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Week 5 Midterm Exam: Chapters 8 Through 11
CHAPTER 8
VALUATION OF INVENTORIES: A COST-BASIS APPROACH
IFRS questions are available at the end of this chapter.
TRUE FALSE—Conceptual
1. A
manufacturing concern would report the cost of units only partially processed
as inventory in the balance sheet.
2. Both
merchandising and manufacturing companies normally have multiple inventory
accounts.
3. When
using a perpetual inventory system, freight charges on goods purchased are
debited to Freight-In.
4. If
a supplier ships goods f.o.b. destination, title passes to the buyer when the
supplier delivers the goods to the common carrier.
5. If
ending inventory is understated, then net income is understated.
6. If
both purchases and ending inventory are overstated by the same amount, net income is not affected.
7. Freight
charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.
8. Purchase
Discounts Lost is a financial expense and is reported in the “other expenses
and losses” section of the income statement.
9. The
cost flow assumption adopted must be consistent with the physical movement of
the goods.
10. In
all cases when FIFO is used, the cost of goods sold would be the same whether a
perpetual or periodic system is used.
11. The
change in the LIFO Reserve from one period to the next is recorded as an
adjustment to Cost of Goods Sold.
12. Many
companies use LIFO for both tax and internal reporting purposes.
13. LIFO
liquidation often distorts net income, but usually leads to substantial tax
savings.
14. LIFO
liquidations can occur frequently when using a specific-goods approach.
15. Dollar-value
LIFO techniques help protect LIFO layers from erosion.
16. 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.
17. A
disadvantage of LIFO is that it does not match more recent costs against
current revenues as well as FIFO.
18. The
LIFO conformity rule requires that if a company uses LIFO for tax purposes, it
must also use LIFO for financial accounting purposes.
19. Use
of LIFO provides a tax benefit in an industry where unit costs tend to decrease
as production increases.
20. LIFO
is inappropriate where unit costs tend to decrease as production increases.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. 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.
22. Where should raw materials be classified on the balance sheet?
a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.
23. Which of the following accounts is not reported in inventory?
a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.
24. 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.
25. 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.
26. 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.
27. Where should goods in transit that were recently purchased
f.o.b. destination be included on the balance sheet?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.
28. If a company uses the periodic inventory system, what is the
impact on net income of including goods in transit f.o.b. shipping point in
purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine
effect on net income.
29. If a company uses the periodic inventory system, what is the
impact on the current ratio of including goods in transit f.o.b. shipping point
in purchases, but not ending inventory?
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.
30. 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.
31. 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.
32. Goods in transit which are shipped f.o.b. shipping point should
be
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.
33. Goods in transit which are shipped f.o.b. destination should be
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.
34. 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 f.o.b. destination.
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.
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