CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Valuation of Inventories: A Cost-Basis Approach
8 – 3
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
MULTIPLE CHOICE—Computational
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 4
MULTIPLE CHOICE—Computational (cont.)
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
BRIEF EXERCISES
Item Description
BE8-148 Recording purchases at net amounts.
BE8-149 Recording purchases at net amounts.
BE8-150 Comparison of FIFO and LIFO.
Valuation of Inventories: A Cost-Basis Approach
8 – 5
EXERCISES
Item Description
E8-151 FIFO and LIFO inventory methods.
E8-152 FIFO and LIFO periodic inventory methods.
E8-153 Perpetual LIFO.
E8–154 Perpetual LIFO and periodic FIFO.
E8-155 Analysis of gross profit.
E8-156 Dollar-value LIFO.
PROBLEMS
Item Description
P8-157 Inventory cut-off.
P8-158 Analysis of errors.
P8-159 Accounting for purchase discounts.
P8-160 Inventory methods.
P8-161 Dollar-value LIFO.
P8-162 Dollar-value LIFO.
CHAPTER LEARNING OBJECTIVES
1. Understand inventory classifications and different inventory systems,
2. Determine the goods and costs included in inventory.
3. Describe and compare the cost flow assumptions used to account for inventories.
4. Identify special issues related to LIFO.
5. Determine the effect of inventory errors on the financial statements.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 6
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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TRUE-FALSE STATEMENTS
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MULTIPLE CHOICE QUESTIONS
21.
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125.
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BRIEF EXERCISES
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EXERCISES
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PROBLEMS
157.
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Valuation of Inventories: A Cost-Basis Approach
8 – 7
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. A modified perpetual inventory system provides detailed inventory records of increases
and decreases in quantities only–not dollar amounts.
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. Freight charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.
6. Purchase Discounts Lost is a financial expense and is reported in the “other expenses
and losses” section of the income statement.
7. The cost flow assumption adopted must be consistent with the physical movement of the
goods.
8. In all cases when FIFO is used, the cost of goods sold would be the same whether a
perpetual or periodic system is used.
9. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as
production increases.
10. LIFO is inappropriate where unit costs tend to decrease as production increases.
11. The change in the LIFO Reserve from one period to the next is recorded as an adjustment
to Cost of Goods Sold.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 8
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 LIFO 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 in the inventory pool.
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. If ending inventory is understated, then net income is understated.
20. If both purchases and ending inventory are overstated by the same amount, net income is
not affected.
True False Answers—Conceptual
Valuation of Inventories: A Cost-Basis Approach
8 – 9
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. Which of the following methods is also referred as “parking transactions”?
a. Consignment sales.
b. Sales on installment.
c. Sales with high rates of return.
d. Sales with buyback agreement.
23. Under what circumstances should a company with high rate of return on sales consider
the inventory sold?
a. When it can reasonably estimate the amount of returns
b. When the retailer gives a confirmation that the goods won’t be returned
c. When the goods are sold on installment
d. When the payment for goods is received
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.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 10
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 consignor.
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 answer choices are correct.
Valuation of Inventories: A Cost-Basis Approach
8 – 11
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 answer choices are correct.
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 answers are correct.
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 answer choices are correct.
Use the following information for questions 35 and 36. During 2020 Carne Corporation transferred
inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2021. Nolan
then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to
Carne. In 2021 when Carne repurchased the inventory, Nolan used the proceeds to repay its
bank loan.
35. This transaction is known as a(n)
a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.
36. On whose books should the cost of the inventory appear at the December 31, 2020
balance sheet date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 12
37. Goods on consignment are
a. included in the consignee’s inventory.
b. included in the consignor’s inventory.
c. included in the consignee’s revenue.
d. included in both the consignee’s and the consignor’s inventory.
S38. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.
P39. The accountant for the Pryor Sales Company is preparing the income statement for 2020
and the balance sheet at December 31, 2020. Pryor uses the periodic inventory system.
The January 1, 2020 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
P40. If the beginning inventory for 2020 is overstated, the effects of this error on cost of goods
sold for 2020, net income for 2020, and assets at December 31, 2021, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
S41. The failure to record a purchase of merchandise on account even though the goods are
properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an overstatement of owners’ equity.
Valuation of Inventories: A Cost-Basis Approach
8 – 13
42. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded
the transaction as a purchase and included the goods in inventory. The effect of this on its
financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
43. Green Co. received merchandise on consignment. As of January 31, Green included the
goods in inventory, but did not record the transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were
understated.
d. net income, current assets, and retained earnings were understated.
44. Feine Co. accepted delivery of merchandise which it purchased on account. As of
December 31, Feine had recorded the transaction, but did not include the merchandise in
its inventory. The effect of this on its financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.
45. On June 15, 2020, Wynne Corporation accepted delivery of merchandise which it pur–
chased on account. As of June 30, Wynne had not recorded the transaction or included
the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2020
would be
a. assets and stockholders’ equity were overstated but liabilities were not affected.
b. stockholders’ equity was the only item affected by the omission.
c. assets, liabilities, and stockholders’ equity were understated.
d. assets and liabilities were understated but stockholders’ equity was not affected.
46. What is the effect of a $50,000 overstatement of last year’s inventory on current years
ending retained earning balance?
a. Understated by $50,000.
b. No effect.
c. Overstated by $50,000.
d. Need more information to determine.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 14
47. Which of the following is a product cost as it relates to inventory?
a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.
48. Which of the following is a period cost?
a. Direct costs.
b. Freight in.
c. Production costs.
d. Selling costs.
49. Which method may be used to record cash discounts a company receives for paying
suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. Both the net method and the gross method.
