Deck 8: Valuation of Inventories: a Cost-Basis Approach

Question 1

Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory.

Answer 1

False

Question 2

LIFO is inappropriate where unit costs tend to decrease as production increases.

Answer 2

True

Question 3

A disadvantage of LIFO is that it does not match more recent costs against current revenues as well as FIFO.

Answer 3

False

Question 4

The change in the LIFO Reserve from one period to the next is recorded as an adjustment to Cost of Goods Sold.

Question 5

Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as production increases.

Question 6

The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and physical quantity of the goods in the inventory pool.

Question 7

If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

Question 8

A modified perpetual inventory system provides detailed inventory records of increases and decreases in quantities only-not dollar amounts.

Question 9

Purchase Discounts Lost is a financial expense and is reported in the "other expenses and losses" section of the income statement.

Question 10

LIFO liquidation often distorts net income, but usually leads to substantial tax savings.

Question 11

Many companies use LIFO for both tax and internal reporting purposes.

Question 12

If ending inventory is understated, then net income is understated.

Question 13

Dollar-value LIFO techniques help protect LIFO layers from erosion.

Question 14

The cost flow assumption adopted must be consistent with the physical movement of the goods.

Question 15

In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used.

Question 16

A manufacturing concern would report the cost of units only partially processed as inventory in the balance sheet.

Question 17

Both merchandising and manufacturing companies normally have multiple inventory accounts.

Question 18

The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes.

Question 19

LIFO liquidations can occur frequently when using a specific-goods LIFO approach.

Question 20

If both purchases and ending inventory are overstated by the same amount, net income is not affected.

Question 21

Which of the following items should be included in a company's inventory at the balance sheet date?

A) Goods in transit which were purchased
B) Goods received from another company for sale on consignment.
C) Goods sold to a customer which are being held for the customer to call for at his or her convenience.
D) None of these answer choices are correct.
F)o.b. destination.

Question 22

Valuation of inventories requires the determination of all of the following except

A) the costs to be included in inventory.
B) the physical goods to be included in inventory.
C) the cost of goods held on consign?ment from other companies.
D) the cost flow assumption to be adopted.

Question 23

If a company uses the periodic inventory system, what is the impact on net income of including goods in transit

A) Overstate net income.
B) Understate net income.
C) No effect on net income.
D) Not sufficient information to determine effect on net income.
F)o.b. shipping point in purchases, but not ending inventory?

Question 24

Goods on consignment are

A) included in the consignee's inventory.
B) included in the consignor's inventory.
C) included in the consignee's revenue.
D) included in both the consignee's and the consignor's inventory.

Question 25

What is consigned inventory?

A) Goods that are shipped, but title transfers to the receiver.
B) Goods that are sold, but payment is not required until the goods are sold.
C) Goods that are shipped, but title remains with the shipper.
D) Goods that have been segregated for shipment to a customer.

Question 26

Goods in transit which are shipped

A) included in the inventory of the seller.
B) included in the inventory of the buyer.
C) included in the inventory of the shipping company.
D) None of these answer choices are correct.
F)o.b. shipping point should be

Question 27

The accountant for the Pryor Sales Company is preparing the income statement for 2014 and the balance sheet at December 31, 2014. Pryor uses the periodic inventory system. The January 1, 2014 merchandise inventory balance will appear

A) only as an asset on the balance sheet.
B) only in the cost of goods sold section of the income statement.
C) as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
D) as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.

Question 28

Why are inventories included in the computation of net income?

A) To determine cost of goods sold.
B) To determine sales revenue.
C) To determine merchandise returns.
D) Inventories are not included in the computation of net income.

Question 29

If a company uses the periodic inventory system, what is the impact on the current ratio of including goods in transit

A) Overstate the current ratio.
B) Understate the current ratio.
C) No effect on the current ratio.
D) Not sufficient information to determine effect on the current ratio.
F)o.b. shipping point in purchases, but not ending inventory?

Question 30

Which of the following is a characteristic of a perpetual inventory system?

A) Inventory purchases are debited to a Purchases account.
B) Inventory records are not kept for every item.
C) Cost of goods sold is recorded with each sale.
D) Cost of goods sold is determined as the amount of purchases less the change in inventory.

Question 31

How is a significant amount of consignment inventory reported in the balance sheet?

A) The inventory is reported separately on the consignor's balance sheet.
B) The inventory is combined with other inventory on the consignor's balance sheet.
C) The inventory is reported separately on the consignee's balance sheet.
D) The inventory is combined with other inventory on the consignee's balance sheet.

Question 32

Use the following information for questions 35 and 36.
During 2014 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2015. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2015 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.
On whose books should the cost of the inventory appear at the December 31, 2014 balance sheet date?

A) Carne Corporation
B) Nolan Corporation
C) Norwalk Bank
D) Nolan Corporation, with Carne making appropriate note disclosure of the transaction

Question 33

Under what circumstances should a company with high rate of return on sales consider the inventory sold?

