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[QUESTION]
REFER TO: Ref. 09_02
58. If no correcting entries were made at the end of 2017, how much will retained earnings be
overstated or understated at the end of 2018? (Ignore income tax.)
a. $2,000 understated
b. $2,000 overstated
c. $10,000 understated
d. $10,000 overstated
59. The use of the lower of cost or net realizable value (LCNRV) method to value inventory for
reporting purposes is a departure from the accounting principle of
a. going concern.
b. conservatism.
c. matching.
d. historical cost.
60. TAD, Inc. uses the lower of cost or market method (“Old -LCM”) to value inventory. If the
inventory value is replacement cost, which one of the following statements is true?
a. Historical cost is less than replacement cost.
b. Replacement cost is greater than net realizable value less a normal profit margin.
c. Replacement cost is greater than historical cost.
d. Net realizable value is greater than historical cost.
61. When applying the lower of cost or net realizable value (LCNRV) method, inventory value
reported cannot exceed the
a. market floor.
b. selling price less the expected cost of completion and disposal.
c. selling price less a normal profit margin.
d. replacement cost.
62. The use of the lower of cost or market (Old-LCM) method to value inventory indicates a
probable loss has been sustained. This is an application of the accounting principle of
a. matching.
b. going concern.
c. conservatism.
d. consistency.
63. The use of the lower of cost or net realizable value (LCNRV) method to value inventory for
reporting purposes employs the accounting principle of
a. cost-benefit.
b. matching.
c. historical cost.
d. conservatism.
Use the following to answer questions 64 – 72:
REFERENCE: Ref. 09_03
Konan, Inc. needs to determine its inventory value. The following information pertains to the
individual products in ending inventory:
Replacement
Selling
Cost of
Normal
Product
Cost
Cost
Price
Completion
Profit
L-19
$40
$38
$50
$2
$11
M-23
52
40
60
10
8
N-05
20
24
30
2
6
[QUESTION]
REFER TO: Ref. 09_03
64. Assuming Konan uses the LIFO method for costing its inventory, the maximum limit for
market value of product L-19 is
a. $37.
b. $38.
c. $48.
d. $50.
65. Assuming Konan uses the LIFO method for costing its inventory, the minimum limit for
market value of product M-23 is
a. $42.
b. $52.
c. $50.
d. $60.
66. Assuming Konan uses the LIFO method for costing its inventory, the lower of cost or market
for product N-05 is
a. $20.
b. $22.
c. $24.
d. $28.
67. Assuming Konan uses the LIFO method for costing its inventory, the lower of cost or market
for item M-23 is
a. $40.
b. $42.
c. $46.
d. $52.
68. Assuming Konan uses the LIFO method for costing its inventory, the “market” value for item
N-05 is
a. $20.
b. $24.
c. $28.
d. $30.
69. Assuming Konan uses the FIFO method for costing its inventory, the net realizable value for
product L-19 is
a. $37.
b. $38.
c. $48.
d. $50.
70. Assuming Konan uses the FIFO method for costing its inventory, the reported value of
product M-23 is
a. $42.
b. $52.
c. $50.
d. $60.
71. Assuming Konan uses the FIFO method for costing its inventory, writedown of inventory
value for item M-23 is
a. $10.
b. $8.
c. $2.
d. $0.
72. Assuming Konan uses the FIFO method for costing its inventory, the writedown of inventory
value for Product N-05 is
a. $6.
b. $2.
c. $8.
d. $0.
73. Similarities between U.S. GAAP and IFRS include which of the following?
a. Both U.S. GAAP and IFRS permit the same cost flow assumptions.
b. Inventory is carried at the lower of cost or net realizable value under both U.S. GAAP and IFRS.
c. Direct costing is required under both U.S. GAAP and IFRS.
d. The definition of inventory is similar in both U.S. GAAP and IFRS.
74. IFRS accounting for inventory (IAS 2) does not permit which of the following cost flow
assumptions?
a. LIFO.
b. FIFO.
c. Weighted average.
d. Specific identification.
75. When applying lower of cost or market under IFRS, market is defined as
a. net realizable value less normal markup.
b. replacement cost.
c. net realizable value.
d. the middle value among the above three alternatives.
76. Reported income for FIFO firms _________ includes some realized holding gains during
periods of rising inventory costs. Which of the following terms (when inserted in the blank)
makes the previous sentence a true statement?
a. always.
b. sometimes.
c. usually.
d. never.
77. Analysts try to remove holding gains from reported FIFO income because
a. the code of professional ethics to which they must comply requires that they do so if possible.
b. holding gains understate management’s true performance.
c. they are potentially unsustainable.
d. they are always unsustainable.
78. The size of the divergence between FIFO cost of goods sold and replacement cost of goods
sold depends on
a. the severity of input cost changes.
b. the rapidity of physical inventory turnover.
c. both the severity of input cost changes and the rapidity of physical inventory turnover.
d. the rate of inflation.
79. ABC Company has elected to adopt the dollar-value LIFO inventory method when the
inventory is valued at $125,000. The adoption takes place as of January 1, 2018 when the entire
inventory represents a single pool. ABC Company determined that the inventory at December
31, 2018 was $144,375 at current year cost and $131,250 at base year cost using a relevant price
index of 1.10. The inventory at December 31, 2018 under dollar value LIFO is
a. $139,438.
b. $131,875.
c. $138,125.
d. $144,375.
