is ___________________.

(i) Understated and (ii) Understated

A company uses the periodic inventory method. Beginning inventory is overstated by $10,000 because the prior's year's ending inventory was overstated by $10,000. The company's ending inventory for this period is correct. The current period's gross profit is _________________ and this year's ending retained earnings is ___________________.

(i) understated; (ii) neither overstated nor understated

Which situation requires using the lower-of-cost-or-market basis to valuing inventory instead of the cost basis?

A decline in the current replacement cost of the inventory

If the ending inventory is overstated, what occurs?

Assets are overstated and stockholders' equity is overstated.

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

FIFO

In a period of falling prices, which of the following methods will give the largest net income?

LIFO

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

LIFO method

Which inventory method usually results in cost of goods sold being the closest to the current cost of replacing inventory?

LIFO 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 purchased as inventory has increased during the period, then the company using

LIFO will have the lowest ending inventory LIFO will have the highest cost of goods sold FIFO will have the highest retained earnings LIFO will have the lowest net income

Which is true if the ending inventory is overstated?

Net income will be overstated and the stockholders' equity will be overstated.

Fran Company's ending inventory is understated by $4,000. What are the effects of this error on the current year's cost of goods sold and net income, respectively?

Overstated and understated

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

Under the LCM basis, inventory is recorded at market if it increases in value after it is acquired.

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

A company uses the periodic inventory method. An understatement of ending inventory in one period results in

an overstatement of net income of the next period

A company uses the periodic inventory method. An overstatement of the beginning inventory results in

an understatement of net income

A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

assets are correct and stockholders' equity is correct

The lower of cost or market basis of valuing inventories is an example of What is the underlying rationale for the lower-of-cost-or-market rule? What accounting concept is employed when using the lower-of-cost-or-market valuation?

conservatism

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

current replacement cost

A low number of days in inventory may indicate

the company has a relatively small amount of funds tied up in inventory there is a relatively low chance of inventory becoming obsolete before it can be sold there is a relatively high chance that sales opportunities may be lost because of inventory shortages