Q. If a company uses FIFO for inventory valuation, what effect does it have on the balance sheet during inflation?
A.
Assets are understated.
B.
Assets are overstated.
C.
Liabilities are understated.
D.
Equity is unaffected.
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Solution
Under FIFO during inflation, older, cheaper inventory costs remain on the balance sheet, leading to an overstatement of assets.
Correct Answer:
B
— Assets are overstated.
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Q. In a period of deflation, which inventory method would likely result in higher ending inventory values?
A.
FIFO
B.
LIFO
C.
Weighted Average Cost
D.
All methods equally
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Solution
In deflation, FIFO will result in higher ending inventory values as it accounts for the older, cheaper costs first.
Correct Answer:
A
— FIFO
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Q. In a period of deflation, which inventory method would likely show the highest net income?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
In a period of deflation, FIFO would likely show the highest net income as it matches older, higher costs against current revenues.
Correct Answer:
A
— FIFO
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Q. Under LIFO, how are the cost of goods sold (COGS) affected during inflation?
A.
COGS increases
B.
COGS decreases
C.
COGS remains the same
D.
COGS is unpredictable
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Solution
Under LIFO, COGS increases during inflation because the most recently purchased, higher-cost inventory is sold first.
Correct Answer:
A
— COGS increases
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Q. Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?
A.
COGS decreases.
B.
COGS remains the same.
C.
COGS increases.
D.
COGS is not affected.
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Solution
LIFO (Last-In, First-Out) results in higher COGS during inflation, as the most recently purchased (and typically more expensive) inventory is considered sold first.
Correct Answer:
C
— COGS increases.
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Q. What is the effect of using the weighted average cost method on inventory valuation?
A.
It smooths out price fluctuations.
B.
It always results in the highest COGS.
C.
It is the same as FIFO.
D.
It is the same as LIFO.
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Solution
The weighted average cost method averages the cost of all inventory items, which smooths out price fluctuations over time.
Correct Answer:
A
— It smooths out price fluctuations.
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Q. What is the impact of switching from FIFO to LIFO on a company's financial statements during a period of rising prices?
A.
Increase in net income.
B.
Decrease in net income.
C.
No impact on net income.
D.
Increase in cash flow.
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Solution
Switching from FIFO to LIFO during inflation will typically decrease net income due to higher COGS being reported.
Correct Answer:
B
— Decrease in net income.
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Q. What is the main disadvantage of using LIFO for inventory valuation?
A.
Lower net income
B.
Higher ending inventory
C.
Complexity in record-keeping
D.
All of the above
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Solution
The main disadvantages of using LIFO include lower net income, higher ending inventory values, and increased complexity in record-keeping.
Correct Answer:
D
— All of the above
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Q. What is the primary advantage of using the FIFO inventory valuation method?
A.
It results in lower taxes during inflation.
B.
It matches current costs with current revenues.
C.
It is easier to implement than LIFO.
D.
It provides a more accurate reflection of inventory value.
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Solution
FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, which often reflects the current market value of inventory more accurately.
Correct Answer:
D
— It provides a more accurate reflection of inventory value.
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Q. What is the primary effect of using FIFO during a period of rising prices?
A.
Higher net income
B.
Lower net income
C.
No effect on net income
D.
Higher tax liability
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Solution
Using FIFO during rising prices results in higher net income because older, cheaper costs are matched against current revenues.
Correct Answer:
A
— Higher net income
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Q. Which accounting standard requires consistency in inventory valuation methods?
A.
IFRS
B.
GAAP
C.
IAS
D.
FASB
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Solution
GAAP (Generally Accepted Accounting Principles) requires that companies consistently apply their chosen inventory valuation method to ensure comparability.
Correct Answer:
B
— GAAP
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Q. Which inventory valuation method can lead to lower net income during inflationary periods?
A.
FIFO
B.
LIFO
C.
Weighted Average Cost
D.
Specific Identification
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Solution
LIFO results in higher COGS and thus lower net income during inflation, as it accounts for the most recent, higher costs first.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method can lead to tax advantages during inflationary periods?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
LIFO can lead to tax advantages during inflationary periods as it results in higher COGS and lower taxable income.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method typically results in higher ending inventory during periods of rising prices?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
FIFO typically results in higher ending inventory during periods of rising prices because it values inventory at the most recent costs.
Correct Answer:
A
— FIFO
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Q. Which method is generally preferred for tax purposes in an inflationary environment?
A.
FIFO
B.
LIFO
C.
Weighted Average Cost
D.
Specific Identification
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Solution
LIFO is often preferred for tax purposes during inflation as it results in lower taxable income due to higher COGS.
Correct Answer:
B
— LIFO
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Q. Which method is not allowed under International Financial Reporting Standards (IFRS)?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
LIFO is not allowed under IFRS, which prefers FIFO and weighted average methods.
Correct Answer:
B
— LIFO
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Q. Which method would provide the most accurate matching of current costs with current revenues?
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Specific Identification
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Solution
The Weighted Average method provides the most accurate matching of current costs with current revenues by averaging costs over the period.
Correct Answer:
C
— Weighted Average
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Q. Which of the following is NOT a characteristic of LIFO?
A.
Higher COGS in inflation.
B.
Lower ending inventory value in inflation.
C.
Tax benefits in deflation.
D.
Not allowed under IFRS.
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Solution
LIFO does not provide tax benefits in deflation; rather, it typically results in lower COGS and higher net income.
Correct Answer:
C
— Tax benefits in deflation.
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