Use the following to answer questions 80 – 82:
REFERENCE: Ref. 09_04
The Shill Company uses the dollar-value LIFO method for valuing inventory. The following
inventory information is available at the end of the year:
Year
Year-End Price
Price Index
1
$200,000
100
2
250,000
105
3
296,000
108
4
286,000
110
80. The inventory at the end of Year 2 under dollar-value LIFO is
a. $238,095.
b. $240,000.
c. $250,000.
d. $262,500.
[QUESTION]
REFER TO: Ref. 09_04
81. The inventory under dollar-value LIFO at the end of Year 3 is
a. $274,074.
b. $276,800.
c. $278,857.
d. $300,000.
82. The inventory under dollar-value LIFO at the end of Year 4 is
a. $260,000.
b. $263,657.
c. $274,074.
d. $286,000.
83. LIFO layers are more likely to be liquidated when inventory records are kept on
a. an inventory group basis.
b. a total inventory basis.
c. an item-by-item basis.
d. a specific identification basis.
84. Which of the following statements regarding inventory accounting is false?
a. The choice of method for allocating the cost of goods available for sale between ending
inventory and cost of goods sold represents the major issue in inventory accounting.
b. The input cost changes that occur after the purchase of inventory items in a current cost
accounting system are recognized as unrealized holding gains.
c. If the cost of inventory never changed, the FIFO, LIFO and weighted average cost flow would
produce the same financial statement result.
d. Although many firms use the LIFO cost flow assumption, there are no examples where the
actual physical flow of units is also last-in, first-out.
85. Which of the following statements regarding inventory accounting is true?
a. In a perpetual inventory system, losses related to inventory must be recorded in the accounts.
b. A periodic inventory system provides management a greater degree of control over inventory.
c. In a perpetual inventory system, purchases are debited to a purchases account.
d. A periodic system of inventory is generally used when inventory volumes are low and per unit
costs are high.
86. Which of the following statements regarding inventory accounting is false?
a. The inventory carrying cost should include storage costs.
b A manufacturing firm that uses a just-in-time system, and wants to avoid “stock-outs” if
possible, would prefer a periodic inventory system.
c. The use of computerized optical scanning equipment has led to the adoption of perpetual
inventory systems in high-volume settings.
d. Inventory carrying cost should include transportation costs that are paid by the purchaser.
87. Which of the following statements regarding inventory accounting is false?
a. A cash purchase discount that is lost due to a late payment should be recorded as interest
expense rather than a cost of acquiring inventory.
b. Vendor allowances should be used by the buyer to lower the cost of inventory and the cost of
goods sold.
c. U.S. GAAP requires that inventory costs should include the costs of the purchasing
department and other administrative costs incurred with the acquisition and distribution of
inventory.
d. Product costs, i.e. raw material, labor and certain overhead items, should be assigned to
inventory and treated as assets until the inventory is sold.
88. Which of the following statements regarding inventory accounting is true?
a. When using the absorption costing method, all production costs should be inventoried.
b. Use of the variable costing method is preferred under GAAP.
c. When variable costing is used, fixed production costs are included as a part of inventory cost.
d. Companies frequently disclose the effects of absorption costing on reported net income.
89. Which of the following statements regarding inventory accounting is true?
a. Analysts should be aware that when a company uses absorption costing, reported income tends
to decrease as inventory absorbs more of the fixed costs.
b. Variable costing includes more than the variable costs of production in the valuation of
inventory.
c. When physical inventory levels are decreasing and a company uses the absorption cost
method, net income tends to increase.
d. When physical inventory levels are increasing and a company uses the absorption cost
method, net income tends to increase.
90. Which of the following statements regarding inventory accounting is false?
a. Under U.S. GAAP, the cost flow assumption does not need to conform to the actual flow of
the goods.
b. Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of
management with proper disclosure.
c. The FIFO method of inventory valuation assumes that the first unit purchased is the first unit
sold.
d. The weighted average cost flow assumption generates numbers that are between the LIFO and
FIFO assumptions.
91. Which of the following statements regarding inventory accounting is true?
a. FIFO charges the most recent costs against revenues on the income statement.
b. In the U.S., FASB prefers replacement cost accounting because it records holding gains on the
financial statements as they arise.
c. The primary difference between FIFO and LIFO is that each method makes a different choice
regarding which financial statement element is shown at the out-of-date cost.
d. The specific identification method of inventory accounting is generally considered to be the
most prevalent.
92. Which of the following statements regarding inventory accounting is false?
a. By charging the oldest costs to the income statement, LIFO automatically includes in income
any holding gains on the units that are sold.
b. Under either FIFO or LIFO it is not possible to simultaneously reflect both the balance sheet
inventory and cost of goods sold at current cost.
c. When purchases and sales occur continuously, the costs incurred most recently will be
virtually identical to current replacement cost so LIFO provides a good match between current
costs and current revenues.
d. To get the most recent prices into cost of goods sold, a company using LIFO will use the
periodic inventory system, rather than a perpetual system, to compute its ending inventory and
cost of goods sold.
93. Which of the following statements regarding inventory accounting is false?
a. Firms that use LIFO must disclose the dollar magnitude of the difference between LIFO and
FIFO cost.
b. The LIFO reserve disclosure requirement is intended to help investors compare LIFO versus
FIFO firms in a meaningful manner.
c. The formula to convert the cost of goods sold under LIFO to an estimate of the cost of goods
sold under FIFO is: LIFO cost of goods sold minus increase in LIFO reserve equals FIFO cost of
goods sold.
d. U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve.
94. Which of the following statements regarding inventory accounting is false?
a. IFRS requires the use of absorption costing.
b. Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when
accounting for inventory.
