FIN 540 WEEK 8 Homework Chapter 28

2. During times of inflation, which of these inventory accounting methods is best for cash flow?
a. 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.
b. Specific identification, because it correctly identifies the actual item sold and so the actual
cost is recorded on the income statement.
c. Weighted average, because it smoothes the reported cost of goods sold over time.
d. It doesn't matter which you use since cash flow is unaffected by the choice of inventory
identification method.
e. FIFO, because the cheapest goods are recorded as being sold first, resulting in lower
cost of goods sold and higher reported net income.
3. Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is
C*.
a. If the total amount of cash needed during the year increases by 20%, then C* will
increase by 20%.
b. If the average cash balance increases by 20%, then the total holding costs will increase
by 20%.
c. If the average cash balance increases by 20% the total transactions costs will increase
by 20%.
d. The optimal transfer amount is the same for all companies.
e. If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by
20%, then C* will increase by 20%.
4. Which of the following is true of the EOQ model? Note