BAT CH 6 03

Which of the following statements is true regarding inventory cost flow assumptions?

• A company may use more than one cost flow assumption concurrently.
• A company must comply with the assumption specified by industry standards.
• A company must use the same assumption for domestic and foreign operations.
• A company may never change its inventory cost flow assumption once it has chosen an assumption.

Which of the following statements is correct with respect to inventories?

• The FIFO cost flow assumption assumes that the costs of the earliest goods acquired are the last to be sold.
• It is generally good business management to sell the most recently acquired goods first.
• Under FIFO, the ending inventory is based on the latest units purchased.
• FIFO seldom coincides with the actual physical flow of inventory.

The cost of goods available for sale is allocated to the cost of goods sold and the

• beginning inventory.
• ending inventory.
• cost of goods purchased.
• gross profit.

In periods of rising prices, the cost flow assumption which results in the inventory value on the balance sheet that is closest to current cost is

• FIFO.
• COGS.
• average cost.
• the tax method.

Two companies report the same cost of goods available for sale but each employs a different cost flow assumption. If the price of goods has increased during the period, then the company using

• Average will have the highest ending inventory.
• FIFO will have the highest cost of good sold.
• FIFO will have the highest ending inventory.
• Average will have the lowest cost of goods sold.

The specific identification method of costing inventories is used when the

• physical flow of units cannot be determined.
• company sells large quantities of relatively low cost homogeneous items.
• company sells large quantities of relatively low cost heterogeneous items.
• company sells a limited quantity of high-unit cost items.

The specific identification method of inventory costing

• always maximizes a company's net income.
• always minimizes a company's net income.
• has no effect on a company's net income.
• may enable management to manipulate net income.

Selection of an inventory cost flow assumption by management does not usually depend on

• the fiscal year-end.
• income statement effects.
• balance sheet effects.
• tax effects.

When comparing the average and FIFO inventory cost flow assumptions during a period when prices are rising, which of the following statements is correct?

• FIFO will result in a lower inventory balance reported on the balance sheet.
• Average will result in a higher cash flow.
• FIFO will result in a higher net income reported on the income statement.
• Average will result in a higher gross profit reported on the income statement.

The manager of Worley is given a bonus based on net income. If the manager adopts FIFO, the net income is $8,000; if the manager adopts average, the net income is $7,000. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of average cost?

• 200
• 1000
• 1400
• 1600