A201 CH5 Conceptual Q & A

The choice of an inventory valuation method can have a major impact on gross profit and cost of sales.

The matching principle requires that the inventory valuation method used match the physical flow of inventory.

The consistency concept:

The inventory valuation method that results in the lowest taxable income in a period of rising costs is:

A company's cost of inventory was $317,500. Due to phenomenal demand for this product, the market value of its inventory increased to $323,000. According to the consistency principle, this company should write up the value of its inventory.

An overstatement of ending inventory will cause:

Merchandise inventory includes:

When units are purchased at different costs over time, it is simple to determine the cost per unit assigned to inventory.

The FIFO inventory method assumes that costs for the most recently purchased items are the first to be charged to the cost of goods sold.

In a period of rising prices, FIFO usually gives a lower taxable income, which leads to an advantage when it comes to paying income tax.

The conservatism constraint prescribes that the most optimistic amount is used when more than one estimate of the amount to be received or paid in the future exists and these estimates are about equally likely.

An error in the period-end inventory causes an offsetting error in the next period and therefore:

Days' sales in inventory is calculated as:

The inventory valuation method that identifies the invoice cost of each item in ending inventory to determine the cost assigned to that inventory is the:

LIFO assumes that inventory costs flow in the order they were incurred.

During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:

An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.

A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.

The lower of cost or market rule for inventory valuation must be applied to only individual items of inventory, not to major categories of inventory or to the entire inventory.

The inventory turnover ratio:

Goods in transit are included in a purchaser's inventory:

Whether prices are rising or falling, FIFO always will yield the highest gross profit and net income.

Generally accepted accounting principles require that the inventory of a company be reported at its:

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost of the same inventory items in the usual manner.

Days' sales in inventory:

The cost of goods purchased will differ under the four inventory valuation methods of specific identification, FIFO, LIFO, and weighted average.

Under LIFO, the most recent costs are assigned to ending inventory.

The full disclosure principle:

The understatement of the ending inventory balance causes:

The inventory turnover ratio is calculated as:

Damaged and obsolete goods:

The understatement of the beginning inventory balance causes:

Goods on consignment:

Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption.

In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses?

The inventory valuation method that tends to smooth out erratic changes in costs is: