Inventory Valuation Methods Quiz
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Questions and Answers

What is the value assigned to ending inventory if Planter’s uses a periodic LIFO system?

  • $6,701.90
  • $6,525.00 (correct)
  • $6,235.00
  • $7,496.50

What is the value assigned to ending inventory if Planter’s uses a periodic average system?

  • $6,235.00
  • $6,701.90
  • $7,496.50
  • $6,525.00 (correct)

What is the value assigned to cost of goods sold if Planter’s uses a periodic FIFO system?

  • $33,388.60
  • $33,855.50 (correct)
  • $32,594.00
  • $6,235.00

When calculating net income, what must be considered to ensure accurate forecasting of future performance?

<p>Discontinued operations (D)</p> Signup and view all the answers

What is true regarding dollar-value LIFO?

<p>Increases the recordkeeping costs of LIFO. (C)</p> Signup and view all the answers

What is required when using the gross profit method to estimate ending inventory?

<p>Net purchases (A)</p> Signup and view all the answers

What qualitative characteristic is important for analyzing net income's ability to forecast future performance?

<p>Relevance (A)</p> Signup and view all the answers

In the research and development costs for Edwards Corporation, what is noted to be non-recoverable?

<p>Indirect costs (C)</p> Signup and view all the answers

Flashcards

Periodic LIFO

A method of inventory valuation where the last units purchased are assumed to be the first units sold. This results in the ending inventory being valued at the cost of the oldest units.

Periodic Average Cost

A method of inventory valuation where the cost of goods available for sale is divided by the number of units available to determine a weighted-average cost per unit. This average cost is then used to value both ending inventory and cost of goods sold.

Periodic FIFO

A method of inventory valuation where the first units purchased are assumed to be the first units sold. This results in the ending inventory being valued at the cost of the most recent purchases.

Perpetual FIFO

A method of inventory valuation where the cost of each item sold is tracked continuously, using the FIFO method. This means that the cost of goods sold is calculated directly as items are sold, rather than at the end of the period.

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Dollar-Value LIFO

A method of inventory valuation that uses dollar values instead of specific units to create LIFO layers. This is beneficial for businesses with a wide variety of inventory items.

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Gross Profit Method

A method used to estimate ending inventory when detailed inventory records are unavailable. This method relies on the idea that the gross profit percentage remains relatively stable over time.

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Relevance

One of the qualitative characteristics of financial information, indicating that the information is capable of making a difference in the decisions made by users.

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Research and Development Costs

Expenses incurred in developing new products or processes. They are often expensed as incurred, but may be capitalized in certain circumstances involving future economic benefits.

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Study Notes

Inventory Valuation Methods (Questions 1-4)

  • Planter's Home-grown Ice Cream Farm has beginning inventory, purchases, and ending inventory figures
  • Unit and price information is available for each inventory item for the relevant period
  • LIFO (Last-In, First-Out): Ending Inventory valuation is $6,525.00
  • Average Cost Method: Ending Inventory valuation is $6,701.90
  • FIFO (First-In, First-Out): Cost of goods sold is $33,855.50
  • Perpetual FIFO: Cost of goods sold is $33,388.60

Dollar-Value LIFO (Question 5)

  • Starts with ending inventory at current costs
  • Creates LIFO layers for inventory costs.
  • Increases record-keeping costs for LIFO.
  • Not allowed for financial reporting under US GAAP

Gross Profit Method (Question 6)

  • To estimate ending inventory using the gross profit method, you need to know net sales and cost of goods sold

Net Income Forecasting (Question 7)

  • Net income is powerful for forecasting future profitability.
  • Be mindful that items like discontinued operations have limited value in predicting future financial performance.
  • This relates to the qualitative characteristic of relevance in financial accounting.

Research and Development Costs (Question 8)

  • Edwards Corporation incurred R&D costs in 2015 related to a future product launch in 2016.
  • Costs include materials, equipment, personnel, and indirect costs.
  • Estimated recoupment date is December 31, 2018.
  • Equipment is non-recoverable outside of this project.

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Description

Test your knowledge on various inventory valuation methods such as LIFO, FIFO, and the Gross Profit Method. This quiz covers key concepts, calculations, and implications of each method. Strengthen your understanding of how inventory valuation affects financial statements.

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