1. When purchase costs of inventory regularly decline, which method of inventory costing will yield the lowest cost of goods sold? FIFO. LIFO. Weighted average. Specific identification. Gross margin. 2. Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as expenses when incurred. The argument that supports this is called: The matching principle. The materiality constraint. The cost principle. The conservation constraint principle. The lower of cost or market principle. 3. An error in the period-end inventory causes an offsetting error in the next period and therefore: Managers can ignore the error. It is sometimes said to be self-correcting. It affects only income statement accounts. If affects only balance sheet accounts. Is immaterial for managerial decision making. 4. Management decisions in accounting for inventory cost include all of the following except: Costing method. Inventory system (perpetual or periodic). Customer demand for inventory. Use of market values or other estimates. Items included in inventory and their costs. 5. Generally accepted accounting principles require that the inventory of a company be reported at: Market value. Historical cost. Lower of cost or market. Replacement cost. Retail value. 6. In applying the lower of cost or market method to inventory valuation, market is defined as: Historical cost. Current replacement cost. Current sales price. FIFO. LIFO. 7. The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is: FIFO. Weighted average. LIFO. Specific identification. All of the inventory valuation methods accomplish this. 8. Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except: Prenumbered inventory tickets. A manager does not confirm that all inventories are ticketed once, and only once. Counters must confirm the validity of inventory existence, amounts, and quality. Second counts by a different counter. Counters of inventory should not be those who are responsible for the inventory. 9. Damaged and obsolete goods that can be sold: Are never counted as inventory. Are included in inventory at their full cost. Are included in inventory at their net realizable value. Should be disposed of immediately. Are assigned a value of zero. 10. Costs included in the Merchandise Inventory account can include all of the following except: Invoice price minus any discount. Transportation-in. Storage. Insurance. Damaged inventory that cannot be sold. 11. The operating cycle for a merchandiser that sells only for cash moves from: Purchases of merchandise to inventory to cash sales. Purchases of merchandise to inventory to accounts receivable to cash sales. Inventory to purchases of merchandise to cash sales. Accounts receivable to purchases of merchandise to inventory to cash sales. Accounts receivable to inventory to cash sales. 12. The gross margin ratio: Is also called the net profit ratio. Measures a merchandising firm’s ability to earn a profit from the sale of inventory. Is also called the profit margin. Is a measure of liquidity. Should be greater than 1. 13. An account used in the periodic inventory system that is not used in the perpetual inventory system is Merchandise Inventory Sales Sales Returns and Allowances Accounts Payable Purchases 14. The current period’s ending inventory is: The next period’s beginning inventory. The current period’s cost of goods sold. The prior period’s beginning inventory. The current period’s net purchases. The current period’s beginning inventory. 15. Liquidity problems are likely to exist when a company’s acid-test ratio: Is less than the current ratio. Is 1 to 1. Is higher than 1 to 1. Is
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