Module 21

Question 1

The dead costs included included in inventories on the balance

Answer 1

product costs

Question 2

Product costs are _______ in the inventories (asset) account on the _______.

Answer 2

Capitalized
Balance sheet

Question 3

Absorption costing, which includes costs including labor and overhead are _____ costs, a type of ____ cost.

Answer 3

conversion/manufacturing
product costs (capitalized on balance sheet)

Question 4

Inventories hit the income statement as ____ when ______.

Answer 4

COGS (expense)
they are sold

Question 5

Costs that are expensed when they are incurred:
-abnormal waste
-finished goods storage costs
-admin overhead
-selling costs (freight-out)

Answer 5

period costs

Question 6

Trade discounts are _______ inventory costs (product costs).

Answer 6

subtract from inventory expense

Question 7

Inventory valuation method that best matches the physical flow of the inventory items because it tracks the actual units that are sold

Answer 7

Specific identification

Question 8

Which inventory valuation method is best used for inventory items are not interchangeable?

Answer 8

specific identification

Question 9

Inventory values and COGS are updated continuously

Answer 9

perpetual inventory system

Question 10

How does the perpetual inventory stem impact the inventory valuation methods?

Answer 10

No Change: FIFO and specific identification
Change: LIFO and weighted average costs
LIFO & FIFO relationships remain

Question 11

When calculating that current ratio, what impact will the inventory have on the numerator and denominator?

Answer 11

Impacts Numerator: Assets- includes inventory
No impact denominator: accounts payable is to suppliers, not based on inventory accounting

Question 12

In a period of rising price, LIFO will result in _____ inventory and ____ cost of sales

Answer 12

lower inventory, cheaper inventory is still held
higher COGS because of more expensive current inventory prices

Question 13

Inventory valuation methods relate to the debt-to-equity ratio through?

Answer 13

Equity: net income and inventory

Question 14

The LIFO reserve is the amount by which the LIFO _____ is less than the FIFO.

Answer 14

inventory
FIFO inventory - LIFO inventory

Question 15

LIFO liquidation occurs when a firm’s inventories ______.

Answer 15

Decline

Question 16

In a period of rising prices, LIFO liquidation results in

Answer 16

Higher earnings
Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

Question 17

Write-downs occur when

Answer 17

NRV < Inventory value on BS
Loss is recognized on income statement

Question 18

Write ups affect the income statement how?

Answer 18

gain is recognized by reducing the COGS by the recovery amount (NRV- inventory value)

Question 19

Lower of cost or market methods are used for which inventory valuation methods?

Answer 19

LIFO (GAAP) or retail

Question 20

The market value can be used when it is in a range of:

Answer 20

NRV - profit margin < Market value < NRV

Question 21

The effect of an inventory writedown on a firm’s return on assets (ROA) is:

Answer 21

lower ROA; Writing down inventory to net realizable value decreases both net income and total assets in the period of the write-down. Because net income is most likely less than assets, the result in the period is a decrease in ROA.

Question 22

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:

Answer 22

When inventory is written down to market, the replacement cost of the inventory is its market value

Question 23

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change

Answer 23

prospectively, with the carrying value as the first LIFO layer.
Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.

Question 24

When a company wrote down their inventory to NRV in year 1 and then in year 2 inventory increased above NRV, how would firms report under IFRS and GAAP

Answer 24

Under IFRS, a firm that has written down inventory to net realizable value may record any subsequent reversal (limited to the original writedown amount) as a gain on the income statement. Under U.S. GAAP, reversals of inventory writedowns are not permitted.

Question 25

When the sales growth rate exceeds the finished goods inventory growth rate it indicates that:

Answer 25

effective inventory management
the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management

Question 26

Low inventory turnover (high number of days in inventory) may be a sign of

Answer 26

slow-moving or obsolete inventory

Question 27

No _____ account is needed for a perpetual system

Answer 27

purchases

Question 28

Companies can covert _____ to ____, but not the other way around. Which create the _______.

Answer 28

LIFO to FIFO
LIFO reserve

Question 29

Arises when the number of units sold exceeds the number of units purchased or manufactured, so a portion of the older inventory is thus sold off

Answer 29

LIFO Liquidation

older inventory is liquidated; the statement means that units manufactured (or purchased) equaled or exceeded unit sales for each year.

Question 30

IFRS & GAPP Inventory write-downs:

Answer 30

inventory is written down to net realizable value, for both GAAP & IFRS

Question 31

When finished goods are increasing faster than both raw materials and work in progress goods, this suggests:

Answer 31

That there is a decline in demand, and a strong likelihood of future write-downs