Chapter 5

Specific identification

FIFO

LIFO

Weighted-average

The Internal Revenue Service requires that companies using LIFO for income tax purposes must use FIFO for financial reporting purposes.

Although gross margins may vary between these three inventory methods, the cash outflow for inventory purchases is the same regardless of which method is used.

Generally accepted accounting principles (GAAP) require that financial statements disclose which inventory method is used in the financial statements.

All of the above statements are correct.

1, 2, 3

1, 2, 3, 4

5, 7, 8

4, 6

A discrepancy between the perpetual inventory account and the physical inventory account may indicate the presence of fraud.

Inventory is often the largest single asset reported on the balance sheet of a merchandising business.

The same individual should record inventory transactions and count the inventory to reduce the likelihood of an inventory-related fraud occurrence.

Cost of goods sold is normally the largest single expense on the balance sheet of a merchandising business.

2016 cost of goods sold, 2016 gross margin, and 2017 net income.

2016 gross margin, 2016 net income, and 2017 cost of goods sold.

2016 cost of goods sold, 2017 cost of goods available, and 2017 gross margin.

2017 beginning inventory, 2017 net income, and 2016 goods available for sale.