Inventory Management Methods Quiz

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What does FIFO stand for in inventory management?

Final In, First Out
First In, First Out (correct)
Fast In, Fast Out
First In, Final Out

LIFO results in a higher net income during periods of rising prices.

False (B)

What does the LCNRV rule require companies to do if the market value of inventory falls below its cost?

Write down the inventory to the lower value.

LIFO assumes that the ______ purchased items are sold first.

most recently Signup and view all the answers

Match the inventory methods to their characteristics:

FIFO = Higher net income in rising prices LIFO = Lower net income due to more expensive inventory Average Cost = Uses the average cost of all inventory items Specific Identification = Highly accurate for expensive items Signup and view all the answers

What is a significant drawback of cash basis accounting?

It can mislead financial statements (B) Signup and view all the answers

Accrual accounting recognizes revenues only when cash is received.

False (B) Signup and view all the answers

What is the primary purpose of adjusting entries?

To update account balances for proper revenue and expense recognition Signup and view all the answers

The principle that expenses should be recorded in the same period as the related revenues is known as the _________ principle.

matching Signup and view all the answers

Match the following accounting methods or principles with their definitions:

Cash Basis Accounting = Recognizes revenue when cash is received Accrual Basis Accounting = Recognizes revenue when it is earned Revenue Recognition Principle = Dictates when to record revenue Expense Recognition Principle = Requires expenses to match revenues Signup and view all the answers

Which of the following accounts is debited when recognizing accrued revenues?

Accounts Receivable (D) Signup and view all the answers

Under the revenue recognition principle, cash must be received before revenue can be recognized.

False (B) Signup and view all the answers

What happens to unearned revenue when the service is performed?

It is adjusted by debiting unearned revenue and crediting revenue. Signup and view all the answers

What is the primary purpose of closing entries in accounting?

To reset temporary accounts to zero (D) Signup and view all the answers

Accrued expenses are recorded by debiting accounts payable.

False (B) Signup and view all the answers

What formula is used to calculate periodic depreciation expense?

(Cost - Salvage Value) / Useful Life Signup and view all the answers

The __________ reflects only the revenues and expenses for the current accounting period.

income statement Signup and view all the answers

Match the inventory systems with their characteristics:

Perpetual = Updates records continuously Periodic = Updates records at the end of the period Specific Identification = Tracks individual items FIFO = First in, first out method Signup and view all the answers

Which of the following correctly describes gross profit?

Net sales minus cost of goods sold (A) Signup and view all the answers

The multiple-step income statement provides a detailed breakdown of revenues and expenses.

True (A) Signup and view all the answers

What accounts are closed at the end of an accounting period?

Revenue accounts, expense accounts, dividends Signup and view all the answers

Interest expense can be calculated using the formula: Principal × Interest Rate × __________.

Time Signup and view all the answers

In a perpetual inventory system, inventory records are updated:

Whenever purchases and sales occur (B) Signup and view all the answers

What is the main difference between the single-step and multiple-step income statements?

The single-step income statement totals revenues and expenses without detail, while the multiple-step format breaks them into categories. Signup and view all the answers

Gains and losses are reported under operating income in the income statement.

False (B) Signup and view all the answers

Net sales are determined by subtracting sales returns, allowances, and __________ from total sales revenue.

discounts Signup and view all the answers

Match the types of inventory cost systems with their characteristics:

FIFO = First items purchased are the first sold LIFO = Last items purchased are the first sold Average Cost = Cost is averaged over purchases Specific Identification = Tracks unique items in inventory Signup and view all the answers

What does the formula for calculating interest expense require as its components?

Principal, Interest Rate, Time (C) Signup and view all the answers

How is the book value of an asset determined?

Cost of Asset - Accumulated Depreciation (B) Signup and view all the answers

Which of the following expresses the concept of gross profit rate?

Gross Profit / Net Sales (C) Signup and view all the answers

What formula do you use to determine the cost of goods sold (COGS)?

Beginning Inventory + Purchases - Ending Inventory (B) Signup and view all the answers

What does positive working capital indicate about a company?

The company can meet its short-term liabilities. (D) Signup and view all the answers

Which key financial metric helps assess how efficiently a company produces and sells its products?

Gross Profit Rate (D) Signup and view all the answers

Which calculation represents the working capital of a company?

Current Assets - Current Liabilities (B) Signup and view all the answers

What do ratios like current ratio and quick ratio primarily assess?

Company's liquidity and financial structure (B) Signup and view all the answers

What is a major advantage of accrual accounting over cash basis accounting?

It provides a more accurate financial picture. (C) Signup and view all the answers

When should revenue be recognized according to the revenue recognition principle?

