Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell.
1. During times of inflation, which of these inventory accounting methods is best for cash flow?
a. FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.
b. LIFO, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
c. Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
d. Weighted average, because it smoothes the reported cost of goods sold over time.
e. It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
2. Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?
a. If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%
b. If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
c. If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
d. If the average cash balance increases by 20% the total transactions costs will increase by 20%.
e. The optimal transfer amount is the same for all companies.