Chapter 7

Question 1

What is the primary purpose of inventory valuation?

Answer 1

To determine the cost of goods sold and the value of inventory on hand.

Question 2

True or False: Inventory valuation affects financial statements.

Answer 2

True

Question 3

What are the two main methods for inventory valuation?

Answer 3

First-In, First-Out (FIFO) and Last-In, First-Out (LIFO)

Question 4

Fill in the blank: The __________ method assumes that the earliest goods purchased are the first to be sold.

Answer 4

FIFO

Question 5

Which inventory valuation method typically results in lower taxes during periods of inflation?

Answer 5

LIFO

Question 6

What does ‘cost basis’ refer to in inventory valuation?

Answer 6

The original cost of acquiring inventory, including purchase price and additional costs.

Question 7

Short answer: What is the impact of inventory valuation on net income?

Answer 7

It affects the cost of goods sold, which in turn influences net income.

Question 8

True or False: The weighted average cost method calculates a new average cost for each sale.

Answer 8

False

Question 9

What is the weighted average cost method?

Answer 9

A method that averages the cost of all inventory available for sale during the period.

Question 10

Multiple Choice: Which of the following methods would likely show the highest ending inventory during a period of rising prices? A) FIFO B) LIFO C) Weighted Average

Answer 10

A) FIFO

Question 11

Fill in the blank: Under LIFO, the __________ costs are matched against current revenues.

Answer 11

latest

Question 12

What is a disadvantage of the LIFO method?

Answer 12

It can result in lower inventory values on the balance sheet.

Question 13

True or False: Businesses can switch between inventory valuation methods at any time without restrictions.

Answer 13

False

Question 14

What is the impact of inventory errors on financial statements?

Answer 14

They can lead to misstatements of income and inventory values.

Question 15

Short answer: Why is it important to choose an inventory valuation method?

Answer 15

It affects financial reporting, tax obligations, and business decisions.

Question 16

What does GAAP stand for?

Answer 16

Generally Accepted Accounting Principles

Question 17

True or False: GAAP allows companies to use LIFO for tax purposes but requires FIFO for financial reporting.

Answer 17

False

Question 18

Fill in the blank: The __________ method can lead to income manipulation by changing inventory valuation.

Answer 18

LIFO

Question 19

Multiple Choice: Which inventory valuation method is generally preferred for tax purposes in the U.S.? A) FIFO B) LIFO C) Specific Identification

Answer 19

B) LIFO

Question 20

What is the Specific Identification method?

Answer 20

An inventory valuation method that tracks the actual cost of each specific item sold.

Question 21

Short answer: What type of businesses benefit most from the Specific Identification method?

Answer 21

Businesses with unique, high-value items, such as art galleries or car dealerships.

Question 22

True or False: The choice of inventory valuation method has no effect on cash flow.

Answer 22

False

Question 23

What is a common reason for businesses to choose FIFO over LIFO?

Answer 23

FIFO generally provides a better reflection of current inventory value.

Question 24

Fill in the blank: Inventory valuation is crucial for __________ management.

Answer 24

financial

Question 25

Multiple Choice: Which method provides a better matching of current costs with revenues during inflation? A) FIFO B) LIFO C) Weighted Average

Answer 25

B) LIFO

Question 26

What is net realizable value?

Answer 26

The estimated selling price of inventory minus any costs to complete and sell it.

Question 27

True or False: Businesses must write down inventory to its net realizable value if it is less than the cost.

Answer 27

True

Question 28

What is the impact of using a perpetual inventory system?

Answer 28

It allows for real-time tracking of inventory levels and costs.

Question 29

Short answer: What is the difference between periodic and perpetual inventory systems?

Answer 29

Periodic updates inventory at intervals, while perpetual updates continuously.

Question 30

Fill in the blank: A __________ inventory system is often used by businesses with lower inventory turnover.

Answer 30

periodic

Question 31

What is inventory turnover?

Answer 31

A measure of how many times inventory is sold and replaced over a period.

Question 32

True or False: A high inventory turnover ratio is generally favorable.

Answer 32

True

Question 33

Multiple Choice: Which factor does NOT affect inventory valuation? A) Purchase price B) Selling price C) Carrying costs

Answer 33

B) Selling price

Question 34

Short answer: How does inflation impact inventory valuation?

Answer 34

It can distort the cost of goods sold and the value of inventory reported.

Question 35

What is the lower of cost or market rule?

Answer 35

A principle that requires inventory to be valued at the lower of its cost or its market value.

Question 36

True or False: The lower of cost or market rule is applied to individual items of inventory.

Answer 36

True

Question 37

Fill in the blank: The __________ method can smooth out fluctuations in inventory costs over time.

Answer 37

Weighted Average

Question 38

What is a write-down in the context of inventory?

Answer 38

A reduction in the book value of inventory due to impairment or obsolescence.

Question 39

Short answer: Why is inventory valuation important for stakeholders?

Answer 39

It affects financial ratios, investment decisions, and overall financial health.

Question 40

Multiple Choice: Which method is least affected by price fluctuations? A) FIFO B) LIFO C) Weighted Average

Answer 40

C) Weighted Average

Question 41

What is the main goal of inventory management?

Answer 41

To maintain optimal inventory levels while minimizing costs.

Question 42

True or False: All inventory valuation methods are allowed under IFRS.

Answer 42

False

Question 43

Fill in the blank: Inventory valuation is essential for __________ reporting.

Answer 43

financial

Question 44

What is a cost flow assumption?

Answer 44

An assumption about how costs associated with inventory are recognized and allocated.