Download CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES and more Exams Financial Accounting in PDF only on Docsity!
CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
T 1. When to use lower-of-cost-or-market. F 2. Reporting inventory at net realizable value. T 3. Valuing inventory at net realizable value. T 4. Lower-of-cost-or-market and consistency. F 5. Lower-of-cost-or-market and conservatism. F 6. Purpose of the “floor” in LCM. T 7. Valuation using relative sales value. F 8. Definition of a basket purchase. F 9. Purchase commitments. T 10. Loss on purchase commitments. F 11. Recording noncancelable purchase contract. T 12. Gross profit method. F 13. Gross profit percentage. T 14. Disadvantage of gross profit method. F 15. Conventional retail method. F 16. Markup and markdown cancellation. T 17. Accounting for abnormal shortages. F 18. Computing inventory turnover. T 19. Average days to sell inventory. T 20 LIFO retail method.
MULTIPLE CHOICE—Conceptual
Answer No. Description
d 21. Recording inventory loss under the loss method. d 22. Recording inventory loss under the cost-of-goods-sold method. a 23. Lower-of-cost-and net realizable value description. c 24. Reason inventories are stated at LCM. a 25. Acceptable approaches in applying LCM. d 26. Methods used to record inventory loss. d 27. Definition of "net realizable value." d 28. Knowledge of lower-of-cost-or-market valuations. c 29. Definition of "market" under LCM. b 30. Definition of "ceiling." a 31. Definition of "designated market value." c 32. Application of lower-of-cost-or-market valuation. d s 33. Effect of inventory write-down. b 34. Definition of "floor". d 35. Rationale of the "ceiling". b 36. Net realizable value under LCM. a 37. Valuation of inventory at net realizable value.
Test Bank for Intermediate Accounting, Sixteenth Edition MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
a 38. Reason for reporting inventory at sales price. c S 39. Recording inventory at net realizable value. d 40. Appropriate use of net realizable value. a 41. Material purchase commitments. a 42. Hedging and purchase commitments. b P 43. Reporting purchase commitments loss. d 44. Accounting for purchase commitments. c 45. Record unrealized losses on purchase commitments. a 46. Use of gross profit method. d S 47. Gross profit method assumptions. d 48. Appropriate use of the gross profit method. b 49. Appropriate use of the gross profit method. d 50. Advantage of retail inventory method. c 51. Conventional retail inventory method. a 52. Assumptions of the retail inventory method. d 53. Appropriate use of the retail inventory method. b 54. Markdowns and the conventional retail method. a 55. Markups and the conventional retail method. b *56. Knowledge of the cost ratio for retail inventory methods. a S 57. Information needed in retail inventory method. d S 58. Reasons for using retail inventory method. a 59. Condition necessary to use retail method. c 60. Accounting for normal shortages. d 61. Net markups and the conventional retail method. a 62. Freight-in and the conventional retail method. b 63. Common inventory disclosures. b P 64. Inventory cost flow assumptions. a P 65. Computing average days to sell inventory. d *66. Dollar-value LIFO retail method. c *67. Dollar-value LIFO retail method. MULTIPLE CHOICE—Computational
Answer No. Description
a 68. Value inventory at LCM. b 69. Lower-of-cost-or-market. b 70. Lower-of-cost-or-market. d 71. Value inventory at LCM. b 72. Value inventory at LCM. c 73. Value inventory at LCM. c 74. Determine market value under LCM. b 75. Value inventory under LCM. d 76. Determine cost amount under LCM. c 77. Value inventory under LCM. b 78. Value inventory under LCM. a 79. Value inventory under LCM. c 80. Value inventory under LCM.
Test Bank for Intermediate Accounting, Sixteenth Edition c *128. Determine cost to retail ratio using LIFO cost. a *129. Calculate ending inventory cost using dollar-value LIFO. MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
b *130. Calculate cost of ending inventory using LIFO retail. a *131. Calculate ending inventory cost using dollar-value LIFO. P (^) These questions also appear in the Problem-Solving Survival Guide. S (^) These questions also appear in the Study Guide.
