Chapter 8

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Which cost flow assumption would be most appropriate when a relatively small number of costly, easily distinguishable items are sold? FIFO. Average. LIFO. Specific identification.

Specific identification.

True or False: When goods are shipped f.o.b. shipping point, title passes to the buyer when the seller delivers the goods to a common carrier.

True

The ending inventory and cost of goods sold will be the same whether a perpetual or periodic system is used under the: FIFO method. weighted-average method. moving-average method. LIFO method.

FIFO method.

True or False: LIFO liquidation can distort net income, but generally results in substantial tax savings.

False

True or False: The Allowance to Reduce Inventory to LIFO account is reported on the income statement in the Other Expenses and Losses section.

False

Which of the following items should be included in a company's inventory at the balance sheet date? Goods received from another company for sale on consignment. Goods sold to a customer that are being held for the customer to call for at his or her convenience. Goods in transit, which were purchased f.o.b. shipping point. Goods sold to a customer, that were shipped f.o.b. shipping point.

Goods in transit, which were purchased f.o.b. shipping point.

Which of the following would not be included in a manufacturing company's balance sheet? Work-in-process inventory. Raw materials inventory. Merchandise inventory. Finished goods inventory.

Merchandise inventory.

A new layer is formed under dollar-value LIFO when the ending inventory at: end-of-year prices exceeds the beginning inventory at end-of-year prices. end-of-year prices exceeds the beginning inventory at base-year prices. current cost exceeds the beginning inventory at base-year cost. base-year prices exceeds the beginning inventory at base-year prices.

base-year prices exceeds the beginning inventory at base-year prices.

The approach employed by most companies that currently use the LIFO method is: specific goods pooled LIFO. specific goods LIFO. unit LIFO. dollar-value LIFO.

dollar-value LIFO.

Under dollar-value LIFO each layer in ending inventory at LIFO cost is calculated by: first expressing the year at base-year prices and then extending it to current LIFO cost by multiplying by the year's price index. dividing the layer at current-year prices by the current year price index. dividing the layer at base-year prices by base-year price index. multiplying the layer at current-year prices by the current year price index.

first expressing the year at base-year prices and then extending it to current LIFO cost by multiplying by the year's price index.

All of the following are major disadvantages of using LIFO, except: lower profits reported in inflationary times. future earnings will not be affected substantially by future price declines. doesn't approximate the physical flow of inventory. inventory is understated.

future earnings will not be affected substantially by future price declines.

Under a perpetual inventory system which accounts should be debited the each time a sale on account is made? Accounts Payable and Purchases. Accounts Receivable and Cost of Goods Sold. Accounts Receivable and Purchases. Inventory and Cost of Goods Sold.

Accounts Receivable and Cost of Goods Sold.

The use of a Purchase Discounts Lost account implies that the recorded cost of a purchased inventory item is its invoice price. invoice price less the purchase discount taken. invoice price less the purchase discount allowable whether taken or not. invoice price plus the purchase discount lost.

invoice price less the purchase discount allowable whether taken or not.

Both U.S. GAAP and IFRS exclude which of the following from the cost of inventory? Most storage costs. General administrative costs. Selling costs. All of these answer choices are excluded by U.S. GAAP and IFRS.

All of these answer choices are excluded by U.S. GAAP and IFRS.

A business whose inventory consists of similar items would be most likely to use which of the following cost flow assumptions? Specific identification. LIFO. FIFO. Average.

Average.

The buyer would report the inventory in its balance sheet for items: purchased with a buyback agreement. shipped f.o.b. destination and in transit. purchased f.o.b. shipping point and in transit. received on consignment.

purchased f.o.b. shipping point and in transit.

Which of the following accounts does not exist in a perpetual inventory system? Sales Returns and Allowances. Inventory. Purchases. Cost of Goods Sold.

purchases

If the beginning inventory is overstated: cost of goods sold is understated working capital is understated. retained earnings is understated. the current ratio is overstated.

retained earnings is understated.

All of the following are advantages of LIFO except: an improvement of cash flow. recent costs are matched against current revenues. a deferral of income tax occurs as long as the price level increases. an approximation of the physical flow of goods is achieved.

an approximation of the physical flow of goods is achieved.

If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is income taxes tend to be reduced in periods of rising prices. cost of goods sold tends to be stated at approximately current cost on the income statement. cost assignments typically parallel the physical flow of goods. income tends to be smoothed as prices change over time.

cost assignments typically parallel the physical flow of goods.

Freight charges on goods sold are accounted for as: manufacturing costs. product costs. period costs. variable costs.

period costs

In a period of rising prices, which inventory method tends to give the highest reported ending inventory?

FIFO

In a period of rising prices, which inventory method tends to give the highest reported net income?

FIFO

True or False: A sale with a "repurchase" agreement allows the seller to finance their inventory and retain the risks of ownership even though the technical title has been transferred.

False

True or False: Interest incurred while getting inventories ready for sale is a product cost.

False

True or False: Merchandising concerns report the cost assigned to unsold units left on hand as finished goods inventory.

False

What is the inventory method where the cost flow best matches the physical flow?

specific identification

An inventory method that makes it possible to manipulate net income is the: specific identification method. FIFO method. average cost method. LIFO method.

specific identification method.

True or False: Goods shipped f.o.b. destination, which arrive to a customer, on January 2, 2017 should be included in the seller's December 31, 2016 inventory.

True

Which of the following statements is not true as it relates to the dollar-value LIFO inventory method? Several pools are commonly employed in using the dollar-value LIFO inventory method. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one pool. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in terms of total dollar value, not physical quantity. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO.

It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO.

In a period of rising prices, which inventory method tends to give the highest reported cost of goods sold?

LIFO

Which of the following statements related to the LIFO method is incorrect? LIFO is not appropriate in situations where specific identification is traditional. LIFO is appropriate where prices tend to lag behind costs. LIFO is preferable in situations where it has been traditional. LIFO is preferable if revenues have been increasing faster than costs.

LIFO is appropriate where prices tend to lag behind costs.

Which of the following statements related to the LIFO method is incorrect? LIFO is not appropriate in situations where specific identification is traditional. LIFO is preferable in situations where it has been traditional. LIFO is not appropriate where prices tend to lead costs. LIFO is preferable if revenues have been increasing faster than costs.

LIFO is not appropriate where prices tend to lead costs.

Select the correct statement concerning LIFO liquidations from the following. LIFO liquidations seldom distort net income and do not result in substantial tax payments. LIFO liquidations seldom distort nets income and may result in substantial tax payments. LIFO liquidations often distort net income and may result in substantial tax payments. LIFO liquidations often distort net income and do not result in substantial tax payments.

LIFO liquidations often distort net income and may result in substantial tax payments.

In a period of rising prices, the inventory method that produces the lowest ending inventory is the: LIFO perpetual method. LIFO periodic method. FIFO perpetual method. average cost method.

LIFO periodic method.

When a company uses LIFO for external reporting purposes and FIFO for internal reporting purposes, an Allowance to Reduce Inventory to LIFO account is used. This account should be reported: on the income statement in the Other Revenues and Gains section. on the income statement in the Cost of Goods Sold section. on the balance sheet in the Current Assets section. on the income statement in the Other Expenses and Losses section.

on the balance sheet in the Current Assets section.


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