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

Question 1

The International Accounting Standards Board requires the specific identification method when unit price is low, inventory turnover is high, and inventory quantities are large.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Both merchandising and manufacturing companies normally have multiple inventory accounts.

Answer 3

False

Question 4

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

Question 5

The International Accounting Standards Board (IASB) requires the specific identification method of inventory costing where individual items of inventory can be identified and costed.

Question 6

Interest costs incurred to manufacture large quantities of inventory that are produced routinely should be capitalized.

Question 7

IFRS requires manufacturers to disclose their inventory components on the statement of financial position or in related notes.

Question 8

When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.f.o.b.destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

Question 9

Companies must allocate the cost of all the goods available for sale (or use) between the income statement and the statement of financial position.

Question 10

Freight costs incurred by the seller to ship merchandise to the purchaser are accounted for by the seller as part of inventory on the statement of financial position.

Question 11

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

Question 12

Under IFRS, agricultural inventories, such as wheat, oranges, etc., are recorded at their fair value less estimated selling costs at the point of harvest.

Question 13

A trade discount that is granted as an incentive for a first-time customer or as a reward for large order should be accounted for by the purchaser as revenue.

Question 14

A manufacturing concern would report the cost of units only partially processed as inventory in the statement of financial position.

Question 15

Abnormal freight costs are not included on the statement of financial position as part of the cost of inventory.

Question 16

Goods in transit, shipped FOB shipping point, are included in the buyer's statement of financial position at the time of delivery to the common carrier.

Question 17

If a supplier ships goods

Question 18

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

Question 19

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

Question 20

Tang, Inc.sells collectible jewelry on consignment from various manufacturers and should include this consigned inventory on its statement of financial position.

Question 21

Which of the following accounts is not reported in inventory?

A)Raw materials.
B)Equipment.
C)Finished goods.
D)Supplies.

Question 22

Companies must allocate the cost of all the goods available for sale (or use) between

A)The cost goods on hands at the beginning of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period.
B)The cost of goods on hand at the end of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period.
C)The income statement and the statement of financial position.
D)All of the choices are correct.

Question 23

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.

Question 24

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

Question 25

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

Question 26

How is a significant amount of consignment inventory reported in the statement of financial position?

A)The inventory is reported separately on the consignor's statement of financial position.
B)The inventory is combined with other inventory on the consignor's statement of financial position.
C)The inventory is reported separately on the consignee's statement of financial position.
D)The inventory is combined with other inventory on the consignee's statement of financial position.

Question 27

Computers For You is a retailer specializing in selling computers and related equipment.Which of the following would not be reported in the merchandise inventory account reported on the statement of financial position for Computers For You at December 31, 2011?

A)Computer purchased for resale during November 2011.
B)Shelving materials purchased during December 2011.
C)Freight costs related to the computers purchased in November.
D)All of the choices are included in the merchandise inventory account at December 31, 2011.

Question 28

Tang, Inc.sells collectible jewelry on consignment from various manufacturers.Additionally, Tang sells its own line of specialty jewelry manufactured in-house.On December 31, 2011, during Tang, Inc 's annual inventory count, an inexperienced new staff member included in Tang's ending inventory $350,000 worth of inventory held on consignment from Metcalf Associates.Which of the following is correct regarding the impact of this error on Tang's income statement and statement of financial position at December 31, 2011?

A)Ending inventory is understated by $350,000.
B)Retained earnings is overstated by $350,000.
C)Cost of goods sold is overstated by $350,000.
D)The financial statements are correctly stated.

Question 29

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

Question 30

Where should raw materials be classified on the statement of financial position?

A)Prepaid expenses.
B)Inventory.
C)Equipment.
D)Not on the statement of financial position.

Question 31

The LIFO perpetual method results in the same ending inventory and cost of goods sold amounts as under the LIFO periodic method.

Question 32

Culver Company purchases the majority of its inventory from three primary suppliers for re-sale to customers around the world.Culver Company's statement of financial position will include

A)Finished goods inventory.
B)Work-in-process inventory.
C)Merchandise inventory.
D)All of the choices are correct.

Question 33

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 34

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

Question 35

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 36

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

Question 37

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

Question 38

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

Question 39

Mineral Makers (MM) Company keeps its inventory records using a perpetual system.At December 31, 2011, the unadjusted balance in the inventory account is $64,000.Through a physical count on December 31, 2011, MM determines that its actual merchandise inventory at year-end is $62,500.Which of the following is true regarding the statement of financial position and the income statement of MM at December 31, 2011?

A)Inventory is increased and cost of goods sold is decreased by $1,500.
B)Inventory is decreased and cost of goods sold is increased by $1,500.
C)Inventory is increased and cost of goods sold is increased by $1,500.
D)Inventory is decreased and cost of goods sold is decreased by $1,500.

Question 40

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 41

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.

Question 42

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 43

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 44

Oats Company offers a trade discount to its customers as a reward for large orders.According to the International Accounting Standards Board (IASB) how should the customers of Oats Company account for these trade discounts?

A)As an expense.
B)As a revenue.
C)As a reduction in the cost of inventory.
D)The IASB allows any of these treatments so long as the company applies it consistently.

Question 45

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 46

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 47

Computers For You is a retailer specializing in selling computers and related equipment.During 2011, Computers For You sells $200,000 of merchandise to Sandcastles, Inc.Computers For You incurs $24,000 of freight costs associated with these sales.Which of the following is true regarding how this $24,000 is treated on the financial statements?

