Q. If a company uses FIFO for inventory valuation, how does it affect the ending inventory during inflation?
-
A.
Higher ending inventory
-
B.
Lower ending inventory
-
C.
No effect
-
D.
Depends on sales
Solution
FIFO results in a higher ending inventory value during inflation as the most recent costs are not included in COGS.
Correct Answer:
A
— Higher ending inventory
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Q. If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?
-
A.
Increases
-
B.
Decreases
-
C.
Remains the same
-
D.
Cannot be determined
Solution
Ending inventory valuation increases under LIFO during a period of deflation as older, cheaper costs remain in inventory.
Correct Answer:
A
— Increases
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Q. In a period of rising prices, which method would show the lowest ending inventory value?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
All methods show the same
Solution
In a period of rising prices, LIFO would show the lowest ending inventory value.
Correct Answer:
B
— LIFO
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Q. Under which inventory valuation method would the cost of goods sold be higher in a period of rising prices?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Standard Costing
Solution
LIFO (Last In, First Out) results in higher cost of goods sold during periods of rising prices.
Correct Answer:
B
— LIFO
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Q. What is the effect of using FIFO on the balance sheet during inflation?
-
A.
Higher assets
-
B.
Lower liabilities
-
C.
Higher equity
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D.
No effect
Solution
Using FIFO during inflation results in higher asset values on the balance sheet due to the higher cost of recent inventory.
Correct Answer:
A
— Higher assets
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Q. What is the impact of using FIFO on the balance sheet during inflation?
-
A.
Higher assets
-
B.
Lower assets
-
C.
No impact
-
D.
Higher liabilities
Solution
Using FIFO during inflation results in higher assets on the balance sheet due to higher ending inventory valuation.
Correct Answer:
A
— Higher assets
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Q. What is the main advantage of using the weighted average method for inventory valuation?
-
A.
Simplicity
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B.
Tax benefits
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C.
Accuracy
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D.
Compliance with GAAP
Solution
The main advantage of the weighted average method is its simplicity in calculating the cost of goods sold and ending inventory.
Correct Answer:
A
— Simplicity
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Q. What is the primary effect of using FIFO during inflationary periods?
-
A.
Higher net income
-
B.
Lower net income
-
C.
No effect on net income
-
D.
Higher inventory valuation
Solution
Using FIFO during inflationary periods typically results in higher net income due to lower cost of goods sold.
Correct Answer:
A
— Higher net income
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Q. Which inventory valuation method is most appropriate for perishable goods?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
FIFO is most appropriate for perishable goods as it ensures that older inventory is sold first.
Correct Answer:
A
— FIFO
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Q. Which inventory valuation method matches current costs with current revenues most effectively?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO matches current costs with current revenues most effectively during inflationary periods.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method smooths out price fluctuations over time?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
The Weighted Average method smooths out price fluctuations by averaging the cost of all inventory items.
Correct Answer:
C
— Weighted Average
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Q. Which method is most commonly used for tax purposes in the United States?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO is commonly used for tax purposes in the United States due to its tax advantages in inflationary periods.
Correct Answer:
B
— LIFO
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Q. Which method would likely result in lower taxes during a period of rising prices?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO would likely result in lower taxes during rising prices due to higher cost of goods sold.
Correct Answer:
B
— LIFO
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Q. Which method would likely result in lower taxes during periods of rising prices?
-
A.
FIFO
-
B.
LIFO
-
C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO would likely result in lower taxes during periods of rising prices due to higher cost of goods sold.
Correct Answer:
B
— LIFO
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