"Financial Report":Inventory valuation method
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Questions 1:
Which of the following inventory valuation methods best matches the actual historical cost of the inventory items sold to their physical flow?
A 、LIFO
B 、FIFO
C、 Specific identification
Questions 2:
Selected financial information about a company is provided in the table:
Which of the following conclusions is most accurate based on the foregoing information?
A 、The company faces a strong possibility of future write-downs.
B、The price of supplies increased significantly.
C、 Management anticipates a strong increase in product demand.
C is correct. Specific identification best matches the physical flow of the inventory items because it tracks the actual units that are sold.
A is incorrect. LIFO is based on cost flow assumptions but does not necessarily match the actual physical movement of the goods.
B is incorrect. FIFO is based on cost flow assumptions but does not necessarily match the actual physical movement of the goods.
A is correct. The company experienced a large buildup of finished goods (38% increase) and a decline in both raw materials (–11.3%) and work in process (–4.0%). This scenario suggests a decline in demand for the company’s products and a strong likelihood of future write-downs. Supplies grew by less than 2.0%, but sales increased by less than 5.0%, so it is unlikely that the price of supplies increased significantly.
B is incorrect. Supplies have grown by less than 2.0%, but sales have increased by just under 5.0%, so it is unlikely that there has been a significant increase in the price of supplies.
C is incorrect. There is a large buildup of finished goods (38% increase) and a decline in both raw materials (–11.3%) and work in process (–4.0%). This suggests a decline in demand for the firm’s products.
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