Multiple Choice Questions
1. The inventory valuation method that has the advantages that it assigns a value to the inventory on the balance sheet that approximates current cost, and also mimics the actual flow of goods for most businesses is:
A) FIFO.
B) Weighted average.
C) LIFO.
D) Specific identification.
E) All of the above.
2. The inventory valuation method that tends to smooth out erratic changes in costs is:
A) FIFO.
B) Weighted average.
C) LIFO.
D) Specific identification.
E) WIFO
3. During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net income is:
A) Specific identification method.
B) Average cost method.
C) Weighted-average method.
D) FIFO method.
E) LIFO method.
4. The consistency principle:
A) Requires a company to consistently apply the same accounting method of inventory valuation unless another method becomes preferable.
B) Requires a company to use one method of inventory valuation exclusively.
C) Requires that all companies in the same industry use the same accounting methods of inventory valuation.
D) Is also called the full disclosure principle.
E) Is also called the matching principle.
5. The full disclosure principle:
A) Requires that when a change in inventory valuation method is made, the notes to the statements report the type of change, its justification and its effect on net income.
B) Requires that companies use the same accounting method for inventory valuation period after period.
C) Is not subject to the materiality principle.
D) Is only applied to retailers.
E) Is also called the consistency principle.
6. If a period-end inventory amount is reported in error, it can cause a misstatement in:
A) Cost of goods sold.
B) Gross profit.
C) Net income.
D) Current assets.
E) All of the above.
7. The inventory turnover ratio:
A) Is used to analyze profitability.
B) Is used to measure solvency.
C) Measures how quickly a company turns over its merchandise inventory.
D) Validates the acid-test ratio.
E) Calculation depends on the company's inventory valuation method.
8. Days' sales in inventory:
A) Is also called days' stock on hand.
B) Focuses on average inventory rather than ending inventory.
C) Is used to measure solvency.
D) Is calculated by dividing cost of goods sold by ending inventory.
E) Is a substitute for the acid-test ratio.
9. Accounting information systems:
A) Collect and process data from transactions and events.
B) Organize data in useful forms.
C) Communicate information to business decision makers.
D) Are crucial to effective decision making.
E) All of the above.
10. Internal control procedures include:
A) Procedures to ensure reliable financial reports.
B) Safeguards to protect company assets.
C) Policies to direct operations toward common goals.
D) Methods to achieve compliance with laws and regulation.
E) All of the above.