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Unformatted text preview: Solutions to Questions and Multiple Choice Questions: 1. 2. 3. 4. 5. 6. 7. 8. 9. The physical flow of inventory refers to the actual physical movement of goods (i.e., which goods are actually sold). The inventory cost flow assumption refers to the flow of costs associated with the goods that pass through the company (i.e.. determines which costs are assigned to goods sold). The four primary cost flow assumptions are LIFO, FIFO, Weighted Average Cost and Specific Identification: The LIFO (last-in, first-out) cost flow assumption assumes that the most recently purchased goods are the first sold. The FIFO (first-in, first-out) cost flow assumption assumes that the first goods purchased are the first goods sold. The Weighted Average Cost flow assumption averages the cost of the goods available for sale and then uses this average cost to value both cost of goods sold and ending inventory. The Specific Identification cost flow assumption requires the company to keep track of which goods are actually sold. The firm records the actual cost of the specific goods sold. If inventory costs are rising, LIFO results in the lowest net income because the goods with the highest costs (most recent purchases) are assumed to have been sold and these higher costs are assigned to cost of goods sold. If inventory costs are rising, FIFO results in the highest net income because the first purchases (lowest cost) are assumed to have been sold and these lower costs are assigned to cost of goods sold. With FIFO, the balance sheet value for the ending inventory reflects the current cost of the goods. LIFO best matches costs and revenues because current inventory costs are assigned to cost of goods sold. Because inventory prices are usually rising, LIFO results in the highest cost of goods sold and lowest net and taxable income. Therefore, firms using LIFO pay lower taxes. The LIFO Conformity Rule states that firms using LIFO for tax purposes must also use it for financial reporting purposes. The lower-of-cost-or-market rule requires companies to compare the cost of the inventory at the end of the period with the market value of that inventory, based on either individual items or the total inventory. The company must use the lower of either cost or market valuation for the balance sheet. This rule is an example of the conservatism constraint in accounting. 10. 11. 12. Multiple Choice: 1. The correct answer is not among the choices. The correct answer is $12,500. [When the book has another printing, the answer will be d.] 2. a 3. b 4. d 5. a 6. b 7. a 8. c 9. d 10.b The risks associated with inventory include loss by theft or damage and obsolescence. Damage and theft can be minimized with physical controls such as passwords and security locks. Risk of obsolescence can be minimized with rapid inventory turnover....
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