Short Essay Questions
1.Please explain the statement that “a LIFO liquidation creates ‘phantom’ income”.
2.Identify the options a manager has in measuring the cost of inventory as it flows through the accounting system.
3.What effect does management's perception of the ‘capital market’ have on selecting an inventory costing method?
4.If an entity overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold, retained earnings, and total stockholders’ equity for the current year?
5.During a period of rapidly rising inventory prices and a significant increase in inventory, a financial analyst made the following statement:
"I rank a company's earning power by using earnings per share. You do not need to be a rocket scientist and know all that accounting mumbo-jumbo in order to compare earnings per share of two companies to obtain a ranking of their earnings power."
Respond to the statement made by the financial analyst concerning the implications of choosing an inventory valuation method.
6.How do inventories of manufacturing companies differ from inventories of merchandising companies?