- This topic is dealt with in an Appendix to the chapter. MULTIPLE CHOICE—CPA Adapted
Answer No. Description
d 132. Recognizing a loss due to LCM. b 133. Appropriate use of replacement costs in LCM. b 134. Identification of the designated market value. a 135. Estimate cost of inventory lost by theft. a 136. Determine cost of ending inventory using retail method. d 137. Determine cost of ending inventory using retail method. a *138. Calculate ending inventory using LIFO retail. BRIEF EXERCISES
Item Description
BE9-139 Lower-of-cost-or-market. BE9-140 Lower-of-cost-or-market. BE9-141 Lower-of-cost-or-market. EXERCISES Item Description E9-142 Lower-of-cost-or-market. E9-143 Lower-of-cost-or-market. E9-144 Relative sales value method. E9-145 Gross profit method. E9-146 Gross profit method. E9-147 Gross profit method.
Inventories: Additional Valuation Issues PROBLEMS
Item Description
P9-148 Gross profit method. P9-149 Retail inventory method. *P9-150 Retail inventory method. *P9-151 LIFO retail inventory method, fluctuating prices. *P9-152 LIFO retail inventory method, stable prices. *P9-153 Dollar-value LIFO retail method. *P9-154 Retail LIFO. CHAPTER LEARNING OBJECTIVES
- Understand and apply the lower-of-cost-or-net realizable value rule.
- Understand and apply the lower-of-cost-or-market rule.
- Understand other inventory valuation issues.
- Determine ending inventory by applying the gross profit method.
- Determine ending inventory by applying the retail inventory method.
- Explain how to report and analyze inventory. *7. Determine ending inventory by applying the LIFO retail methods.
- Compare the accounting procedures related to valuation of inventories under GAAP and IFRS.
Inventories: Additional Valuation Issues TRUE-FALSE—Conceptual
- A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- GAAP requires reporting inventory at net realizable value, even if above cost, whenever there is a controlled market with a quoted price applicable to all quantities. Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Application of the lower-of-cost-or-market rule results in inconsistency because a company may value inventory at cost in one year and at market in the next year. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value. Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating inventory. Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- A basket purchase occurs when a company agrees to buy inventory weeks or months in advance. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- According to FASB concepts statement No.6, purchase commitments include only the right to receive assets. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Test Bank for Intermediate Accounting, Sixteenth Edition
- If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should record any expected losses on the commitment in the period in which the market decline takes place. Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract. Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- The gross profit method can be used to approximate the dollar amount of inventory on hand. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- In most situations, the gross profit percentage is stated as a percentage of cost. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- A disadvantage of the gross profit method is that it uses past percentages in determining the markup. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- When the conventional retail method includes both net markups and net markdowns in the cost-to-retail ratio, it approximates a lower-of-cost-or-market valuation. Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- A markup cancellation can exceed the original markup but a markdown cancellation cannot exceed the original markdown. Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- The inventory turnover is computed by dividing the cost of goods sold by the ending inventory on hand. Ans: F, LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Test Bank for Intermediate Accounting, Sixteenth Edition
- Why are inventories stated at lower-of-cost and net realizable value? a. To report a loss when there is a decrease in the future utility. b. To keep track of the market value of the inventory. c. To report a loss when there is a decrease in the future utility below the original cost. d. To permit future profits to be recognized. Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Which of the following is not an acceptable approach in applying the lower-of-cost-and net realizable value method to inventory? a. Inventory location. b. Categories of inventory items. c. Individual item. d. Total of the inventory. Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Which method(s) may be used to record a loss due to a price decline in the value of inventory? a. The cost-of-goods-sold method. b. The sales method. c. The loss method d. Both the cost-of-goods-sold method and the loss method. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price. c. selling price plus costs to complete and sell. d. selling price less costs to complete, sell, and transport Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Which of the following statements is incorrect regarding the lower-of-cost-or-market rule? a. It is inconsistent because losses are recognized but not gains. b. It usually understates assets. c. It can increase future income if the expected reductions do not materialize. d. It incorporates both gains and losses in value that occur during the course of business. Ans: D, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"? a. Net realizable value b. Net realizable value less a normal profit margin c. Replacement cost, Net realizable value, or Net realizable value less a normal profit margin. d. Discounted present value Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Inventories: Additional Valuation Issues