A) When it can reasonably estimate the amount of returns
B) When the retailer gives a confirmation that the goods won't be returned
C) When the goods are sold on installment
D) When the payment for goods is received

Question 34

Where should goods in transit that were recently purchased

A) Accounts payable.
B) Inventory.
C) Equipment.
D) Not on the balance sheet.
F)o.b. destination be included on the balance sheet?

Question 35

If the beginning inventory for 2014 is overstated, the effects of this error on cost of goods sold for 2014, net income for 2014, and assets at December 31, 2015, respectively, are

A) overstatement, understatement, overstatement.
B) overstatement, understatement, no effect.
C) understatement, overstatement, overstatement.
D) understatement, overstatement, no effect.

Question 36

When using a perpetual inventory system,

A) no Purchases account is used.
B) a Cost of Goods Sold account is used.
C) two entries are required to record a sale.
D) All of these answer choices are correct.

Question 37

Goods in transit which are shipped

A) included in the inventory of the seller.
B) included in the inventory of the buyer.
C) included in the inventory of the shipping company.
D) none of these answers are correct.
F)o.b. destination should be

Question 38

Which of the following methods is also referred as "parking transactions"?

A) Consignment sales.
B) Sales on installment.
C) Sales with high rates of return.
D) Sales with buyback agreement.

Question 39

Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a retailer?

A) Raw materials.
B) Work-in-process.
C) Finished goods.
D) Supplies.

Question 40

Use the following information for questions 35 and 36.
During 2014 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2015. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2015 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.
This transaction is known as a(n)

A) consignment.
B) installment sale.
C) assignment for the benefit of creditors.
D) product financing arrangement.

Question 41

On June 15, 2014, Wynne Corporation accepted delivery of merchandise which it pur-chased on account. As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2014 would be

A) assets and stockholders' equity were overstated but liabilities were not affected.
B) stockholders' equity was the only item affected by the omission.
C) assets, liabilities, and stockholders' equity were understated.
D) assets and liabilities were understated but stockholders' equity was not affected.

Question 42

Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be

A) net income, current assets, and retained earnings were understated.
B) net income was correct and current assets were understated.
C) net income was understated and current liabilities were overstated.
D) net income was overstated and current assets were understated.

Question 43

Costs which are inventoriable include all of the following except

A) costs that are directly connected with the bringing of goods to the place of business of the buyer.
B) costs that are directly connected with the converting of goods to a salable condition.
C) buying costs of a purchasing department.
D) selling costs of a sales department.

Question 44

Which of the following is correct?

A) Selling costs are product costs.
B) Manufacturing overhead costs are product costs.
C) Interest costs for routine inventories are product costs.
D) All of these answers are correct.

Question 45

Use the following information for questions 56 and 57.
During 2014, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.
Which of the following recording procedures would result in the highest cost of goods sold for 2014?1. Recording purchases at gross amounts2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement

A) 1
B) 2
C) Either 1 or 2 will result in the same cost of goods sold.
D) Cannot be determined from the information provided.

Question 46

Which of the following is a product cost as it relates to inventory?

A) Selling costs.
B) Interest costs.
C) Raw materials.
D) Abnormal spoilage.

Question 47

What is the effect of a $50,000 overstatement of last year's inventory on current years ending retained earning balance?

A) Understated by $50,000.
B) No effect.
C) Overstated by $50,000.
D) Need more information to determine.

Question 48

Which of the following is included in inventory costs?

A) Product costs.
B) Period costs.
C) Product and period costs.
D) Neither product or period costs.

Question 49

Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be

A) net income, current assets, and retained earnings were overstated.
B) net income was correct and current assets were understated.
C) net income and current assets were overstated and current liabilities were understated.
D) net income, current assets, and retained earnings were understated.

Question 50

The use of a Purchase Discounts Lost account implies that the recorded cost of a purchased inventory item is its

A) invoice price.
B) invoice price plus the purchase discount lost.
C) invoice price less the purchase discount taken.
D) invoice price less the purchase discount allowable whether taken or not.

Question 51

Use the following information for questions 56 and 57.
During 2014, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.
Which of the following recording procedures would result in the highest net income for 2014?1. Recording purchases at gross amounts2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement

A) 1
B) 2
C) Either 1 or 2 will result in the same net income.
D) Cannot be determined from the information provided.

Question 52

When using the periodic inventory system, which of the following generally would not be separately accounted for in the computation of cost of goods sold?

A) Trade discounts applicable to purchases during the period
B) Cash (purchase) discounts taken during the period
C) Purchase returns and allowances of merchandise during the period
D) Cost of freight-in for merchandise purchased during the period

Question 53

Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost?

A) Purchase discounts lost
B) Interest incurred during the production of discrete projects such as ships or real estate projects
C) Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
D) All of these should be capitalized.

Question 54

Which method may be used to record cash discounts a company receives for paying suppliers promptly?

A) Net method.
B) Gross method.
C) Average method.
D) Both the net method and the gross method.

