Trivia Questions: Basic Financial Accounting Quiz!

1. If the unit costs of inventory are increasing, which method should you use to get lower income taxes?

FIFO

LIFO

LIFO (Last-In, First-Out) method should be used to get lower income taxes when the unit costs of inventory are increasing. This is because LIFO assumes that the most recently purchased inventory items are the first ones to be sold, resulting in higher cost of goods sold and lower ending inventory value. As a result, the taxable income is reduced, leading to lower income taxes.

Explanation

LIFO (Last-In, First-Out) method should be used to get lower income taxes when the unit costs of inventory are increasing. This is because LIFO assumes that the most recently purchased inventory items are the first ones to be sold, resulting in higher cost of goods sold and lower ending inventory value. As a result, the taxable income is reduced, leading to lower income taxes.

2. What is the Cost of Goods Sold Equation?

BI - P + EI = COGS

BI + P + EI = COGS

BI - P - EI = COGS

BI + P - EI = COGS

The Cost of Goods Sold equation is calculated by adding the beginning inventory (BI) to the purchases (P) and subtracting the ending inventory (EI). This equation helps determine the total cost of goods that were sold during a specific period of time.

Explanation

The Cost of Goods Sold equation is calculated by adding the beginning inventory (BI) to the purchases (P) and subtracting the ending inventory (EI). This equation helps determine the total cost of goods that were sold during a specific period of time.

3. When unit costs are rising, which of the following methods will give you the most profit?

Average

LIFO

FIFO

When unit costs are rising, using the FIFO (First-In, First-Out) method will give you the most profit. This is because FIFO assumes that the first units purchased are the first ones sold, resulting in lower costs of goods sold. As a result, the remaining inventory is valued at higher, more current costs, leading to higher profits.

Explanation

When unit costs are rising, using the FIFO (First-In, First-Out) method will give you the most profit. This is because FIFO assumes that the first units purchased are the first ones sold, resulting in lower costs of goods sold. As a result, the remaining inventory is valued at higher, more current costs, leading to higher profits.

4. Consider the following: Beginning inventory: 2 units $50 Additional Purchases: 2 units $60 4 units $70 Using the FIFO method, what is the amount of COGS if 5 units were sold?

$180

$290

$340

$350

The FIFO (First-In, First-Out) method assumes that the first units purchased are the first ones sold. In this case, the beginning inventory of 2 units at $50 each is sold first, followed by 2 units purchased at $60 each. The remaining 1 unit from the beginning inventory is then sold, along with 4 units purchased at $70 each. Therefore, the cost of goods sold (COGS) is calculated as (2 units x $50) + (2 units x $60) + (1 unit x $60) + (2 units x $70) = $290.

Explanation

The FIFO (First-In, First-Out) method assumes that the first units purchased are the first ones sold. In this case, the beginning inventory of 2 units at $50 each is sold first, followed by 2 units purchased at $60 each. The remaining 1 unit from the beginning inventory is then sold, along with 4 units purchased at $70 each. Therefore, the cost of goods sold (COGS) is calculated as (2 units x $50) + (2 units x $60) + (1 unit x $60) + (2 units x $70) = $290.

5. Consider the Inventory Turnover Data below: Harley-Davidson: 9.8 How many days does Harley take to sell its inventory?

28.7

37.2

40.8

60.2

Harley-Davidson takes approximately 37.2 days to sell its inventory. This can be calculated by dividing the number of days in a year (365) by the inventory turnover ratio (9.8). The inventory turnover ratio measures how efficiently a company manages its inventory by indicating the number of times the inventory is sold and replaced within a given period. In this case, Harley-Davidson sells and replaces its inventory approximately 9.8 times in a year, resulting in an average of 37.2 days to sell its inventory.

Explanation

Harley-Davidson takes approximately 37.2 days to sell its inventory. This can be calculated by dividing the number of days in a year (365) by the inventory turnover ratio (9.8). The inventory turnover ratio measures how efficiently a company manages its inventory by indicating the number of times the inventory is sold and replaced within a given period. In this case, Harley-Davidson sells and replaces its inventory approximately 9.8 times in a year, resulting in an average of 37.2 days to sell its inventory.

6. Which of the following are acceptable inventory costing methods?

Average cost

Cost flow

First In Last Out

Last In First Out

First In, First Out

The acceptable inventory costing methods are Average cost, Last In First Out (LIFO), and First In, First Out (FIFO). Average cost calculates the average cost of all units in inventory, LIFO assumes that the most recently purchased items are sold first, and FIFO assumes that the oldest items in inventory are sold first. These methods are commonly used to determine the value of inventory and the cost of goods sold.

Explanation

The acceptable inventory costing methods are Average cost, Last In First Out (LIFO), and First In, First Out (FIFO). Average cost calculates the average cost of all units in inventory, LIFO assumes that the most recently purchased items are sold first, and FIFO assumes that the oldest items in inventory are sold first. These methods are commonly used to determine the value of inventory and the cost of goods sold.

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7. Which of the following methods is not allowed by IFRS?

Average Cost

FIFO

LIFO

LIFO (Last-In, First-Out) is not allowed by IFRS (International Financial Reporting Standards). Under LIFO, the assumption is that the most recently acquired inventory is sold first, which does not align with the IFRS requirement of using the "cost formula" to determine the value of inventory. IFRS requires the use of either the Average Cost method or the FIFO (First-In, First-Out) method, which are considered more consistent and reliable for financial reporting purposes.

Explanation

LIFO (Last-In, First-Out) is not allowed by IFRS (International Financial Reporting Standards). Under LIFO, the assumption is that the most recently acquired inventory is sold first, which does not align with the IFRS requirement of using the "cost formula" to determine the value of inventory. IFRS requires the use of either the Average Cost method or the FIFO (First-In, First-Out) method, which are considered more consistent and reliable for financial reporting purposes.

8. If the unit costs of inventory are decreasing, which method should you use to get lower income taxes?

FIFO

LIFO

If the unit costs of inventory are decreasing, using the FIFO (First-In, First-Out) method will result in lower income taxes. This is because FIFO assumes that the oldest inventory is sold first, which means that the cost of goods sold will be calculated using the lower unit costs. As a result, the profit will be lower, leading to lower income taxes.

Explanation

If the unit costs of inventory are decreasing, using the FIFO (First-In, First-Out) method will result in lower income taxes. This is because FIFO assumes that the oldest inventory is sold first, which means that the cost of goods sold will be calculated using the lower unit costs. As a result, the profit will be lower, leading to lower income taxes.