CHAPTER 7
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
TRUE-FALSE—Conceptual
1. A manufacturing concern would report the cost of units only partially processed as
inventory in the balance sheet.
Ans: T, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
2. Both merchandising and manufacturing companies normally have multiple inventory
accounts.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
3. The downside of keeping inventory levels low is that the merchandiser may lose sales to
other companies.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
4. In a manufacturing company, the Overhead account is debited for actual overhead
expenditures and credited for overhead applied to production.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
5. Goods purchased for resale are recorded according to the historical cost principle and,
generally, a cost flow assumption.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
6. If a company uses a perpetual inventory system, it is not necessary to do a physical count
of inventory at the end of the period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
7. Purchases of merchandise inventory are debited to Purchases in a perpetual inventory
system and Inventory in a periodic inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
8. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier
delivers the goods to the common carrier.
Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
9. Freight charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.
Ans: F, LO: 2, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,7-2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. Purchase Discounts Loss is a financial expense and is reported in the “other expenses
and losses” section of the income statement.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
11. Ownership of goods in transit depends on the shipping terms.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
12. In a “parking transaction”, goods are sold with an agreement that requires the seller to
hold the goods until the buyer is ready to take possession.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
13. Selling costs and financing costs incurred to purchase inventory are period costs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
14. The cost flow assumption adopted must be consistent with the physical movement of the
goods.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
15. When the FIFO cost flow assumption is used, the cost of goods sold will be the same
whether a perpetual or periodic system is used.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
16. The average-cost method is not as subject to income manipulation as some other
inventory costing methods.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
17. The average-cost method requires identifying the cost of each item sold and each item left
in inventory so it can only be used when it is possible to physically separate the different
purchases made.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
18. When a perpetual inventory system is used with the average-cost method, the average
inventory cost is recalculated each time a sale is made,
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
19. The FIFO method assumes that a company sells inventory in the order in which it purchased them.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
20. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as
production increases.
Ans: F, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
21. LIFO is inappropriate where unit costs tend to decrease as production increases.
, Valuation of Inventories: A Cost-Basis Approach 7-3
Ans: T, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
22. The change in the LIFO Reserve from one period to the next is recorded as an adjustment
to Cost of Goods Sold.
Ans: T, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
23. Many companies use LIFO for both tax and internal reporting purposes.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
24. LIFO liquidation often distorts net income, but usually leads to substantial tax savings.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
25. LIFO liquidations can occur frequently when using a specific-goods LIFO approach.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
26. Dollar-value LIFO techniques help protect LIFO layers from erosion.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
27. The dollar-value LIFO method measures any increases and decreases in a pool in terms
of total dollar value and physical quantity of the goods in the inventory pool.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
28. A disadvantage of LIFO is that it does not match more recent costs against current
revenues as well as FIFO.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
29. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must
also use LIFO for financial accounting purposes.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None,, IMA: Reporting &
Control: Financial Statement Analysis IFRS: None
30. If ending inventory is understated, then net income is understated.
Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
31. If both purchases and ending inventory are overstated by the same amount, net income is
not affected.
Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
, 7-4 Test Bank for Intermediate Accounting, Eighteenth Edition
MULTIPLE CHOICE—Conceptual
32. Which of the following inventories carried by a manufacturer is similar to the merchandise
inventory of a retailer?
a. Raw materials
b. Work-in-process
c. Finished goods
d. Supplies
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
33. A company with high rate of return on sales should consider the inventory sold when
a. when it can reasonably estimate the amount of returns.
b. when the retailer gives a confirmation that the goods won’t be returned.
c. when the goods are sold on installment.
d. when the payment for goods is received.
Ans: A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
34. In a perpetual inventory system, the inventory account
a. is debited for purchases and credited when the goods are sold and the cost is
transferred to cost of goods sold
b. is debited for purchases and credited for purchase returns and freight-in.
c. is not adjusted for cost of goods sold until the end of the accounting period.
d. is debited for purchases and credited for sales returns.
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
35. Which of the following is a characteristic of a perpetual inventory system?
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
36. Which of the following is a characteristic of a periodic inventory system?
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are updated for each purchase and sale
c. Cost of goods sold is recorded each time a sale is made.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
Ans: A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
37. When a perpetual inventory system is used,
a. no Purchases account is used.
b. Cost of Goods Sold account is debited when goods are sold.
c. two entries are required to record a sale.
d. All of the choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
TRUE-FALSE—Conceptual
1. A manufacturing concern would report the cost of units only partially processed as
inventory in the balance sheet.
