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Financial and Managerial Accounting: The Basis for Business Decisions, 12/e
Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs

Inventories and the Cost of Goods Sold

Multiple Choice Quiz

Please answer all questions


The specific identification method can be used only:
A)In income tax returns.
B)For financial reporting purposes (but not in income tax returns).
C)When the individual items in inventory are similar in terms of cost, function, and sales value.
D)When the actual acquisition costs of individual units can be determined from the accounting records.

Hearn Beverages sells a wide variety of soft drinks. Because of the way Hearn stores its inventory of soda, the most recently purchased cases are usually the first sold. Given these circumstances, what flow assumption must Hearn use?
C)Average cost
D)Any assumption its wishes.

Wilson Motors maintains an inventory of sport utility vehicles. The vehicles are essentially similar, but were purchased from a variety of sources at widely different prices. Which method of accounting for inventory might provide misleading information regarding Wilson Motors?
C)Average cost.
D)Specific identification.

During a period of steadily rising prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit?
C)Specific identification.
D)Average cost.

Which of the following flow assumptions is not acceptable under generally accepted accounting principles?
A)First-in, first-out.
B)Last-in, first-out.
C)Next-in, first-out.
D)Average cost.

In a period of rising prices, a company is most likely to use the LIFO method of pricing inventory if:
A)Each item in the inventory is unique.
B)Management wants the same unit cost assigned to items sold and items remaining in inventory.
C)Management's primary objective is to minimize income taxes.
D)Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

The primary disadvantage of a just-in-time inventory system is:
A)A reduction in the amount of money tied up in inventory.
B)The company must use the FIFO inventory method, and forgo the income tax advantages of LIFO.
C)Smaller inventories may reduce the company's current ratio and working capital.
D)The risk is increased of losing sales opportunities or having to shut down manufacturing operations because of inventory shortages.