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Intermediate Accounting - Chapter 9
Which of the following is true about lower-of-cost-or-market? a. It is inconsistent because losses are recognized but not gains. b. It usually understates assets. c. It can increase future income. d. All of these. - correct answer d. All of these. 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 a. selling price will be less than their replacement cost. b. replacement cost will be more than their net realizable value. c. cost will be less than their replacement cost. d. future utility will be less than their cost. - correct answer d. 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"? a. Net realizable value b. Net realizable value less a normal profit margin c. Current replacement cost d. Discounted present value - correct answer c. Current replacement cost 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. - correct answer b. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. 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. - correct answer a. 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 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. - correct answer c. 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? 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. - correct answer d. Income of the following year will be understated. When the direct method is used to record inventory at market
Why are inventories stated at lower-of-cost-or-market? a. To report a loss when there is a decrease in the future utility. b. To be conservative. 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. - correct answer c. 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? a. Inventory location. b. Categories of inventory items. c. Individual item. d. Total of the inventory. - correct answer a. Inventory location. Which method(s) may be used to record a loss due to a price decline in the value of inventory? a. Allowance method. b. Sales method. c. Direct method d. Both a and c. - correct answer d. Both a and c. Why might inventory be reported at sales prices (net realizable value or market price) rather than cost? a. When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal. b. When there are no significant costs of disposal. c. When a non-cancellable contract exists to sell the inventory. d. When there is a controlled market with a quoted price applicable to all quantities.
- correct answer a. 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 a. the ending inventory is determined by a physical inventory count. b. a normal profit is not anticipated. c. there is a controlled market with a quoted price applicable to all quantities. d. the internal revenue service is assured that the practice is not used only to distort reported net income. - correct answer c. 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? a. Sales price b. Net realizable value c. Historical cost d. Net realizable value reduced by a normal profit margin - correct answer b. Net realizable value 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 and sell. - correct answer d. 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 a. net realizable value. b. original cost. c. market value. d. net realizable value less a normal profit margin. - correct answer a. net realizable value.
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. Disclose the existence of the purchase commitment. - correct answer d. 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? 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. Disclose the existence of the purchase commitment. - correct answer c. 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? a. Verify the accuracy of the perpetual inventory records. b. Verity the accuracy of the physical inventory. c. To estimate cost of goods sold. d. To provide an inventory value of LIFO inventories. - correct answer a. Verify the accuracy of the perpetual inventory records. 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. - correct answer d. 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 a. a portion of the inventory is destroyed. b. there is a substantial increase in inventory during the year. c. there is no beginning inventory because it is the first year of operation. d. none of these. - correct answer d. none of these. Which statement is not true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for interim statements. b. It may be used to estimate inventories for annual statements. c. It may be used by auditors. d. None of these. - correct answer b. It may be used to estimate inventories for annual statements. A major advantage of the retail inventory method is that it a. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period. b. hides costs from competitors and customers. c. gives a more accurate statement of inventory costs than other methods. d. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies. - correct answer d. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.
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. - correct answer a. include markups but not markdowns. 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. - correct answer b. 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? 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 goods purchased. c. A record of the total cost and retail value of the goods available for sale. d. Total sales for the period. - correct answer a. 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? 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 - correct answer d. To defer income tax liability
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. - correct answer a. 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? a. FIFO. b. Lower-of-average-cost-or-market. c. Average cost. d. LIFO. - correct answer b. Lower-of-average-cost-or-market. What is the effect of net markups on the cost-retail ratio when using the conventional retail method? a. Increases the cost-retail ratio. b. No effect on the cost-retail ratio. c. Depends on the amount of the net markdowns. d. Decreases the cost-retail ratio. - correct answer d. Decreases the cost-retail ratio. What is the effect of freight-in on the cost-retail ratio when using the conventional retail method? a. Increases the cost-retail ratio. b. No effect on the cost-retail ratio. c. Depends on the amount of the net markups. d. Decreases the cost-retail ratio. - correct answer a. Increases the cost-retail ratio. Which of the following is not a common disclosure for inventories?
b. this year's cost ratio and this year's index. c. last year's cost ratio and last year's index. d. this year's cost ratio and last year's index. - correct answer c. last year's cost ratio and last year's index.
