Q. If a company uses FIFO during periods of inflation, what effect does it have on the balance sheet?
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A.
Higher inventory values
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B.
Lower inventory values
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C.
No effect on inventory values
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D.
Increased liabilities
Solution
Using FIFO during periods of inflation results in higher inventory values on the balance sheet because older, cheaper costs are recorded.
Correct Answer:
A
— Higher inventory values
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Q. In a period of inflation, which method would likely result in lower taxes?
-
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
LIFO (Last In, First Out) would likely result in lower taxes during inflation because it matches the most recent, higher costs against revenues.
Correct Answer:
B
— LIFO
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Q. Under which method would the ending inventory be valued at the most recent purchase prices?
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A.
FIFO
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B.
LIFO
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C.
Weighted Average
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D.
Specific Identification
Solution
Under LIFO, the ending inventory is valued at the oldest costs, while FIFO values it at the most recent purchase prices.
Correct Answer:
B
— LIFO
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Q. What impact does the choice of inventory valuation method have on financial statements?
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A.
It affects only the balance sheet
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B.
It affects only the income statement
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C.
It affects both the balance sheet and income statement
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D.
It has no impact
Solution
The choice of inventory valuation method affects both the balance sheet and income statement, influencing net income and asset values.
Correct Answer:
C
— It affects both the balance sheet and income statement
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Q. What is a key characteristic of the weighted average inventory method?
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A.
It uses the oldest costs for inventory valuation.
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B.
It averages the cost of all inventory available for sale.
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C.
It prioritizes the most recent purchases.
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D.
It is only applicable for perishable goods.
Solution
The weighted average method averages the cost of all inventory available for sale, providing a middle ground between FIFO and LIFO.
Correct Answer:
B
— It averages the cost of all inventory available for sale.
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Q. What is the primary disadvantage of using the LIFO method?
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A.
It can lead to inventory liquidation.
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B.
It is more complex to implement.
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C.
It does not match current costs with revenues.
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D.
It is not allowed under IFRS.
Solution
LIFO is not allowed under IFRS, which can be a significant disadvantage for companies operating internationally.
Correct Answer:
D
— It is not allowed under IFRS.
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Q. What is the primary reason companies choose FIFO over LIFO?
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A.
Tax benefits
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B.
Simplicity
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C.
Better matching of current costs with revenues
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D.
Compliance with IFRS
Solution
Companies often choose FIFO over LIFO for compliance with IFRS, as LIFO is not permitted under these standards.
Correct Answer:
D
— Compliance with IFRS
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Q. Which inventory valuation method is most commonly used for tax purposes in the United States?
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A.
FIFO
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B.
LIFO
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C.
Weighted Average
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D.
Specific Identification
Solution
LIFO is most commonly used for tax purposes in the United States due to its tax advantages during inflation.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method is most commonly used in the United States?
-
A.
FIFO
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B.
LIFO
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C.
Weighted Average
-
D.
Specific Identification
Solution
LIFO is most commonly used in the United States due to its tax advantages during inflationary periods.
Correct Answer:
B
— LIFO
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Q. Which inventory valuation method typically results in higher profits during periods of rising prices?
-
A.
FIFO
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B.
LIFO
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C.
Weighted Average
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D.
Specific Identification
Solution
FIFO typically results in higher profits during periods of rising prices because older, cheaper costs are matched against current revenues.
Correct Answer:
A
— FIFO
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Q. Which method would likely show a higher ending inventory value in a deflationary environment?
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A.
FIFO
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B.
LIFO
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C.
Weighted Average
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D.
All of the above
Solution
In a deflationary environment, FIFO would likely show a higher ending inventory value as it uses the most recent, lower costs.
Correct Answer:
A
— FIFO
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Q. Which method would provide a better matching of current costs with revenues in a declining price environment?
-
A.
FIFO
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B.
LIFO
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C.
Weighted Average
-
D.
Specific Identification
Solution
In a declining price environment, FIFO would provide a better matching of current costs with revenues as it uses older, higher costs.
Correct Answer:
A
— FIFO
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Q. Which of the following is a disadvantage of using the LIFO method?
-
A.
It can lead to lower net income
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B.
It is not allowed under IFRS
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C.
It is complex to implement
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D.
All of the above
Solution
All of the above are disadvantages of using the LIFO method, including lower net income, non-acceptance under IFRS, and complexity.
Correct Answer:
D
— All of the above
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