When goods or services are delivered. (B) Signup and view all the answers

How does the expense recognition principle affect the timing of reporting expenses?

Expenses are recorded in the same period as the revenues they help generate. (C) Signup and view all the answers

What is the main purpose of adjusting entries at the end of an accounting period?

To ensure proper recognition of revenues and expenses in the correct period. (D) Signup and view all the answers

What happens to unearned revenue when the related service is performed?

It is recognized as revenue and reduces unearned revenue. (D) Signup and view all the answers

Which entries are made for accrued revenues?

Debit accounts receivable and credit revenue. (C) Signup and view all the answers

How are prepaid expenses adjusted in accounting records?

By debiting the expense account and crediting the prepaid asset account. (D) Signup and view all the answers

Which accounting method is required under generally accepted accounting principles (GAAP)?

Accrual basis accounting. (A) Signup and view all the answers

What is the effect on financial statements if accrued expenses are not recorded?

Unearned revenue would be overstated. (A) Signup and view all the answers

What is the key characteristic of a multiple-step income statement?

It provides detailed category breakdowns. (D) Signup and view all the answers

How does accumulated depreciation affect the book value of an asset?

It reduces the book value of the asset. (A) Signup and view all the answers

Which of the following accurately describes the process of depreciation?

Allocating an asset's cost over its useful life. (A) Signup and view all the answers

What does the gross profit rate indicate?

The efficiency of selling products. (A) Signup and view all the answers

Which of the following best describes the primary purpose of closing entries?

To permanently remove the balances of temporary accounts. (D) Signup and view all the answers

What effect does a sale below book value have on net income?

It will decrease net income. (A) Signup and view all the answers

In a perpetual inventory system, how is inventory updated?

With each purchase and sale in real time. (D) Signup and view all the answers

Which formula is used to calculate gross profit?

Net Sales - Cost of Goods Sold (COGS). (B) Signup and view all the answers

What occurs under FOB shipping point regarding freight costs?

The buyer pays the freight costs and takes ownership upon shipment. (B) Signup and view all the answers

Which inventory costing method assumes that the oldest inventory items are sold first?

FIFO. (C) Signup and view all the answers

Which of the following is a disadvantage of the periodic inventory system?

It does not offer real-time inventory levels. (A) Signup and view all the answers

What do purchase discounts represent?

Benefits for early payment on purchases. (D) Signup and view all the answers

What is the net income calculated as?

Total Revenues - Total Expenses. (A) Signup and view all the answers

What is a key characteristic of the FIFO inventory method?

It matches current revenues with older inventory. (C) Signup and view all the answers

What effect does LIFO have on taxable income during periods of inflation?

It lowers taxable income. (B) Signup and view all the answers

What must a company do if the market value of inventory falls below its cost according to LCNRV?

Write down the inventory to the lower value. (C) Signup and view all the answers

Which formula represents the basic accounting equation?

Assets = Liabilities + Stockholders' Equity (D) Signup and view all the answers

Which ratio measures a company’s ability to cover its short-term liabilities?

Current Ratio (C) Signup and view all the answers

How is operating income calculated?

Gross Profit - Operating Expenses (D) Signup and view all the answers

Which of these formulas defines net profit margin?

Net Income / Net Sales (C) Signup and view all the answers

What does the debt-to-equity ratio measure?

Financial risk associated with debt financing (A) Signup and view all the answers

Which formula is used to calculate Earnings Per Share (EPS)?

(Net Income - Preferred Dividends) / Weighted Average Shares Outstanding (B) Signup and view all the answers

What is the purpose of the inventory turnover ratio?

To assess how quickly inventory is sold and replaced (C) Signup and view all the answers

Which statement describes the situation when using the specific identification inventory method?

It matches specific costs with specific items sold. (D) Signup and view all the answers

What happens to gross profit when the cost of goods sold increases?

Gross profit decreases. (A) Signup and view all the answers

Which of the following is true about the quick ratio?

It measures short-term liquidity without relying on inventory. (B) Signup and view all the answers

What is the major consequence of using LIFO during periods of increasing prices?

It decreases the value of ending inventory. (D) Signup and view all the answers

Cash Basis Accounting

Recognizes revenue and expenses when cash is received or paid.

Accrual Basis Accounting

Recognizes revenue when earned and expenses when incurred, not necessarily when cash is exchanged.

Revenue Recognition Principle

Revenue is recognized when earned—when goods or services are delivered, not when cash is received.

Expense Recognition Principle

Expenses are recognized in the same period as the revenues generated. It is also known as matching principle