Question

5) One reason to use a periodic inventory system is

A) The company likes to count the inventory a lot

B) The goods have a high unit value, such as diamond rings

C) The goods have a low unit value, such as thumb tacks

D) There is no reason, all companies should use perpetual

6) Using the First In, First Out (FIFO) cost flow assumption

A) Will help save income taxes when the cost of the goods is decreasing

B) Will help save income taxes when the cost of the goods is increasing

C) Is too much trouble

D) Will cause the company to go bankrupt

7) Using the Last in, First Out (LIFO) cost flow assumption

A) Will help save income taxes when the cost of the goods is decreasing

B) Will help save income taxes when the cost of the goods is increasing

C) Is too much trouble

D) Will cause the company to go bankrupt

8) When a company adopts a cost flow assumption such as FIFO or LIFO or Weighted Average Cost

A) The assumption is about the cost, not necessarily the physical flow of the goods

B) It must be the same as the physical flow of the goods or it will cause an earthquake

C) It does not matter what the goods cost

D) They all sing the company song

Answer 1

5) Solution: The goods have a low unit value, such as thumb tacks

Explanation: The periodic inventory systems is applied for high volume and low value goods

6) Solution: Will help save income taxes when the cost of the goods is decreasing

Explanation: Under FIFO inventory cost method the taxes can be saved when prices are declining. It causes a higher inventory costs and a rise in the cost of goods sold (COGS). The higher costs of inventory would causes a lower reported net income thus saving the taxes

7) Solution: Will help save income taxes when the cost of the goods is increasing

Explanation: Under LIFO inventory cost method when prices are rising, it causes a lower taxable income compared to FIFO.\

8) Solution: The assumption is about the cost, not necessarily the physical flow of the goods

Explanation: The flow of costs out of inventory need not match the approach the goods were physically removed from inventory.