Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
1
Which inventory costing method typically results in an ending inventory valuation that closely reflects current market prices?
Answer:
FIFO
The First-In, First-Out (FIFO) method assumes that the oldest items in inventory are sold first. Consequently, the remaining inventory consists of the most recently purchased items, which are valued at costs that are generally closer to current market prices compared to older costs used in LIFO or average cost methods.
2
Which inventory costing method typically results in the highest taxable income during periods of rising prices?
Answer:
FIFO
During inflationary periods, the First-In, First-Out (FIFO) method assumes that the oldest, cheaper inventory items are sold first. This results in a lower Cost of Goods Sold (COGS) and consequently a higher gross profit. Since taxable income is based on profit, FIFO leads to higher taxable income compared to LIFO or average cost methods.
3
Which inventory valuation method results in an ending inventory balance that most closely approximates current market prices?
Answer:
FIFO
The First-In, First-Out (FIFO) method assumes that the oldest inventory items are sold first. Consequently, the remaining inventory consists of the most recently purchased items, which typically reflect current market costs. This makes the ending inventory valuation more representative of current replacement costs compared to methods that rely on older historical costs, such as LIFO or weighted average cost.
4
Which inventory valuation method results in a higher net income during periods of rising costs?
Answer:
FIFO
Under the FIFO (First-In, First-Out) method, the oldest and typically cheaper costs are assigned to the Cost of Goods Sold (COGS) when prices are rising. Lower COGS results in a higher gross profit and, consequently, a higher net income compared to the LIFO method, which assigns more recent, higher costs to COGS.
5
Which inventory valuation method typically results in the highest taxable income during periods of rising prices?
Answer:
FIFO
The First-In, First-Out (FIFO) method assumes that the oldest inventory items are sold first. During inflationary periods, older, cheaper costs are matched against current revenues, resulting in a lower Cost of Goods Sold (COGS). Consequently, this leads to higher gross profit and, ultimately, higher taxable income compared to other methods like LIFO.