Question 55

Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be

A) no effect.
B) net income was correct and current assets and current liabilities were overstated.
C) net income, current assets, and current liabilities were overstated.
D) net income and current liabilities were overstated.

Question 56

The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its

A) invoice price.
B) invoice price plus any purchase discount lost.
C) invoice price less the purchase discount taken.
D) invoice price less the purchase discount allowable whether taken or not.

Question 57

Which of the following is a period cost?

A) Labor costs.
B) Freight in.
C) Production costs.
D) Selling costs.

Question 58

The failure to record a purchase of mer?chandise on account even though the goods are properly included in the physical inven?tory results in

A) an overstatement of assets and net income.
B) an understatement of assets and net income.
C) an understatement of cost of goods sold and liabilities and an overstatement of assets.
D) an understatement of liabilities and an overstatement of owners' equity.

Question 59

All of the following costs should be charged against revenue in the period in which costs are incurred except for

A) manufacturing overhead costs for a product manufactured and sold in the same accounting period.
B) costs which will not benefit any future period.
C) costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
D) costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.

Question 60

Which inventory costing method most closely approximates current cost for each of the following:

Question 61

In situations where there is a rapid turnover, an inventory method which produces a balance sheet valuation similar to the first-in, first-out method is

A) average cost.
B) base stock.
C) joint cost.
D) prime cost.

Question 62

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

A) FIFO.
B) average cost.
C) LIFO.
D) None of these choices are correct.

Question 63

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

A) FIFO.
B) moving average.
C) LIFO.
D) weighted-average.

Question 64

In a period of rising prices which inventory method generally provides the greatest amount of net income?

A) Average cost.
B) FIFO.
C) LIFO.
D) Specific identification.

Question 65

Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?

A) Average cost
B) First-in, first-out
C) Last-in, first-out
D) Base stock

Question 66

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is

A) FIFO.
B) LIFO.
C) base stock.
D) weighted-average.

Question 67

Tanner Corporation's inventory on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. Assuming no beginning inventory, in what direction did the cost of purchases move during the period?

A) Up
B) Down
C) Steady
D) Cannot be determined

Question 68

In a period of falling prices, which inventory method generally provides the greatest amount of net income?

A) Average cost.
B) FIFO.
C) LIFO.
D) Specific identification.

Question 69

Which of the following statements is true about specific-goods pooled LIFO approach?

A) It determines and measures any increases and decreases in a pool in terms of total dollar value
B) Most companies using a LIFO system prefer specific-goods pooled LIFO approach over dollar-value LIFO
C) It usually results in large LIFO liquidation
D) The reduction of one quantity in the pool may be offset by an increase in another

Question 70

In the context of dollar-value LIFO, what is a LIFO layer?

A) The difference between the LIFO inventory and the amount used for internal reporting purposes.
B) The LIFO value of the inventory for a given year.
C) The inventory in base year dollars.
D) The LIFO value of an increase in the inventory for a given year.

Question 71

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?

A) Prices decreased.
B) Prices remained unchanged.
C) Prices increased.
D) Price trend cannot be determined from information given.

Question 72

In the double-extension method, the value of the units in inventory is extended at:

A) twice the base-year prices.
B) twice the current year prices.
C) both base-year prices and current-year prices.
D) only the base-year prices.

Question 73

The pricing of issues from inventory must be deferred until the end of the accounting period under the following method of inventory valuation:

A) moving-average.
B) weighted-average.
C) LIFO perpetual.
D) FIFO.

Question 74

What is a LIFO reserve?

A) The difference between the LIFO inventory and the amount used for internal reporting purposes.
B) The tax savings attributed to using the LIFO method.
C) The current effect of using LIFO on net income.
D) Change in the LIFO inventory during the year.

Question 75

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

A) on the income statement in the Other Revenues and Gains section.
B) on the income statement in the Cost of Goods Sold section.
C) on the income statement in the Other Expenses and Losses section.
D) on the balance sheet in the Current Assets section.

Question 76

The acquisition cost of a certain raw material changes frequently. The book value of the inventory of this material at year end will be the same if perpetual records are kept as it would be under a periodic inventory method only if the book value is computed under the

A) weighted-average method.
B) moving average method.
C) LIFO method.
D) FIFO method.

Question 77

Which of the following statements is not valid as it applies to inventory costing methods?

A) If inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices.
B) LIFO tends to smooth out the net income pattern by matching current cost of goods sold with current revenue, when inventories remain at constant quantities.
C) When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old costs with current revenue.
D) The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO.

Question 78

Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold?

A) The potential for manipulation of net income is reduced.
B) There is no arbitrary allocation of costs.
C) The cost flow matches the physical flow.
D) Able to use on all types of inventory.

Question 79

Which of the following statements is not true as it relates to the dollar-value LIFO inven?tory method?

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

Question 80

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

A) base stock.
B) first-in, first-out.
C) last-in, first-out.
D) weighted-average.