This exercise reviews the characteristics and the effects of using various cost flow methods to…

This exercise reviews the characteristics and the effects of using various cost flow methods to determine inventory costs.

The selection of an inventory cost flow method is an important one. It affects the computation of net income (and thus the resulting amount of income taxes) as well as the amount of total assets and owners" equity.

Instructions

Answer each of the following questions by inserting one of these abbreviations in the space provided:

SI (specific identification)

FIFO (first-in-first-out)

A (average cost)

LIFO (last-in-first-out)

1.

Which inventory cost flow method best matches current costs with current revenues on the income statement?

2.

Which inventory cost flow method yields the most realistic amount for inventory, compared to replacement cost, on the balance sheet?

3.

Which method results in the most exact ending inventory valuation when inventory items of the same type are not homogeneous?

4.

Which method is based on the assumption that inventory flow is “mixed” and therefore “mixes” all acquisition prices?

During a period of rising prices, which method yields the:

5.

lowest net income figure?

6.

lowest amount for inventory on the balance sheet?

7.

lowest cost of goods sold figure?

8.

lowest owner"s equity figure?

9.

lowest income tax bill for the current year?

During a period of declining prices, which method yields the:

10.

lowest net income figure?

11.

lowest amount for inventory on the balance sheet?

12.

lowest cost of goods sold figure?

13.

lowest owner"s equity figure?

14.

lowest income tax bill for the current year?

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