50. Which of the following is included in inventory costs?
a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.
51. Which of the following is correct?
a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these answers are correct.
52. All of the following costs should be charged against revenue in the period in which costs
are incurred except for
a. manufacturing overhead costs for a product manufactured and sold in the same
accounting period.
b. costs which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. costs of normal shrinkage and scrap incurred for the manufacture of a product.
Valuation of Inventories: A Cost-Basis Approach
8 – 15
53. Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate
projects
c. Interest incurred on notes payable to vendors for routine purchases made on a
repetitive basis
d. All of these should be capitalized.
54. The use of a Purchase Discounts Lost account implies that the recorded cost of a
purchased inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
55. The use of a Purchase Discounts account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
During 2020, which was the first year of operations, Oswald Company had merchandise
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30.
Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods
available had been sold at year end.
56. Which of the following recording procedures would result in the highest cost of goods sold
for 2020?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under “other expenses” in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 16
During 2020, which was the first year of operations, Oswald Company had merchandise
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30.
Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods
available had been sold at year end.
57. Which of the following recording procedures would result in the highest net income for
2020?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under “other expenses” in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.
58. When using the periodic inventory system, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of freight-in for merchandise purchased during the period
S59. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of
the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.
P60. Which inventory costing method most closely approximates current cost for each of the
following:
Ending Inventory Cost of Goods Sold
a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO
61. In situations where there is a rapid turnover, an inventory method which produces a
balance sheet valuation similar to the first-in, first-out method is
a. average cost.
b. base stock.
c. joint cost.
d. prime cost.
Valuation of Inventories: A Cost-Basis Approach
8 – 17
62. The costing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation:
a. moving-average.
b. weighted-average.
c. LIFO perpetual.
d. FIFO.
63. An inventory costing procedure in which the oldest costs incurred rarely have an effect on
the ending inventory valuation is
a. FIFO.
b. LIFO.
c. base stock.
d. weighted-average.
64. Which method of inventory costing best approximates specific identification of the actual
flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. Last-in, first-out
d. Base stock
65. Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed when inventory is valued using the FIFO method exceeds
cost of goods sold when inventory is valued using the LIFO method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.
66. In a period of rising prices, the inventory method which tends to give the highest reported
net income is
a. base stock.
b. first-in, first-out.
c. last-in, first-out.
d. weighted-average.
67. In a period of rising prices, the inventory method which tends to give the highest reported
inventory is
a. FIFO.
b. moving average.
c. LIFO.
d. weighted-average.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 18
68. Tanner Corporation’s inventory on its balance sheet was lower using first-in, first-out than
it would have been using last-in, first-out. Assuming no beginning inventory, in what
direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined
69. In a period of rising prices, the inventory method which tends to give the highest reported
cost of goods sold is
a. FIFO.
b. average cost.
c. LIFO.
d. None of these choices are correct.
70. Which of the following statements is not valid as it applies to inventory costing methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested
(plowed back) in inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern by matching current cost of goods
sold with current revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position
(reduces stock on hand below customary levels), there may be a matching of old costs
with current revenue.
d. The use of FIFO permits some control by management over the amount of net income
for a period through controlled purchases, which is not true with LIFO.
71. The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it
would be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. LIFO method.
d. FIFO method.
72. Which of the following is a reason why the specific identification method may be
considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.
Valuation of Inventories: A Cost-Basis Approach
8 – 19
73. In a period of rising prices which inventory method generally provides the greatest amount
of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.
74. In a period of falling prices, which inventory method generally provides the greatest
amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.
75. What is a LIFO reserve?
a. The difference between the LIFO inventory and the amount used for internal reporting
purposes.
b. The tax savings attributed to using the LIFO method.
c. The current effect of using LIFO on net income.
d. Change in the LIFO inventory during the year.
76. When a company uses LIFO for external reporting purposes and FIFO for internal
reporting purposes, an Allowance to Reduce Inventory to LIFO account is used. This
account should be reported
a. on the income statement in the Other Revenues and Gains section.
b. on the income statement in the Cost of Goods Sold section.
c. on the income statement in the Other Expenses and Losses section.
d. on the balance sheet in the Current Assets section.
77. Which of the following statements is true about specific-goods pooled LIFO approach?
a. It determines and measures any increases and decreases in a pool in terms of total
dollar value.
b. Most companies using a LIFO system prefer specific-goods pooled LIFO approach
over dollar-value LIFO.
c. It usually results in large LIFO liquidation.
d. The reduction of one quantity in the pool may be offset by an increase in another.
78. In the double-extension method, the value of the units in inventory is extended at:
a. twice the base-year prices.
b. twice the current year prices.
c. both base-year prices and current-year prices.
d. only the base-year prices.
Test Bank for Intermediate Accounting, Seventeenth Edition
8 – 20
79. In the context of dollar-value LIFO, what is a LIFO layer?
a. The difference between the LIFO inventory and the amount used for internal reporting
purposes.
b. The LIFO value of the inventory for a given year.
c. The inventory in base year dollars.
d. The LIFO value of an increase in the inventory for a given year.
S80. Which of the following statements is not true as it relates to the dollar-value LIFO inven-
tory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with
specific goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only
one pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory
method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and
measured in terms of total dollar value, not physical quantity.
S81. Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company’s future reported earnings will not be affected substantially by future price
declines.
82. Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for internal
reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower of
cost or market approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes.
d. None of these answers are correct.
83. The tax benefit that the LIFO method provides might get nullified when:
a. unit costs tend to decrease as production increases.
b. unit costs tend to increase as production increases.
c. revenues are increasing faster than costs.
d. a fairly constant “base stock” is present.