Q. In a period of deflation, which inventory method would likely yield a higher ending inventory value?
-
A.
FIFO
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B.
LIFO
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C.
Weighted Average
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D.
None of the above
Solution
In a period of deflation, FIFO would likely yield a higher ending inventory value as it uses the cost of older, cheaper inventory.
Correct Answer:
A
— FIFO
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Q. In which scenario would a company prefer to use FIFO over LIFO?
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A.
When prices are stable
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B.
When prices are rising
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C.
When prices are falling
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D.
When tax rates are high
Solution
A company may prefer FIFO over LIFO when prices are falling, as it results in lower cost of goods sold and higher profits.
Correct Answer:
C
— When prices are falling
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Q. Under which method would the cost of goods sold be higher in a period of rising prices?
-
A.
FIFO
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B.
LIFO
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C.
Weighted Average
-
D.
None of the above
Solution
Under LIFO, the cost of goods sold would be higher in a period of rising prices because the latest, more expensive inventory is used first.
Correct Answer:
B
— LIFO
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Q. What does FIFO stand for in inventory valuation?
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A.
First In, First Out
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B.
First In, Final Out
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C.
Final In, First Out
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D.
Final In, Final Out
Solution
FIFO stands for First In, First Out, meaning the oldest inventory items are sold first.
Correct Answer:
A
— First In, First Out
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Q. What is the effect of using the weighted average method on inventory valuation?
-
A.
It smooths out price fluctuations
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B.
It always results in the highest ending inventory
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C.
It is the same as FIFO
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D.
It is the same as LIFO
Solution
The weighted average method smooths out price fluctuations by averaging the cost of all inventory items.
Correct Answer:
A
— It smooths out price fluctuations
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Q. What is the primary disadvantage of using the FIFO method?
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A.
Higher taxes during inflation
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B.
Lower net income
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C.
Complex record-keeping
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D.
None of the above
Solution
The primary disadvantage of FIFO is that it can lead to higher taxes during inflation due to lower cost of goods sold.
Correct Answer:
A
— Higher taxes during inflation
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Q. Which accounting standard allows the use of LIFO for inventory valuation?
-
A.
IFRS
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B.
GAAP
-
C.
Both IFRS and GAAP
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D.
Neither IFRS nor GAAP
Solution
GAAP allows the use of LIFO for inventory valuation, while IFRS does not.
Correct Answer:
B
— GAAP
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Q. Which inventory valuation method assumes that the most recently purchased items are sold first?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO stands for Last In, First Out, meaning the most recently purchased items are sold first.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method is likely to result in lower taxes during inflationary periods?
-
A.
FIFO
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B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO is likely to result in lower taxes during inflationary periods because it reports higher cost of goods sold.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method would likely result in lower taxes during inflationary periods?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO would likely result in lower taxes during inflationary periods because it reports higher cost of goods sold.
Correct Answer:
B
— LIFO
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Q. Which method is often preferred for financial reporting due to its alignment with the actual flow of goods?
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A.
FIFO
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B.
LIFO
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C.
Weighted Average
-
D.
Specific Identification
Solution
FIFO is often preferred for financial reporting as it aligns with the actual flow of goods in many businesses.
Correct Answer:
A
— FIFO
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Q. Which method would show a higher ending inventory value in times of deflation?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
All of the above
Solution
FIFO would show a higher ending inventory value in times of deflation because it uses the cost of older, cheaper inventory.
Correct Answer:
A
— FIFO
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