Question 1

Commodity broker-traders

Accepted Answer

A) Produce or raise commodities such as corn, wheat, or precious metals. 
B) Hold their inventory primarily to sell the commodities in the near term and generate a profit from price fluctuations. 
C) Value their inventories at the lower-of-cost-or-net realizable value (LCNRV). 
D) All of the choices are correct regarding broker-traders. 
A) Produce or raise commodities such as corn, wheat, or precious metals. 
B) Hold their inventory primarily to sell the commodities in the near term and generate a profit from price fluctuations. 
C) Value their inventories at the lower-of-cost-or-net realizable value (LCNRV). 
D) All of the choices are correct regarding broker-traders. B

Question 2

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-net realizable value valuation.

Accepted Answer

A) True 
 B)False  False

Question 3

Biological assets, such as milking cows, are reported as non-current assets at fair value less costs to sale (net realizable value).

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

A) Loss method. 
B) Sales method. 
C) Cost-of-goods-sold method. 
D) Both the loss method and the cost-of-goods-sold method. 
A) Loss method. 
B) Sales method. 
C) Cost-of-goods-sold method. 
D) Both the loss method and the cost-of-goods-sold method.

Question 5

Which of the following is not an acceptable method of applying the lower-of-cost-or-net realizable value method to inventory?

Accepted Answer

A) Inventory location. 
B) Groups of inventory items. 
C) Individual item. 
D) Total of the inventory. 
A) Inventory location. 
B) Groups of inventory items. 
C) Individual item. 
D) Total of the inventory.

Question 6

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

Accepted Answer

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. 
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.

Question 7

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 LCNRV.
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?

Accepted Answer

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. 
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.

Question 8

Most purchase commitments must be recorded as a liability.

Accepted Answer

A) True 
 B)False

Question 9

The gross profit method of inventory valuation is invalid when

Accepted Answer

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 are correct. 
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 are correct.

Question 10

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

Accepted Answer

A) there may be no markdowns in a given year. 
B) this tends to give a better approximation of the lower of cost or net realizable value. 
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. 
A) there may be no markdowns in a given year. 
B) this tends to give a better approximation of the lower of cost or net realizable value. 
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.

Question 11

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

Accepted Answer

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 
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

Question 12

In most situations, the gross profit percentage is stated as a percentage of cost.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) The cost flow assumption need not correspond to the actual physical flow of goods. 
B) The assumption selected may be changed each accounting period. 
C) The FIFO assumption uses the earliest acquired prices to cost the items sold during a period. 
D) The LIFO assumption uses the earliest acquired prices to cost the items on hand at the end of an accounting period. 
A) The cost flow assumption need not correspond to the actual physical flow of goods. 
B) The assumption selected may be changed each accounting period. 
C) The FIFO assumption uses the earliest acquired prices to cost the items sold during a period. 
D) The LIFO assumption uses the earliest acquired prices to cost the items on hand at the end of an accounting period.

Question 14

Which of the following statements is incorrect regarding the lower-of-cost-or-net realizable value (LCNRV)?

Accepted Answer

A) Net realizable value (NRV) is the selling price less estimated costs to complete and estimated costs to make a sale. 
B) In most situations, companies price inventory on a total-inventory basis. 
C) One of two methods may be used to record the income effect of valuing inventory at net realizable value. 
D) Companies use an allowance account, the "Allowance to Reduce Inventory to Net Realizable Value." 
A) Net realizable value (NRV) is the selling price less estimated costs to complete and estimated costs to make a sale. 
B) In most situations, companies price inventory on a total-inventory basis. 
C) One of two methods may be used to record the income effect of valuing inventory at net realizable value. 
D) Companies use an allowance account, the "Allowance to Reduce Inventory to Net Realizable Value."

Question 15

International Financial Reporting Standards (IFRS) require that a company record an inventory write-down as part of cost of goods sold.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

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. 
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.

Question 17

In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss.

Accepted Answer

A) True 
 B)False

Question 18

The average days to sell inventory is computed by dividing

Accepted Answer

A) 365 days by the inventory turnover. 
B) the inventory turnover ratio by 365 days. 
C) net sales by the inventory turnover. 
D) 365 days by cost of goods sold. 
A) 365 days by the inventory turnover. 
B) the inventory turnover ratio by 365 days. 
C) net sales by the inventory turnover. 
D) 365 days by cost of goods sold.

Question 19

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

Accepted Answer

A) Inventory composition. 
B) Inventory location. 
C) Inventory financing arrangements. 
D) Inventory costing methods employed. 
A) Inventory composition. 
B) Inventory location. 
C) Inventory financing arrangements. 
D) Inventory costing methods employed.

Question 20

An inventory of wheat held by a broker-trader is valued at net realizable value.

Accepted Answer

A) True 
 B)False

Exam 9: Inventories: Additional Valuation Issues

Commodity broker-traders

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-net realizable value valuation.

Biological assets, such as milking cows, are reported as non-current assets at fair value less costs to sale (net realizable value).

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

Which of the following is not an acceptable method of applying the lower-of-cost-or-net realizable value method to inventory?

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

Most purchase commitments must be recorded as a liability.

The gross profit method of inventory valuation is invalid when

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

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

In most situations, the gross profit percentage is stated as a percentage of cost.

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

Which of the following statements is incorrect regarding the lower-of-cost-or-net realizable value (LCNRV)?

International Financial Reporting Standards (IFRS) require that a company record an inventory write-down as part of cost of goods sold.

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

In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss.

The average days to sell inventory is computed by dividing

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

An inventory of wheat held by a broker-trader is valued at net realizable value.

Financial Reporting and Accounting Standards

Conceptual Framework for Financial Reporting

The Accounting Information System

Income Statement and Related Information

Statement of Financial Position and Statement of Cash Flows

Accounting and the Time Value of Money

Cash and Receivables

Valuation of Inventories: a Cost-Basis Approach

Acquisition and Disposition of Property, Plant, and Equipment

Depreciation, Impairments, and Depletion

Intangible Assets

Current Liabilities, Provisions, and Contingencies

Non-Current Liabilities

Equity

Dilutive Securities and Earnings Per Share

Investments

Revenue Recognition

Accounting for Income Taxes

Accounting for Pensions and Postretirement Benefits

Accounting for Leases

Accounting Changes and Error Analysis

Statement of Cash Flows

Presentation and Disclosure in Financialreporting

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