Ch 17 Review

The average cost method of inventory valuation will always result in the lowest reported net income.

• True

• False

Answer explanation

The average cost method usually results in net income between the amounts obtained with first in, first out (FIFO) and last in, first out (LIFO).

Following the consistency principle, once a firm adopts a method of inventory valuation, it should use that method consistently from one period to the next.

• True

• False

The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is fairly consistent from period to period.

• True

• False

Under a periodic inventory system, cost of goods sold is calculated based on the cost of available-for-sale units less the cost of ending inventory as identified through a physical inventory.

• True

• False

Markon is the difference between the cost and the initial retail price of merchandise.

• True

• False

For which inventory valuation method are the physical flow of inventory and the costs assigned to inventory specifically matched?

• the first in, first out (FIFO) method

• the last in, first out (LIFO) method

• the average cost method

• the specific identification method

Which of the following is not a typical internal control over inventory?

• Verify all sales and shipping invoices to ensure sales have been properly recorded and are being shipped to a valid shipping address.

• Take a physical inventory once every three years to verify that the goods on hand match the amounts in the accounting records.

• Establish and follow strict inventory policies and procedures in the area of sales returns and allowances.

• Have an independent auditor observe the physical inventory count.

A matching of the most recent costs to revenue results from the use of

• the lower of cost or net realizable value method.

• the average cost method.

• the first in, first out (FIFO) method.

• the last in, first out (LIFO) method.

A merchant who deals in one-of-a-kind items with large unit costs may account for inventory by the _________________________ method.

• average cost

• first in, first out (FIFO)

• last in, first out (LIFO)

• specific identification

The lower the ending inventory valuation, the lower the reported _________.

• cost of goods sold

• liabilities

• income from operations

• equity