Accounting Exam 2 Review

1. Which of the following companies would most like have the highest inventory turnover?

A bakery.

An art gallery.

A car dealer.

A piano manufacturer.

A bakery is likely to have the highest inventory turnover because baked goods have a limited shelf life and need to be sold quickly before they go stale. This means that the bakery would need to constantly replenish its inventory to meet customer demand, resulting in a higher turnover rate compared to the other options. On the other hand, an art gallery, car dealer, and piano manufacturer may have slower inventory turnover as their products have a longer lifespan and may require more time to sell.

Explanation

A bakery is likely to have the highest inventory turnover because baked goods have a limited shelf life and need to be sold quickly before they go stale. This means that the bakery would need to constantly replenish its inventory to meet customer demand, resulting in a higher turnover rate compared to the other options. On the other hand, an art gallery, car dealer, and piano manufacturer may have slower inventory turnover as their products have a longer lifespan and may require more time to sell.

2. If goods in transit are shipped FOB destination,

The buyer has title to the goods until they are delivered.

The seller has title to the goods until they are delivered.

The shipper has title to the goods while they are in transit.

No one has title to the goods until they are delivered.

If goods in transit are shipped FOB destination, it means that the seller retains ownership and title to the goods until they are delivered to the buyer. This means that the buyer does not have legal ownership of the goods until they have been delivered. The seller is responsible for any damages or loss that may occur during the transit of the goods.

Explanation

If goods in transit are shipped FOB destination, it means that the seller retains ownership and title to the goods until they are delivered to the buyer. This means that the buyer does not have legal ownership of the goods until they have been delivered. The seller is responsible for any damages or loss that may occur during the transit of the goods.

3. An assumption about inventory cost flow is necessary:

Because inventory costs change and tracking which units actually sold is difficult.

Because cost flow must follow the physical flow of the inventory.

Because average days in inventory must be computed.

So as to compute total operating expenses.

An assumption about inventory cost flow is necessary because inventory costs change and tracking which units actually sold is difficult. This assumption allows businesses to accurately calculate the cost of goods sold and determine the value of the remaining inventory. Without this assumption, it would be challenging to determine the profitability of a business and make informed financial decisions.

Explanation

An assumption about inventory cost flow is necessary because inventory costs change and tracking which units actually sold is difficult. This assumption allows businesses to accurately calculate the cost of goods sold and determine the value of the remaining inventory. Without this assumption, it would be challenging to determine the profitability of a business and make informed financial decisions.

4. If beginning inventory is understated by $10,000, the effect of this error in the current period is: Cost of Goods Sold Net Income

Overstated Overstated

Understated Overstated

Overstated Understated

If beginning inventory is understated by $10,000, it means that the actual value of the beginning inventory is $10,000 more than what is recorded. This error will result in the cost of goods sold being understated because the beginning inventory is used to calculate the cost of goods sold. As a result, the cost of goods sold will be lower than it should be, leading to a higher net income. Therefore, the effect of this error in the current period is that the cost of goods sold is understated and the net income is overstated.

Explanation

If beginning inventory is understated by $10,000, it means that the actual value of the beginning inventory is $10,000 more than what is recorded. This error will result in the cost of goods sold being understated because the beginning inventory is used to calculate the cost of goods sold. As a result, the cost of goods sold will be lower than it should be, leading to a higher net income. Therefore, the effect of this error in the current period is that the cost of goods sold is understated and the net income is overstated.

5. Which method of inventory costing is prohibited under IFRS?

FIFO.

LIFO

Specific identification.

Average cost.

LIFO (Last-In, First-Out) method of inventory costing is prohibited under IFRS (International Financial Reporting Standards). This method assumes that the most recently acquired inventory is sold first, which may not accurately reflect the actual flow of goods. IFRS requires the use of either the FIFO (First-In, First-Out) method or the weighted average cost method for inventory valuation. FIFO assumes that the oldest inventory is sold first, while the weighted average cost method calculates the average cost of inventory based on the total cost divided by the total quantity.

Explanation

LIFO (Last-In, First-Out) method of inventory costing is prohibited under IFRS (International Financial Reporting Standards). This method assumes that the most recently acquired inventory is sold first, which may not accurately reflect the actual flow of goods. IFRS requires the use of either the FIFO (First-In, First-Out) method or the weighted average cost method for inventory valuation. FIFO assumes that the oldest inventory is sold first, while the weighted average cost method calculates the average cost of inventory based on the total cost divided by the total quantity.