Financial Accounting- Chapter #6

Which inventory method writes inventory down when its net realizable value drops below its historical cost?

ALL

Identify the inventory method that you would use if inventory costs have been stable for several​ years, and you expect costs to remain stable for the indefinite future.

ANY

How is cost of goods sold classified in the financial​ statements?

As an expense

Identify the inventory method that you would use if your company prefers to use an inventory costing method that avoids extremes.

Average-cost method

Which inventory method provides a​ middle-ground measure of ending inventory and cost of goods sold?

Average-cost method

An error understated Power Corporation​'s December​ 31, 2018​, ending inventory by​ $54,000. What effect will this error have on total assets and net income for 2018​?

Both will be understated

The sum of ending inventory and cost of goods sold is_____________________________.

Cost of goods available​ (or cost of goods available for​ sale)

Identify the inventory method that you would use if inventory costs are​ decreasing, and your​ company's board of directors wants to minimize income taxes.

FIFO method

Identify the inventory method that you would​ use if inventory costs are​ increasing, and the company prefers to report high income.

FIFO method

Which inventory method maximizes reported income?

FIFO method

Which inventory method results in a cost of ending inventory that is close to the current cost of replacing the inventory?

FIFO method

By having knowledge of the​ company's inventory​ method, as well as having​ clear, complete disclosures in the financial​ statements, bankers are guaranteed that the company will repay its loans. (T/F)?

False

Cost of Goods Sold is an operating expense on the income statement. (T/F)?

False

For most​ firms, the gross profit percentage changes significantly from year to year. (T/F)?

False

Inventory is reported on the balance sheet at the selling price of the inventory still on hand. (T/F)?

False

Service entities report cost of goods sold on the income statement. (T/F)?

False

The choice of an inventory costing method does not impact a​ company's balance sheet. (T/F)?

False

The gross profit method cannot be used for calculating inventory destroyed by a​ disaster, such as a fire. (T/F)?

False

Under U.S.​ GAAP, the application of the lower−of−cost−or−market rule to inventories is OPTIONAL. (T/F)?

False

When applying the lower−of−cost−or−market rule to inventory valuation in the United​ States, market value generally refers to the selling price of the inventory. (T/F)?

False

When inventory costs are​ rising, FIFO allows managers to manipulate net income by timing the purchases of inventory. (T/F)?

False

Which inventory method enables a company to buy​ high-cost inventory at​ year-end and thereby decrease reported income and income tax?

LIFO method

Which inventory method enables a company to keep reported income from dropping lower by liquidating older layers of inventory​ (assume rising​ prices)?

LIFO method

Which inventory method is generally associated with saving income taxes?

LIFO method

Which inventory method matches the most current cost of goods sold against sales revenue?

LIFO method

Which inventory method results in an old measure of the cost of ending inventory?

LIFO method

Which U.S. GAAP principle or rule would apply if the net realizable value of a​ company's inventory is below its original​ cost?

Lower-of-cost-or-market rule (LCM)

The word market as used in​ "the lower of cost or​ market" generally means____________________

Net realizable value

An error understated Golden Flash Company​'s December​ 31, 2018​, ending inventory by​ $27,000. What effect will this error have on net income for 2019​?

Overstate it

Which inventory system maintains a running record of inventory on​ hand, purchased, and​ sold?

Perpetual

Which inventory method is used to account for​ automobiles, jewelry, and art objects?

Specific-identification method

A purchase discount decreases the cost of the inventory. (T/F)?

True

An error in ending inventory creates errors for two accounting periods. (T/F)?

True

An inventory turnover of 3.65 means​ that, on​ average, items of inventory sat on a​ retailer's shelves for 100 days before being sold. (T/F)?

True

Beginning inventory and ending inventory have opposite effects on cost of goods sold. (T/F)?

True

IFRS defines market value for inventory as net realizable value. (T/F)?

True

If a company uses LIFO for tax​ purposes, they must use LIFO for financial reporting purposes. (T/F)?

True

If ending inventory for a year is​ overstated, then gross profit for that year will be overstated. (T/F)?

True

In a perpetual inventory​ system, a business maintains a running record of the number of units​ bought, sold and on hand for each inventory item. (T/F)?

True

Overstating ending inventory in the current year will understate the following​ year's net income. (T/F)?

True

The LIFO method assigns the most recent inventory cost to cost of goods sold. (T/F)?

True

The cost of inventory shifts from asset to expense when the seller fulfills its contract with the​ customer, delivers the goods to the buyer and recognizes revenue. (T/F)?

True

The disclosure principle holds that a​ company's financial statements should report enough information for outsiders to make informed decisions about the company. (T/F)?

True

The gross profit percentage equals net sales divided by gross profit. (T/F)?

True

The lower−of−cost−or−market rule is based on the principles of relevance and representational faithfulness. (T/F)?

True

The seller does not include consigned merchandise on hand in its balance​ sheet, because the seller does not own this inventory. (T/F)?

True

When inventory costs are​ rising, a company using the LIFO costing method will generally pay less taxes than if the company had been using the FIFO method. (T/F)?

True

When does the cost of inventory become an​ expense?

When inventory is delivered to a customer

An understatement of ending inventory by​ $2 million in one period results in___________________________.

an overstatement of gross profit by​ $2 million in the next period.

In a period of rising​ prices,

gross profit under FIFO will be higher than under LIFO