A)Computers For You will report the $24,000 as part of merchandise inventory on the statement of financial position.
B)Sandcastles, Inc.will report the $24,000 as part of merchandise inventory on the statement of financial position.
C)Computers For You will report the $24,000 as part of operating expenses on the income statement.
D)Sandcastles, Inc.will report the $24,000 as an accounts receivable on the statement of financial position.

Question 48

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 49

Amazon.com (USA) and other e-tailers account for certain selling costs--fulfillment costs related to inventory shipping and warehousing--as part of administrative expenses, instead of as cost of goods sold.Which of the following is incorrect regarding this treatment?

A)IFRS allows this treatment as long as it's applied consistently and adequately disclosed.
B)The practice does not affect the bottom line.
C)The practice does not affect gross margins.
D)U.S.GAAP allows this treatment as long as it's applied consistently and adequately disclosed.

Question 50

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 51

Which of the following costs should not be included on the statement of financial position as part of the cost of inventory?

A)Abnormal freight.
B)Import duties.
C)Conversion costs.
D)All of the choices are included on the statement of financial position as part of the cost of inventory.

Question 52

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 53

On June 15, 2010, Wynne Corporation accepted delivery of merchandise which it
Purchased 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 statement of financial position for June 30, 2010 would be

A)assets and equity were overstated but liabilities were not affected.
B)equity was the only item affected by the omission.
C)assets, liabilities, and equity were understated.
D)none of these.

Question 54

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 55

Which of the following is a period cost?

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

Question 56

When inventory is misstated, its presentation lacks?

A)Relevance.
B)Faithful representation.
C)Comparability.
D)All of the choices are correct.

Question 57

The use of a 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 58

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 59

Jarvis, Inc.manufactures cruise ships for sale.Each ship costs approximately $25,000,000 to build and takes 3 years to fully construct.During the time it takes to construct one cruise ship, Jarvis incurs $2,400,000 in interest cost related to the construction.The interest cost is incurred evenly throughout the construction period.During the first year of construction, Jarvis builds a shell that can be customized for any purchaser according to specifications; construction during the final 2 years is all based on client specification.The International Accounting Standards Board requires that Jarvis account for this interest cost as

A)$2,400,000 is recorded as interest expense as incurred.
B)$2,400,000 is capitalized to the cruise ship.
C)$800,000 incurred in 1^{st<\sup> year is expensed as incurred; the remaining amount is capitalized to the cruise ship.
D)$800,000 is capitalized to the cruise ship; the remaining amount is expensed as incurred.}

Question 60

Use the following information for questions.
During 2010 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2011.Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne.In 2011 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 61

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

A)Average cost.
B)Moving average.
C)FIFO.
D)Specific identification.

Question 62

Which of the following is true regarding the use of LIFO for inventory valuation?

A)If LIFO is used for external financial reporting, then it must also be used for internal reports.
B)For purposes of external financial reporting, LIFO may not be used with the lower-of-cost-or-net realizable value approach.
C)If LIFO is used for external financial reporting, then it cannot be used for tax purposes.
D)None of these.

Question 63

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)moving-average
D)weighted-average

Question 64

How might a company obtain a price index in order to apply dollar-value LIFO?

A)Calculate an index based on recent inventory purchases.
B)Use a general price level index published by the government.
C)Use a price index prepared by an industry group.
D)All of the above.

Question 65

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 average cost method?

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

Question 66

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

A)FIFO.
B)moving average.
C)specific identification.
D)weighted-average.

Question 67

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 68

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 69

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)FIFO method.
D)None of these.

Question 70

Homes 4 You builds single-family homes throughout the United States and Europe.The International Accounting Standards Board (IASB) Requires Homes 4 You to use which of the following cost flow assumptions for its inventory?

A)FIFO (first-in, first-out).
B)Specific identification.
C)Weighted-average.
D)The IASB allows any of these cost flow assumptions as long as the company uses it consistently.

Question 71

The International Accounting Standards Board requires the specific identification method in certain circumstances.Which of the following is likely to be a circumstance where the specific identification criteria can be met?

A)Unit price is low.
B)Inventory turnover is low.
C)Inventory quantities are large.
D)All of the choices are circumstances where the criteria are likely to be met.

Question 72

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

A)moving-average.
B)first-in, first-out.
C)specific identification.
D)weighted-average.

Question 73

Oats and Honey Company produces healthy snacks for sale throughout the United States and Europe.The International Accounting Standards Board (IASB) prohibits Oats and Honey from using which of the following cost flow assumptions for its inventory?

A)LIFO (last-in, first-out).
B)Specific identification.
C)Weighted-average.
D)The IASB allows any of these cost flow assumptions as long as the company uses it consistently.

Question 74

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

A)specific identification.
B)average cost.
C)FIFO.
D)none of these.

Question 75

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)specific identification.
D)FIFO.

Question 76

Tanner Corporation's inventory cost on its statement of financial position was lower using first-in, first-out than it would have been using average cost.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 77

What happens when inventory in base year dollars decreases?

A)LIFO reserve increases.
B)LIFO layer is created.
C)LIFO layer is liquidated.
D)LIFO price index decreases.

Question 78

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)specific identification.
D)weighted-average.

Question 79

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 80

In a period of falling prices which inventory method generally provides the lowest reported inventory?

A)Average cost.
B)FIFO.
C)Moving average.
D)Specific identification.