Inventory Management Quiz

Generally accepted accounting principles require that the inventory of A company be reported at:

A. Market value. B. Historical cost. C. Lower of cost or market. D. Replacement cost. E. Retail value.

• C
• A
• B
• D
• E

The conservatism constraint:

• B. Requires that a company use different accounting methods period after period.
• C. Requires that revenues and expenses be reported in the period in which they are not earned or incurred.
• E. Requires that all inventory items be reported at a discounted cost.
• A.Requires that when multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used.

Interim statements:

• A. Are required by the Congress.

• B. Are necessary to achieve full disclosure about a business's operations.

• C. Are usually monthly or quarterly statements prepared for periods less than the traditional, annual statements.

• D. Require the use of the perpetual method for inventories.

• E. Cannot be prepared if the company follows the conservatism principle.

The consistency concept:

• Requires a company to consistently apply the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its financial reporting.

• Requires a company to use one method of inventory valuation exclusively.

• Requires that all companies in the same industry use the same accounting methods of inventory valuation.

• Is also called the full disclosure principle.

• Is also called the matching principle.

Damaged and obsolete goods:

• Are never counted as inventory.

• Are included in inventory at their full cost.

• Are included in inventory at their net realizable value.

• Should be disposed of immediately.

• Are assigned a value of zero.

The inventory valuation method that results in the lowest taxable income in a period of inflation is:

• LIFO method.

• FIFO method.

• Weighted-average cost method.

• Specific identification method.

• Gross profit method.

Goods on consignment:

• Are goods shipped by the owner to the consignee who sells the goods for the owner.

• Are reported in the consignee's books as inventory.

• Are goods shipped to the consignor who sells the goods for the owner.

• Are not reported in the consignor's inventory since they do not have possession of the inventory.

• Are always paid for by the consignee when they take possession.

Regardless of the inventory costing system used, cost of goods available for sale must be allocated between

• beginning inventory and net purchases during the period.

• ending inventory and beginning inventory.

• net purchases during the period and ending inventory.

• ending inventory and cost of goods sold.

• beginning inventory and cost of goods sold.

The inventory valuation method that tends to smooth out erratic changes in costs is:

• FIFO.

• Weighted average.

• LIFO.

• Specific identification.

• WIFO

The full disclosure principle:

• Requires that when a change in inventory valuation method is made, the notes to the statements report the type of change, its justification and its effect on net income.

• Requires that companies use the same accounting method for inventory valuation period after period.

• Is not subject to the materiality principle.

• Is only applied to retailers.

• Is also called the consistency principle.