Q. If a company uses LIFO during a period of inflation, what effect does it have on taxes?
-
A.
Higher taxes due to higher profits.
-
B.
Lower taxes due to lower profits.
-
C.
No effect on taxes.
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D.
Taxes are deferred indefinitely.
Solution
LIFO results in lower profits during inflation, leading to lower taxes.
Correct Answer:
B
— Lower taxes due to lower profits.
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Q. In a case study, a company reports a higher ending inventory using FIFO. What is the likely impact on the balance sheet?
-
A.
Assets will be understated.
-
B.
Liabilities will be overstated.
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C.
Equity will be understated.
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D.
Assets will be overstated.
Solution
Higher ending inventory under FIFO leads to overstated assets on the balance sheet.
Correct Answer:
D
— Assets will be overstated.
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Q. In a case study, a company reports higher profits using FIFO. What could be a potential risk of this method?
-
A.
Overstated inventory.
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B.
Understated expenses.
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C.
Higher tax liabilities.
-
D.
All of the above.
Solution
Using FIFO can lead to overstated inventory, understated expenses, and higher tax liabilities.
Correct Answer:
D
— All of the above.
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Q. In a case study, a company switched from FIFO to LIFO. What immediate effect would this have on their financial statements?
-
A.
Increase in net income.
-
B.
Decrease in net income.
-
C.
No effect on net income.
-
D.
Increase in cash flow.
Solution
Switching to LIFO during inflation would decrease net income due to higher cost of goods sold.
Correct Answer:
B
— Decrease in net income.
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Q. In a case study, a company switches from LIFO to FIFO. What immediate effect will this have on their financial statements?
-
A.
Increase in cost of goods sold.
-
B.
Decrease in net income.
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C.
Increase in ending inventory.
-
D.
Decrease in total assets.
Solution
Switching from LIFO to FIFO typically increases ending inventory values.
Correct Answer:
C
— Increase in ending inventory.
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Q. In a period of rising prices, which inventory method typically results in higher net income?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
FIFO results in lower cost of goods sold and higher net income during periods of rising prices.
Correct Answer:
A
— FIFO
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Q. What is a potential disadvantage of using the FIFO method?
-
A.
It can lead to inventory obsolescence.
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B.
It results in lower net income.
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C.
It is more complex to implement.
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D.
It does not reflect current market conditions.
Solution
FIFO can lead to inventory obsolescence as older inventory is sold first.
Correct Answer:
A
— It can lead to inventory obsolescence.
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Q. What is the impact of using LIFO on the balance sheet during a period of rising prices?
-
A.
Higher current assets.
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B.
Lower current assets.
-
C.
No impact on current assets.
-
D.
Higher liabilities.
Solution
LIFO results in lower ending inventory values, leading to lower current assets on the balance sheet.
Correct Answer:
B
— Lower current assets.
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Q. Which accounting standard allows companies to choose between FIFO and LIFO for inventory valuation?
-
A.
IFRS
-
B.
GAAP
-
C.
IAS
-
D.
FASB
Solution
GAAP (Generally Accepted Accounting Principles) allows companies to choose between FIFO and LIFO.
Correct Answer:
B
— GAAP
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Q. Which accounting standard allows companies to choose between FIFO and LIFO?
-
A.
IFRS
-
B.
GAAP
-
C.
IAS
-
D.
FASB
Solution
GAAP (Generally Accepted Accounting Principles) allows companies to choose between FIFO and LIFO.
Correct Answer:
B
— GAAP
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Q. Which inventory valuation method is most likely to reflect current market prices?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
FIFO reflects current market prices better as it uses the most recent costs for inventory valuation.
Correct Answer:
A
— FIFO
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Q. Which inventory valuation method is often preferred for tax purposes in times of rising prices?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Retail Inventory Method
Solution
LIFO is often preferred for tax purposes as it results in lower taxable income during inflation.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method would likely result in lower ending inventory value during inflation?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Standard Costing
Solution
LIFO (Last-In, First-Out) results in higher cost of goods sold and lower ending inventory value during inflation.
Correct Answer:
B
— LIFO
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Q. Which of the following is a disadvantage of the FIFO method?
-
A.
It can lead to higher taxes.
-
B.
It is more complex than LIFO.
-
C.
It does not reflect current market conditions.
-
D.
It is not allowed under GAAP.
Solution
FIFO can lead to higher taxes because it results in higher net income during inflation.
Correct Answer:
A
— It can lead to higher taxes.
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Q. Which of the following is NOT a characteristic of the FIFO method?
-
A.
It assumes the oldest inventory is sold first.
-
B.
It can lead to higher taxes in inflationary periods.
-
C.
It is commonly used for perishable goods.
-
D.
It results in lower ending inventory values.
Solution
FIFO typically results in higher ending inventory values during inflation, not lower.
Correct Answer:
D
— It results in lower ending inventory values.
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