Problem I: (24 points) Indicate whether each of the following statements is true (T) or false (F).

a.___A company which uses a just-in-time (JIT) inventory system strives to manufacture or purchase its inventory when they believe its sale will shortly occur.

b.___A successful just-in-time (JIT) inventory system allows companies to use unreliable suppliers.

c.___GAAP requires companies to choose an inventory cost flow assumption for financial reporting purposes that most closely resembles the manner in which their inventory physically flows or moves.

d.___Assuming inventory costs are rising over time, one of the main advantages of the LIFO inventory method is its tax savings.

e.___Under current tax laws in the United States, a company which uses the LIFO method for tax purposes must also use the LIFO method for financial reporting purposes.

f.___Under current tax laws in the United States, a company which uses the FIFO method for tax purposes must also use the FIFO method for financial reporting purposes.

g.___GAAP allows companies to switch inventory methods back and forth (ex. FIFO to LIFO) from year to year based upon which method maximizes the companys net income.

h.___An ending inventory error in a given year which overstates net income will understate net income in the subsequent year.

i.___An ending inventory error in a given year will affect the balance sheet only in that year.

j.___When applying the Lower-of-Cost-or-Market (LCM) method, the word market is referring to the inventorys fair market value.

k.___The Lower-of-Cost-or-Market (LCM) method is an application of the conservatism principle.

l.___The LIFO reserve is the dollar difference between the cost of inventory using the LIFO cost flow assumption and the FIFO cost flow assumption.

Problem II: (6 points) Assuming inventory costs are rising over time and new inventory layers are being added, indicate using a checkmark () whether, if applicable, the LIFO or FIFO method would give the desired effect for the pattern being described below in a given year. If the inventory costing method does not affect the pattern being described, select no effect. Only one checkmark should be shown per row. All else being equal, which method would yield theFIFOLIFONo Effect a.Highest cost of goods sold b.Lowest income tax expense c.Highest net income d.Lowest inventory balance e.Highest gross margin f.Highest sales revenue

Problem V: (12 points) Joyner Company uses the periodic inventory system. As a result, any error in its ending inventory calculations will result in an error to its cost of goods sold calculation for the year. Joyner had the following beginning inventory and net purchase amounts for 20X1. Beginning inventory, $10,000 Net purchases, $300,000 At the end of 20X1, Joyner failed to properly include all of its inventory in its physical inventory count, resulting in the cost of its ending inventory being understated by $2,000. What will be the dollar effect on 20X1s cost of goods sold amount due to this ending inventory error? Be sure to indicate whether the dollar effect results in an overstatement or understatement to cost of goods sold. Hint: Use the formula learned in Ch 5, Beginning Inventory + Net Purchases Ending Inventory = Cost of Goods Sold, to help solve for the effect. Answer: ______________________ Based on your answer to part A, how will Joyners net income for 20X1 be affected? Be sure to indicate whether the dollar effect results in an overstatement or understatement to net income. Answer: ______________________ As a result of the 20X1 error, Joyners beginning inventory in the subsequent year, 20X2, will now be understated by $2,000. All else being equal in 20X2, how will the 20X1 continue to affect 20X2s net income? Be sure to indicate whether the dollar effect results in an overstatement or understatement to net income. Answer: ______________________