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