Q11. During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:

A)   weighted average because it allocates average prices to cost of good sold (COGS) and provides a better measure of current income.

B)   FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income.

C)   LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income.

Q12. For balance sheet purposes, inventories based on:

A)   FIFO are preferable to those based on LIFO, as they more closely reflect current costs.

B)   LIFO are preferable to those based on FIFO, as they more closely reflect the current costs.

C)   LIFO are preferable to those based on average cost, as they more closely reflect the current costs.

Q13. Which of the following statements about inventory accounting is least accurate?

A)   If a U.S. firm uses last in, first out (LIFO) for tax reporting it must use LIFO for financial reporting.

B)   During periods of rising prices, first in, first out (FIFO) based current ratios will be smaller than last in, first out (LIFO) based current ratios.

C)   During periods of rising prices, last in, first out (LIFO) income will be lower than under first in, first out (FIFO) but cash flows will be higher.

Q14. Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory:

• Depreciation: straight-line; double-declining balance (DDB)

• Inventory: first in, first out (FIFO); last in, first out (LIFO)

Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1?

A)   DDB; FIFO.

B)   Straight-line; FIFO.

C)   Straight-line; LIFO.

答案和详解如下：

Q11. During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:

A)   weighted average because it allocates average prices to cost of good sold (COGS) and provides a better measure of current income.

B)   FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income.

C)   LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income.

Correct answer is C)

LIFO is the most informative inventory accounting method for income statement purposes in periods of rising prices and stable or growing inventories. It allocates the most recent purchase prices to COGS, and thus provides a better measure of current income and future profitability.

Q12. For balance sheet purposes, inventories based on:

A)   FIFO are preferable to those based on LIFO, as they more closely reflect current costs.

B)   LIFO are preferable to those based on FIFO, as they more closely reflect the current costs.

C)   LIFO are preferable to those based on average cost, as they more closely reflect the current costs.

Correct answer is A)

The inventories based on FIFO are preferable to those presented under LIFO or average cost for balance sheet purposes. Under FIFO, the older inventories are taken out first, and the ending inventory balance consists of the recent purchases and thus most closely reflect the current (economic) value.

Q13. Which of the following statements about inventory accounting is least accurate?

A)   If a U.S. firm uses last in, first out (LIFO) for tax reporting it must use LIFO for financial reporting.

B)   During periods of rising prices, first in, first out (FIFO) based current ratios will be smaller than last in, first out (LIFO) based current ratios.

C)   During periods of rising prices, last in, first out (LIFO) income will be lower than under first in, first out (FIFO) but cash flows will be higher.

Correct answer is B)

During periods of rising prices, FIFO based current ratios will be larger than LIFO based current ratios because the more expensive units (last purchases) are assigned to ending inventory, resulting in greater current assets.

Q14. Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory:

• Depreciation: straight-line; double-declining balance (DDB)

• Inventory: first in, first out (FIFO); last in, first out (LIFO)

Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1?

A)   DDB; FIFO.

B)   Straight-line; FIFO.

C)   Straight-line; LIFO.

Correct answer is C)

For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

thanks

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