True/False
Indicate whether the sentence or statement is true
or false.
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1.
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Many
accountants believe that during periods of changing prices, a realistic matching of revenues and
expenses results from the use of the LIFO inventory valuation method.
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2.
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In a
period of rising prices, the LIFO method of inventory valuation results in a lower reported net
income than the FIFO method.
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3.
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The
FIFO method of inventory valuation attempts to approximate the results of the specific identification
method.
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4.
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The
LIFO method of inventory valuation assigns the cost of the most recent purchases to the ending
inventory.
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5.
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The
use of the FIFO method of inventory valuation results in a matching of current inventory costs
against current sales revenue.
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6.
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Under
the gross profit method of estimating inventory, the ending inventory is determined by subtracting
the estimated cost of goods sold from the cost of goods available for sale.
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7.
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Inventory valuation directly affects the amount of net income or net loss reported for
the accounting period.
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8.
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The
average cost method of inventory valuation is sometimes referred to as the weighted average
method.
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9.
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The
average cost method of inventory valuation will always result in the lowest reported net
income.
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10.
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Following the consistency principle, once a firm adopts a method of inventory
valuation, it should use that method consistently from one period to the next.
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11.
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If a
firm uses the FIFO method of inventory valuation for tax purposes, it must use the FIFO method for
financial accounting.
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12.
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Markup is the difference between the cost and the established retail price of
merchandise.
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13.
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Inventory valuation is very important in computing federal income tax because the
value placed on the inventory determines the net income reported.
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14.
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A
physical inventory should be taken at least annually to verify the goods on hand.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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15.
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In
periods of rising prices, the inventory valuation procedure that results in the highest net income
is a. | the lower of
cost or market method. | c. | the average cost
method. | b. | the LIFO method. | d. | the FIFO method. | | | | |
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16.
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If
other items remain the same, the larger the ending inventory valuation, a. | the higher the
cost of goods sold. | b. | the higher the reported net income. | c. | the lower the
reported gross profit on sales. | d. | the lower the reported net income. | | |
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17.
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A
firm that sells a single product had a beginning inventory of $4,000 units with a total cost of
$24,000. Early in the year, 10,000 units were purchased at $8 each. Using FIFO, what is
the value of the ending inventory of 3,000 units? a. | $24,000. | c. | $18,000. | b. | $21,000. | d. | $32,000. | | | | |
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18.
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A
firm that sells a single product had a beginning inventory of 4,000 units with a total cost of
$12,000. Early in the year, 8,000 units were purchased at $5 each. Using LIFO, what is
the value of the ending inventory of 2,000 units? a. | $10,000. | c. | $6,000. | b. | $8,000. | d. | $20,000. | | | | |
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19.
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The
gross profit method of determining ending inventory cost a. | can be used
without taking a physical count of merchandise. | b. | provides
accurate information about the number of units in inventory. | c. | requires that a
firm keep inventory and purchases data at retail value as well as at cost. | d. | requires that
the inventory be classified into groups of items of about the same rate of
markup. | | |
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20.
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The
accountant for a company whose inventory was destroyed by fire determined from undamaged records that
the cost of goods available for sale was $100,000 and the net sales were $75,000 up to the date of
the fire. The accountant also determined that the company's normal gross profit rate is 40
percent of net sales. From this data, the accountant estimated the cost of the inventory
destroyed by the fire to be a. | $60,000. | c. | $30,000. | b. | $55,000. | d. | $25,000. | | | | |
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21.
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The
merchandise available for sale cost a company $90,000 and was marked to sell at a retail price of
$120,000. Sales during the period totaled $80,000. If the retail method is used, the
estimated cost of the ending inventory is a. | $30,000. | b. | $10,000. | c. | $20,000. | d. | $40,000. | | |
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22.
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The
weighted average cost of an inventory item is calculated by a. | dividing the sum
of the unit cost on the purchase invoices by the number of units purchased. | b. | dividing the
cost of goods available for sale by the number of units on the ending
inventory. | c. | dividing the cost of goods available for sale by the number of
units available during the period. | d. | dividing the cost of goods sold by the number of units
available during the period. | | |
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23.
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The
cost of the earliest merchandise purchased is assigned to ending inventory when a company
uses a. | the LIFO
method. | c. | the average cost
method. | b. | the FIFO method. | d. | the lower of cost or market method. | | | | |
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24.
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During periods of changing prices, a realistic matching of revenues and expenses
results from the use of a. | the LIFO method. | c. | the average cost method. | b. | the FIFO
method. | d. | the lower of
cost or market method. | | | | |
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25.
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The
use of the FIFO method of inventory valuation a. | results in a matching of current inventory costs against sales
revenue. | b. | attempts to approximate the results of the specific
identification method. | c. | results in a lowest reported net income in a time of rising
prices. | d. | results in a highest reported net income in a time of rising
prices. | | |
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26.
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The
use of the LIFO method of inventory valuation a. | assigns the cost of the most recent purchases to the ending
inventory. | b. | identification method. | c. | results in the
lowest reported net income in a time of rising prices. | d. | results in the
highest reported net income in a time of rising prices. | | |
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27.
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The
firm had a beginning inventory of 50 units with a unit cost of $10. Purchases during the year
were as follows: March--50 units with a unit cost of $12; July--60 units with a unit cost of
$15. If the average cost method is used, the value of the ending inventory of 40 units
is a. | $600. | c. | $400. | b. | $500. | d. | $450. | | | | |
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