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6.3 Learning Objective 6-3
1) In a period of rising costs, the first-in, first-out (FIFO) method results in a lower cost of goods sold and
a higher gross profit than the last-in, first-out (LIFO) method.
2) In a period of rising costs, the last-in, first-out (LIFO) method results in a lower cost of goods sold and
a higher net income than the first-in, first-out (FIFO) method.
3) In a period of rising costs, the first-in, first-out (FIFO) method results in a higher cost of goods sold and
a lower gross profit than the last-in, first-out (LIFO) method.
4) In a period of rising costs, the last-in, first-out (LIFO) method results in a higher cost of goods sold and
a lower net income than the first-in, first-out (FIFO) method.
5) Given the same purchase and sales data, and assuming the cost of inventory is rising, the costing
methods for inventory will result in different amounts for cost of goods sold.
6) Given the same purchase and sales data, and assuming the cost of inventory is rising, the costing
methods for inventory will result in different amounts for sales revenue.
7) Given the same purchase and sales data, and assuming the cost of inventory is rising, the costing
methods for inventory will result in different amounts for net income.
8) Which of the following inventory costing methods yields the highest cost of goods sold during a period
of rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
9) Which of the following inventory costing methods yields the lowest cost of goods sold during a period
of rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
10) Which of the following inventory costing methods yields the highest net income during a period of
rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
11) Which of the following inventory costing methods yields the lowest net income during a period of
rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
12) Which of the following inventory valuation methods minimizes income tax expense during a period
of rising inventory costs?
A) first-in, first-out
B) last-in, first-out
C) weighted-average
D) specific identification
13) When inventory costs are declining, which of the following inventory costing methods will result in
the highest cost of goods sold?
A) first-in, first-out
B) last-in, first-out
C) weighted-average
D) specific identification
14) During a period of declining inventory costs, which of the following inventory costing methods
should be used by a company that intends to minimize its income tax expenses?
A) first-in, first-out
B) last-in, first-out
C) weighted-average
D) specific identification
15) When using the FIFO inventory costing method, ending merchandise inventory will be the highest, as
compared to LIFO and weighted-average inventory costing methods, when costs are decreasing.
16) When using the LIFO inventory costing method, ending merchandise inventory will be the lowest, as
compared to FIFO and weighted-average inventory costing methods, when costs are increasing.
17) When using the specific identification inventory costing method, ending inventory costs depend on
which costs are assigned to the inventory sold.
18) Which of the following inventory costing methods results in the highest value of ending inventory
during a period of rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
19) Which of the following inventory costing methods results in the lowest value of ending inventory
during a period of rising inventory costs?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
20) Which of the following remains the same regardless of the inventory costing method used by a
company? Assume the cost of inventory is rising.
A) purchases
B) cost of goods sold
C) ending merchandise inventory
D) net income
21) When inventory costs are declining, which of the following inventory costing method will result in
the lowest ending merchandise inventory?
A) first-in, first-out
B) last-in, first-out
C) weighted-average
D) specific identification
22) Complete the following table, which compares the effects of LIFO, FIFO, and weighted-average
inventory costing methods on the financial statements in periods of rising inventory costs. The answer
should be lowest, highest, or middle.
Financial Statement Element:
LIFO
FIFO
Weighted-
Average
Cost of Goods Sold
Net Income
Ending Merchandise Inventory
Financial Statement Element:
LIFO
FIFO
Weighted-
Average
Cost of Goods Sold
Highest
Lowest
Middle
Net Income
Lowest
Highest
Middle
Ending Merchandise Inventory
Lowest
Highest
Middle
Diff: 3
LO: 6-3
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Balance Sheet, Income Statement
23) Complete the following table, which compares the effects of LIFO, FIFO and weighted–average
inventory costing methods on the financial statements in periods of declining inventory costs. The
answer should be lowest, highest, or middle.
Financial Statement Element:
LIFO
FIFO
Cost of Goods Sold
Net Income
Ending Merchandise Inventory
Financial Statement Element:
LIFO
FIFO
Cost of Goods Sold
Lowest
Highest
Net Income
Highest
Lowest
Ending Merchandise Inventory
Highest
Lowest
Diff: 3
LO: 6-3
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Balance Sheet, Income Statement
24) Southwood Motors is considering which inventory costing method it should use. The business wants
to maximize gross profit during a period of rising costs. Which inventory method should Southwood
select? Discuss your selection.
25) Michigan Motors is considering which inventory costing method it should use. The business wants to
show the highest Merchandise Inventory balance during a period of declining costs. Which inventory
method should Michigan Motors select? Discuss your selection.
1) Companies can choose between reporting ending Merchandise Inventory using specific identification,
FIFO, LIFO, weighted-average, or lower–of-cost-or-market.
2) The lower–of–cost-or-market rule demonstrates accounting conservatism in action.
3) Lower-of-cost-or-market (LCM) requires that merchandise inventory be reported in the financial
statements at the lower of the historical cost or the current selling price of the inventory.
4) Which of the following assets must be reported at the lower–of-cost-or-market value?
A) Accounts Receivable
B) Merchandise Inventory
C) Prepaid Insurance
D) Notes Receivable
5) The lower–of–cost-or-market value (LCM) rule ________.
A) replaces the use of specific identification, FIFO, LIFO, or weighted-average inventory costing methods
B) violates the conservatism principle
C) requires that merchandise inventory be reported in the financial statements at the lower of the
historical cost or the selling price of the inventory
D) is an accounting issue separate from applying an inventory costing method
6) If the historical cost of inventory is less than its current replacement cost, the business must adjust the
inventory value.
7) In computing the lower-of-cost-or–market, current replacement cost is the cost to replace the inventory
on hand.
8) In computing the lower-of-cost-or–market, market value generally means the selling price.
9) In computing the lower-of-cost-or–market, under IFRS, the market value is defined as the net realizable
value, which is essentially the sales price.
10) Which of the following values is considered the market value when valuing inventory at lower–of–
cost-or-market under U.S. GAAP?
A) sales price less the company’s normal mark-up percentage
B) current replacement cost
C) cost plus the company’s normal mark-up percentage
D) historic cost
11) Which of the following amounts would be reported as Merchandise Inventory on the balance sheet of
a company if the cost of an item is $110 and the current replacement cost is $70?
A) $180
B) the average of $70 and $110
C) $110
D) $70