Exam 8: Inventories

A major criticism of the FIFO method is that it magnifies the effects of the business cycle on business income.

Which of the following methods generally is used to determine the loss when inventory is destroyed or stolen?

Cost of goods sold equals $500,000, and average inventory equals $200,000. Days' inventory on hand equals

A merchandiser's inventory consists of raw materials, work in process, and finished goods.

In a period of rising prices, the liquidation of base-layer inventory will result in an unusually high income tax liability under which of the following methods?

Freyman's Shoe Store had net retail sales of $200,000 during the current year. The following additional information was obtained from the accounting records. At Cost At Retail Beginning inventory \ 30,000 \ 63,000 Net purchases for the period 89,000 193,000 Freight-in 9,000 Estimate the company's ending inventory at cost using the retail method. (Show your work.)

Use this information to answer the following question. A periodic inventory system is used. Cost of goods sold under the average-cost method is

In general, in times of rising prices, using FIFO has a favorable effect on cash flows.

The most important accounting problem in dealing with merchandise inventory is the application of which of the following conventions or rules?

Why will an understated beginning inventory produce an overstated income before income taxes for the same period? Will the understatement have a favorable or unfavorable effect on current year income taxes?

Costs incurred in storing inventory usually are included in inventory costs.

Indirect materials and indirect labor are components of manufacturing overhead.

When the cost of inventory is written down due to a market decline, a loss must be recorded.

Inventory methods such as LIFO and FIFO deal more with cost flow than with goods flow.

Given equal circumstances, which inventory method probably would be the most time consuming?

In accounting for inventory, the assumed cost flow need not match the physical goods flow.

Periodic and perpetual are examples of inventory costing systems.

The matching of revenue with inventory costs is best achieved with the FIFO method.

The specific identification method is well suited for a discount department store.

Assume that during the physical count of the inventory of a large corporation last year, $750,000 of merchandise was not counted. The error was not detected, and the financial statements for the current fiscal year were prepared. Identify the individual statements that would be affected and explain the effect the error would have on each of these statements.