Ans: T, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
2. Both merchandising and manufacturing companies normally have multiple inventory
accounts.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
3. The downside of keeping inventory levels low is that the merchandiser may lose sales to
other companies.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
4. In a manufacturing company, the Overhead account is debited for actual overhead
expenditures and credited for overhead applied to production.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
5. Goods purchased for resale are recorded according to the historical cost principle and,
generally, a cost flow assumption.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
6. If a company uses a perpetual inventory system, it is not necessary to do a physical count
of inventory at the end of the period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
7. Purchases of merchandise inventory are debited to Purchases in a perpetual inventory
system and Inventory in a periodic inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Record Keeping, IFRS: None
8. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier
delivers the goods to the common carrier.
Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
9. Freight charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.
Ans: F, LO: 2, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,7-2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. Purchase Discounts Loss is a financial expense and is reported in the “other expenses
and losses” section of the income statement.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
11. Ownership of goods in transit depends on the shipping terms.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
12. In a “parking transaction”, goods are sold with an agreement that requires the seller to
hold the goods until the buyer is ready to take possession.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
13. Selling costs and financing costs incurred to purchase inventory are period costs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
14. The cost flow assumption adopted must be consistent with the physical movement of the
goods.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
15. When the FIFO cost flow assumption is used, the cost of goods sold will be the same
whether a perpetual or periodic system is used.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
16. The average-cost method is not as subject to income manipulation as some other
inventory costing methods.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
17. The average-cost method requires identifying the cost of each item sold and each item left
in inventory so it can only be used when it is possible to physically separate the different
purchases made.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
18. When a perpetual inventory system is used with the average-cost method, the average
inventory cost is recalculated each time a sale is made,
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
19. The FIFO method assumes that a company sells inventory in the order in which it purchased them.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
20. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as
production increases.
Ans: F, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
21. LIFO is inappropriate where unit costs tend to decrease as production increases.
, Valuation of Inventories: A Cost-Basis Approach 7-3
Ans: T, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
22. The change in the LIFO Reserve from one period to the next is recorded as an adjustment
to Cost of Goods Sold.
Ans: T, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
23. Many companies use LIFO for both tax and internal reporting purposes.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
24. LIFO liquidation often distorts net income, but usually leads to substantial tax savings.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
25. LIFO liquidations can occur frequently when using a specific-goods LIFO approach.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
26. Dollar-value LIFO techniques help protect LIFO layers from erosion.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
27. The dollar-value LIFO method measures any increases and decreases in a pool in terms
of total dollar value and physical quantity of the goods in the inventory pool.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
28. A disadvantage of LIFO is that it does not match more recent costs against current
revenues as well as FIFO.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None,, IMA: Reporting & Control: Financial Statement Analysis IFRS: None
29. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must
also use LIFO for financial accounting purposes.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None,, IMA: Reporting &
Control: Financial Statement Analysis IFRS: None
30. If ending inventory is understated, then net income is understated.
Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
31. If both purchases and ending inventory are overstated by the same amount, net income is
not affected.
Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
, 7-4 Test Bank for Intermediate Accounting, Eighteenth Edition
MULTIPLE CHOICE—Conceptual
32. Which of the following inventories carried by a manufacturer is similar to the merchandise
inventory of a retailer?
a. Raw materials
b. Work-in-process
c. Finished goods
d. Supplies
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
33. A company with high rate of return on sales should consider the inventory sold when
a. when it can reasonably estimate the amount of returns.
b. when the retailer gives a confirmation that the goods won’t be returned.
c. when the goods are sold on installment.
d. when the payment for goods is received.
Ans: A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
34. In a perpetual inventory system, the inventory account
a. is debited for purchases and credited when the goods are sold and the cost is
transferred to cost of goods sold
b. is debited for purchases and credited for purchase returns and freight-in.
c. is not adjusted for cost of goods sold until the end of the accounting period.
d. is debited for purchases and credited for sales returns.
Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
35. Which of the following is a characteristic of a perpetual inventory system?
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
36. Which of the following is a characteristic of a periodic inventory system?
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are updated for each purchase and sale
c. Cost of goods sold is recorded each time a sale is made.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
Ans: A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
37. When a perpetual inventory system is used,
a. no Purchases account is used.
b. Cost of Goods Sold account is debited when goods are sold.
c. two entries are required to record a sale.
d. All of the choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