- In no case can "market" in the lower-of-cost-or-market rule be more than a. estimated selling price in the ordinary course of business. b. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. c. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. d. estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses. Ans: B, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- The designated market value a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. b. should always be equal to net realizable value. c. may sometimes exceed net realizable value. d. should always be equal to net realizable value less a normal profit margin. Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Lower-of-cost-or-market a. is most conservative if applied to the total inventory. b. is most conservative if applied to major categories of inventory. c. is most conservative if applied to individual items of inventory. d. must be applied to major categories for taxes. Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- 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? a. The cost of sales of the following year will be understated. b. The current year's income is understated. c. The closing inventory of the current year is understated. d. Income of the following year will be understated. Ans: D, LO: 2, Bloom: AN, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the a. net realizable value. b. net realizable value less normal profit margin. c. replacement cost. d. selling price less costs of completion and disposal. Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Inventories: Additional Valuation Issues
- Which of the following statements regarding the recording of inventory at net realizable value is inaccurate? a. GAAP permits recording of inventory at net realizable value when there is a controlled market with a quoted price applicable to all quantities. b. GAAP permits net realizable value for inventory when there are no significant costs of disposal involved. c. GAAP permits net realizable value in cases where the product is available for immediate delivery. d. GAAP is not similar to IFRS regarding the use of net realizable values for agricultural and mineral products. Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- 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, a. this fact must be disclosed. b. disclosure is required only if prices have declined since the date of the order. c. disclosure is required only if prices have since risen substantially. d. an appropriation of retained earnings is necessary. Ans: A, LO: 3, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- In hedging, the purchaser in the purchase commitment simultaneously enters into a contract in which it agrees to sell in the future: a. the same quantity of the same goods at a fixed price. b. a higher quantity of the same goods at a higher price. c. a lower quantity of the same goods at a fixed price. d. same quantity of different goods at a lower price. Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None P 43. In 2017, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2018 for $700,000. Before the December 31, 2017 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2017 will result in a credit that should be reported a. as a valuation account to Inventory on the balance sheet. b. as a current liability. c. as an appropriation of retained earnings. d. on the income statement. Ans: B, LO: 3, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Test Bank for Intermediate Accounting, Sixteenth Edition
- 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? a. Record unrealized gains of $400,000 and disclose the existence of the purchase commitment. b. No impact. c. Record unrealized losses of $400,000 and disclose the existence of the purchase commitment. d. Only disclose the existence of the purchase commitment. Ans: D, LO: 3, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- 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? a. Record unrealized gains of $350,000 and disclose the existence of the purchase commitment. b. No impact. c. Record unrealized losses of $350,000 and disclose the existence of the purchase commitment. d. Only disclose the existence of the purchase commitment. Ans: C, LO: 3, Bloom: AP, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- How is the gross profit method used as it relates to inventory valuation? a. Verify the accuracy of the perpetual inventory records. b. Verify the accuracy of the physical inventory. c. To estimate cost of goods sold. d. To provide an inventory value of LIFO inventories. Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None S 47. Which of the following is not a basic assumption of the gross profit method? a. The beginning inventory plus the purchases equal total goods to be accounted for. b. Goods not sold must be on hand. c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand. d. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period. Ans: D, LO: 4, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Test Bank for Intermediate Accounting, Sixteenth Edition
- Which statement is true about the retail inventory method? a. It may not be used to estimate inventories for interim statements. b. It may not be used to expedite physical inventory counts. c. It may not be used by auditors. d. There are different versions of the retail inventory method. Ans: D, LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of the cost to retail ratio because a. there may be no markdowns in a given year. b. this tends to give a better approximation of the lower of cost or market. c. markups are also ignored. d. this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold. Ans: B, LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- 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 a. include markups but not markdowns. b. include markups and markdowns. c. ignore both markups and markdowns. d. include markdowns but not markups. Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None *56. When calculating the cost ratio for the retail inventory method, a. if it is the conventional method, the beginning inventory is included and markdowns are deducted. b. if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted. c. if it is the LIFO method, the beginning inventory is included and markdowns are not deducted. d. if it is the conventional method, the beginning inventory is excluded and markdowns are not deducted. Ans: B, LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None S 57. Which of the following is not required when using the retail inventory method? a. All inventory items must be categorized according to the retail markup percentage which reflects the item's selling price. b. A record of the total cost and retail value of the goods purchased. c. A record of the total cost and retail value of the goods available for sale. d. Total sales amount for the period. Ans: A, LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Inventories: Additional Valuation Issues S 58. Which of the following is not a reason the retail inventory method is used widely? a. As a control measure in determining inventory shortages b. For insurance information c. To permit the computation of net income without a physical count of inventory d. To defer income tax liability Ans: D, LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- What condition is not necessary in order to use the retail method to provide inventory results? a. Retailer keeps a record of the total costs of products sold for the period. b. Retailer keeps a record of the total costs and retail value of goods purchased. c. Retailer keeps a record of the total costs and retail value of goods available for sale. d. Retailer keeps a record of sales for the period. Ans: A, LO: 5, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Which of the following is true of normal shortages? a. They do not include theft and shrinkage. b. They are deducted from both the cost and retail columns. c. These goods are no longer available for sale. d. This loss is considered in calculating cost-to-retail ratio. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- What is the effect of net markups on the cost-retail ratio when using the conventional retail method? a. Increases the cost-to-retail ratio. b. No effect on the cost-to-retail ratio. c. Depends on the amount of the net markdowns. d. Decreases the cost-to-retail ratio. Ans: D, LO: 5, Bloom: AN, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- What is the effect of freight-in on the cost-to-retail ratio when using the conventional retail method? a. Increases the cost-to-retail ratio. b. No effect on the cost-to-retail ratio. c. Depends on the amount of the net markups. d. Decreases the cost-to-retail ratio. Ans: A, LO: 5, Bloom: AN, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Which of the following is not a common disclosure for inventories? a. Inventory composition. b. Inventory location. c. Inventory financing arrangements. d. Inventory costing methods employed. Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Inventories: Additional Valuation Issues MULTIPLE CHOICE—Computational
- Oslo Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Product #1 Product # Historical cost $10 $ 18 Replacement cost 11 14 Estimated cost to dispose 3 7 Estimated selling price 20 33 In pricing its ending inventory using the lower-of-cost-or-market, what unit values, rounded to the nearest dollar, should Oslo use for products #1 and #2, respectively? a. $10 and $16. b. $13 and $16. c. $13 and $15. d. $11 and $14. Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of 2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a unit is $6, and the normal profit is 40%. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market? a. $12. b. $24. c. $26. d. $27. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Lexington Company sells product 1976NLC for $20 per unit. The cost of one unit of 1976NLC is $18, and the replacement cost is $17. The estimated cost to dispose of a unit is $4, and the normal profit is 40%. At what amount per unit should product 1976NLC be reported, applying lower-of-cost-or-market? a. $8. b. $16. c. $17. d. $18. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Given the acquisition cost of product Z is $27, the net realizable value for product Z is $24, the normal profit for product Z is $2, and the market value (replacement cost) for product Z is $25, what is the proper per unit inventory value for product Z applying LCM? a. $27. b. $25. c. $22. d. $24. Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
Test Bank for Intermediate Accounting, Sixteenth Edition
- Given the acquisition cost of product ALPHA is $21, the net realizable value for product ALPHA is $20, the normal profit for product ALPHA is $1.50, and the market value (replacement cost) for product ALPHA is $18, what is the proper per unit inventory value for product ALPHA applying LCM? a. $21.00. b. $18. c. $18.00. d. $20.00. Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Given the acquisition cost of product Dominoe is $20, the net realizable value for product Dominoe is $17, the normal profit for product Dominoe is $2, and the market value (replacement cost) for product Dominoe is $18, what is the proper per unit inventory price for product Dominoe applying LCM? a. $18. b. $15. c. $17. d. $ Ans: C, LO: 2, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Given the historical cost of product Z is $20, the selling price of product Z is $25, costs to sell product Z are $3, the replacement cost for product Z is $21, and the normal profit margin is 40% of sales price, what is the market value that should be used in the lower-of- cost-or-market comparison? a. $18. b. $20. c. $21. d. $22. Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Given the historical cost of product Z is $20, the selling price of product Z is $25, costs to sell product Z are $3, the replacement cost for product Z is $21, and the normal profit margin is 40% of sales price, what is the amount that should be used to value the inventory under the lower-of-cost-or-market method? a. $18. b. $20. c. $21. d. $22. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
- Given the historical cost of product Dominoe is $12, the selling price of product Dominoe is $15, costs to sell product Dominoe are $2, the replacement cost for product Dominoe is $11, and the normal profit margin is 20% of sales price, what is the cost amount that should be used in the lower-of-cost-or-market comparison? a. $13. b. $10. c. $11. d. $12. Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Prob. Solving, IMA: FSA, IFRS: None
