kim226

If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst’s point of view are provided by:

A) LIFO inventory and FIFO cost of goods sold.

B) FIFO inventory and LIFO cost of goods sold.

C) FIFO inventory and FIFO cost of goods sold.

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Whether prices are increasing or decreasing, LIFO cost of goods sold and FIFO inventory are preferred because they are the closest estimates of current costs.

kim226

If prices and inventory quantities are increasing, the last-in first-out (LIFO) inventory cost method results in:

A) higher inventory compared to first-in first-out.

B) lower gross profit compared to first-in first-out.

C) lower cost of goods sold compared to first-in first-out.

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In an environment of increasing prices, LIFO results in higher COGS, lower inventory value, and lower gross profit compared to FIFO.

kim226

During periods of decreasing prices, a firm using a periodic inventory system will report higher gross profit if its inventory cost assumption is:

A) FIFO because during periods of decreasing prices, COGS will be higher, resulting in a higher gross profit.

B) FIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.

C) LIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.

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In periods of falling prices, LIFO results in lower COGS, and therefore higher gross profit than FIFO, because LIFO assumes the most recently purchased (lower cost) goods are sold first.

kim226

During periods of declining prices, which inventory method would result in the highest net income?

A) Average Cost.

B) FIFO.

C) LIFO.

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When prices are declining and LIFO is used the COGS is smaller than if FIFO is used leading to a larger net income.

kim226

Assuming inventory levels remain constant during the year and prices have been stable over time, COGS would be:

A) higher under LIFO than FIFO or average cost.

B) higher under the average cost than LIFO or FIFO.

C) the same for both LIFO and FIFO.

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During stable prices inventory levels are the same for both LIFO and FIFO.

kim226

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

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

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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.

kim226

For balance sheet purposes, inventories based on:

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

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

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

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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.

kim226

Which accounting methods are preferable for income statements and balance sheets?

A) Last in, first out (LIFO) for the balance sheet and first in, first out (FIFO) for the income statement.

B) First in, first out (FIFO) for both income statements and balance sheets.

C) Last in, first out (LIFO) for income statements and first in, first out (FIFO) for the balance sheet.

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LIFO allocates the most recent prices to the cost of goods sold and provides a better measure of current income. For balance sheet purposes, inventories based on FIFO are preferable since these values most closely resemble current cost and economic value.

kim226

During periods of rising prices, which of the following is most likely to occur?

A) LIFO COGS > FIFO COGS, therefore LIFO net income < FIFO net income.

B) LIFO COGS > FIFO COGS, therefore LIFO net income > FIFO net income.

C) LIFO COGS < FIFO COGS, therefore LIFO net income < FIFO net income.

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Under the assumptions of this question and using LIFO, the most expensive units go to COGS, resulting in lower net income.

kim226

Inventory, cost of sales, and gross profit can be different under periodic and perpetual inventory systems if a firm uses which inventory cost method?

A) FIFO or weighted average cost, but not LIFO.

B) LIFO or weighted average cost, but not FIFO.

C) LIFO or FIFO, but not weighted average cost.

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The LIFO and weighted average cost methods can provide different values for inventory, cost of sales, and gross profit depending on whether the firm uses a periodic or perpetual inventory system. FIFO produces the same values from either a periodic or perpetual inventory system.