Chapter 9

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Which of the following is true about lower-of-cost-or-market?

All of these:

It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.

The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their

future utility will be less than their cost.

When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"?

Current replacement cost

In no case can "market" in the lower-of-cost-or-market rule be more than

estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

Designated market value

is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin

Lower-of-cost-or-market

is most conservative if applied to individual items of inventory.

An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true?

Income of the following year will be understated.

When the cost-of-goods-sold method is used to record inventory at market

the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

Lower-of-cost-or-market as it applies to inventory is best described as the

drop of future utility below its original cost

The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the

net realizable value less normal profit margin

What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?

Prevents overstatement of the value of obsolete or damaged inventories.

Why are inventories stated at lower-of-cost-or-market?

To report a loss when there is a decrease in the future utility below the original cost.

Which of the following is not an acceptable approach in applying the lower-of-cost-or-market method to inventory?

Inventory location.

Which method(s) may be used to record a loss due to a price decline in the value of inventory?

Both a and c.
a. Cost-of-goods-sold.
c. Loss method

Why might inventory be reported at sales prices (net realizable value or market price) rather than cost?

When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal.

Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and

there is a controlled market with a quoted price applicable to all quantities.

When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?

Net realizable value

Net realizable value is

selling price less costs to complete and sell.

If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable value, the amount to be used for purposes of inventory valuation is

net realizable value.

Inventory may be recorded at net realizable value if

all of these.

If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices,

this fact must be disclosed.

The credit balance that arises when a net loss on a purchase commitment is recognized should be

presented as a current liability

In 2012, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2013 for $700,000. Before the December 31, 2012 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2012 will result in a credit that should be reported

as a current liability

At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon for delivery during the coming summer. The company prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of the year is $4.50, how would this situation be reflected in the annual financial statements?

Disclose the existence of the purchase commitment

At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.60 per gallon for delivery during the coming summer. The company prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of the year is $4.25, how would this situation be reflected in the annual financial statements?

Record unrealized losses of $350,000 and disclose the existence of the purchase commitment.

How is the gross profit method used as it relates to inventory valuation?

Verify the accuracy of the perpetual inventory records.

Which of the following is not a basic assumption of the gross profit method?

The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

The gross profit method of inventory valuation is invalid when

none of these.

Which statement is not true about the gross profit method of inventory valuation?

It may be used to estimate inventories for annual statements

A major advantage of the retail inventory method is that it

provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.

An inventory method which is designed to approximate inventory valuation at the lower of cost or market is

conventional retail method.

The retail inventory method is based on the assumption that the

final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.

Which statement is true about the retail inventory method?

None of these.

When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of the cost to retail ratio because

this tends to give a better approximation of the lower of cost or market.

To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method, the computation of the ratio of cost to retail should

include markups but not markdowns

When calculating the cost ratio for the retail inventory method

if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted.

Which of the following is not required when using the retail inventory method?

All inventory items must be categorized according to the retail markup percentage which reflects the item's selling price

Which of the following is not a reason the retail inventory method is used widely?

To defer income tax liability

What condition is not necessary in order to use the retail method to provide inventory results?

Retailer keeps a record of the total costs of products sold for the period

What method yields results that are essentially the same as those of the conventional retail method?

Lower-of-average-cost-or-market.

What is the effect of net markups on the cost-retail ratio when using the conventional retail method?

Decreases the cost-retail ratio

What is the effect of freight-in on the cost-retail ratio when using the conventional retail method?

Increases the cost-retail ratio

Which of the following is not a common disclosure for inventories?

Inventory location.

Which of the following statements is false regarding an assumption of inventory cost flow?

The assumption selected may be changed each accounting period

The average days to sell inventory is computed by dividing

365 days by the inventory turnover ratio.

The inventory turnover ratio is computed by dividing the cost of goods sold by

average inventory

When using dollar-value LIFO, if the incremental layer was added last year, it should be multiplied by

last year's cost ratio and last year's index.

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