ACCT 2121 Midterm #2 questions and
answers graded A+ passed
What are the advantages of using specific identification for inventory? - correct answer ✔✔-
exactly matches costs and revenues on the income statement
-tracks the actual physical flow
What are the advantages of using FIFO for inventory? - correct answer ✔✔-ending inventory on
the statement of financial position includes the most current costs (closest to replacement cost)
-approximates the physical flow of most retailers
What are the advantages of using average cost for inventory? - correct answer ✔✔-cost of
goods sold on the income statement includes more current costs than FIFO
-smooths the effects of price changes by assigning all units to the same average cost
How are each of the cost formulas reflected on financial statements during rising prices? -
correct answer ✔✔Specific identification: all statements will be variable and cash will be the
same.
FIFO:
-COGS is lower
-Gross profit is higher
-Net income is higher
, -Cash is the same
-Ending inventory is higher
-Retained earnings are higher
Average cost:
-COGS is higher
-Gross profit is lower
-Net income is lower
-Cash is the same
-Ending inventory is lower
-Retained earnings are lower
What two statements do inventory errors affect? - correct answer ✔✔-Income statement
(COGS)
-SFP (inventory and accounts payable or retained earnings)
What happens if inventory is overstated? - correct answer ✔✔-COGS is understated
-Gross profit is overstated
-Income before income tax is overstated
-Retained earnings are overstated
What happens if inventory is understated? - correct answer ✔✔-COGS is overstated
-Gross profit is understated
-Income before income tax is understated
-Retained earnings are understated
answers graded A+ passed
What are the advantages of using specific identification for inventory? - correct answer ✔✔-
exactly matches costs and revenues on the income statement
-tracks the actual physical flow
What are the advantages of using FIFO for inventory? - correct answer ✔✔-ending inventory on
the statement of financial position includes the most current costs (closest to replacement cost)
-approximates the physical flow of most retailers
What are the advantages of using average cost for inventory? - correct answer ✔✔-cost of
goods sold on the income statement includes more current costs than FIFO
-smooths the effects of price changes by assigning all units to the same average cost
How are each of the cost formulas reflected on financial statements during rising prices? -
correct answer ✔✔Specific identification: all statements will be variable and cash will be the
same.
FIFO:
-COGS is lower
-Gross profit is higher
-Net income is higher
, -Cash is the same
-Ending inventory is higher
-Retained earnings are higher
Average cost:
-COGS is higher
-Gross profit is lower
-Net income is lower
-Cash is the same
-Ending inventory is lower
-Retained earnings are lower
What two statements do inventory errors affect? - correct answer ✔✔-Income statement
(COGS)
-SFP (inventory and accounts payable or retained earnings)
What happens if inventory is overstated? - correct answer ✔✔-COGS is understated
-Gross profit is overstated
-Income before income tax is overstated
-Retained earnings are overstated
What happens if inventory is understated? - correct answer ✔✔-COGS is overstated
-Gross profit is understated
-Income before income tax is understated
-Retained earnings are understated
