Exam 2 - Theory

LIFO? FIFO? Weighted Avg? Specific Identification? /// Inventory costs are increasing. In order to be in compliance with your bank loan requirements, your company uses the inventory method that results in the highest current ratio possible

FIFO

True or False// The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items

False

True or False// The matching principle requires that the COGS be matched against the EI in order to determine income

False - Matching principle - match exp & income to same period

True or False// To grant a customer a sales return, the seller credits Sales Returns & Allowants

False - debit, not credit

True or False// Sales Allow & Discts are both designed to encourage customers to pay their accounts promptly

False - sales discounts = yes sales allowances = no

True or False// The Sales Return & Allowances acct and the Sales Discount account are both classified as expense accounts.

False - contra revenue accounts

LIFO? FIFO? Weighted Avg? Specific Identification? /// Inventory costs are increasing. Your company has had a good year and you need to keep income from increasing too much in order to save on taxes. To do this, you purchase a large amount of inventory at the end of the year.

LIFO

LIFO? FIFO? Weighted Avg? Specific Identification? /// Suppliers of your inventory are threatening a labor strike and it may be difficult for your company to obtain inventory. Prices are rising and this situation could increase your income taxes.

LIFO

______ is inappropriate where unit costs tend to decrease as production increases

LIFO

what do most companies use for both tax and external reporting purposes?

LIFO

What rule says that Use LIFO for taxes MUST use it for Financial Stmts (GAAP Purposes)?

LIFO Conformity Rule

LIFO method: boss purchases inventory at end of year to try and decrease taxes. None merchandise delivered before Dec 31. What is the effect of this purchase on income stmt? 1. Revenue 2. COGS 3. NI What if it was FIFO? FIFO// 1. COGS 2. NI 3. EI

LIFO// Revenue - NE COGS - Increase NI - Decrease FIFO// COGS - NE NI - NE EI - Increases

True or False// The revenue recognition principle applies to merchandisers by recognizing sales revenue when they are earned.

T

If a company uses LIFO, and prices are rising large purchases of inventory near the end of the year will...

- increase the COGS - decrease the amount of income taxes paid

True or False// A company's unadjusted balance in Merchandise Inventory will usually NOT agree with the actual amount of inventory on hand at year-end.

True

True or False// The FIFO inventory method results in an ending inventory valued at most recent cost.

True

LIFO? FIFO? Weighted Avg? Specific Identification? /// You prefer an inventory policy that avoids extremes

WA

Matching principle - says to match what to same period?

exp & income

Use of LIFO provides a tax benefit in an industry where unit cost tends to ________ as production increases.

increase

If a compnay uses FIFO prices are rising, large purchases of inventory near the end of the year willl

increase the value assigned to EI

If a compnay uses LIFO, large purchases of inventory near the end of the year will

none bc doesn't say anything about prices

Most companies use LIFO for for both ____ and _________reporting purposes?

tax & external

A disadvantage of periodic inventory is

COGS may include lost or stolen inventory

Sales Returns and Allowances account is classified as

a contra revenue account