Question 1

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

Accepted Answer

A) presented as a current liability. 
B) subtracted from ending inventory. 
C) presented as an appropriation of retained earnings. 
D) presented in the income statement. 
A) presented as a current liability. 
B) subtracted from ending inventory. 
C) presented as an appropriation of retained earnings. 
D) presented in the income statement.

Question 2

Under International Financial Reporting Standards (IFRS), a company who recorded a loss on a purchase commitment in 2015 cannot record a recovery of that loss in 2016 if prices improve.

Accepted Answer

A) True 
 B)False

Question 3

Under International Financial Reporting Standards (IFRS), when companies value inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations, companies price inventory on a total-inventory basis.

Accepted Answer

A) True 
 B)False

Question 4

Application of the lower-of-cost-or-net realizable value rule results in inconsistency because a company may value inventory at cost in one year and at net realizable value in the next year.

Accepted Answer

A) True 
 B)False

Question 5

In the retail inventory method, the term markup means a markup on the original cost of an inventory item.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is correct regarding International Financing Reporting Standards (IFRS) and U.S.GAAP with regard to inventory?

Accepted Answer

A) LIFO (last-in, first-out) is permitted under IFRS but not under U.S.GAAP. 
B) When applying lower-of-cost-or-market, U.S.GAPP defines market as net realizable value. 
C) IFRS permits valuing inventories at fair value, similar to the accounting for property, plant, and equipment. 
D) Under U.S.GAPP, if inventory is written down under lower-of-cost-or-market, it may not be written back up to its original cost in a subsequent period. 
A) LIFO (last-in, first-out) is permitted under IFRS but not under U.S.GAAP. 
B) When applying lower-of-cost-or-market, U.S.GAPP defines market as net realizable value. 
C) IFRS permits valuing inventories at fair value, similar to the accounting for property, plant, and equipment. 
D) Under U.S.GAPP, if inventory is written down under lower-of-cost-or-market, it may not be written back up to its original cost in a subsequent period.

Question 7

Why are inventories stated at lower-of-cost-or-net realizable value?

Accepted Answer

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. 
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.

Question 8

Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

Accepted Answer

A) reporting of a loss when there is a decrease in the future utility below the original cost. 
B) method of determining cost of goods sold. 
C) assumption to determine inventory flow. 
D) change in inventory value to net realizable value. 
A) reporting of a loss when there is a decrease in the future utility below the original cost. 
B) method of determining cost of goods sold. 
C) assumption to determine inventory flow. 
D) change in inventory value to net realizable value.

Question 9

Situations in which net realizable value is used to value inventory include

Accepted Answer

A) agricultural inventory. 
B) minerals and mineral products. 
C) commodities held by broker-traders. 
D) All of these are correct. 
A) agricultural inventory. 
B) minerals and mineral products. 
C) commodities held by broker-traders. 
D) All of these are correct.

Question 10

In late 2015, Daisy Company entered into a noncancelable purchase contract for which the contract price is now greater than the market price, and Daisy expects that losses will occur when the purchase is executed in early 2016.Under IFRS, Daisy should recognize a liability and corresponding loss in 2015.

Accepted Answer

A) True 
 B)False

Question 11

When inventory declines in value below original (historical) cost what is the maximum amount that the inventory can be valued at?

Accepted Answer

A) Sales price 
B) Net realizable value 
C) Historical cost 
D) Sales price reduced by estimated costs to sell 
A) Sales price 
B) Net realizable value 
C) Historical cost 
D) Sales price reduced by estimated costs to sell

Question 12

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

Accepted Answer

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) It may be used when fire or other catastrophe destroys the inventory. 
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) It may be used when fire or other catastrophe destroys the inventory.

Question 13

Agricultural produce is harvested from biological assets and is measured at fair value less costs to sell at the point of harvest.

Accepted Answer

A) True 
 B)False

Question 14

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 LCNRV.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?

Accepted Answer

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. 
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.

Question 15

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

Accepted Answer

A) FIFO. 
B) Lower-of-average-cost-or-net realizable value. 
C) Average cost. 
D) LIFO. 
A) FIFO. 
B) Lower-of-average-cost-or-net realizable value. 
C) Average cost. 
D) LIFO.

Question 16

The gross profit method can be used to approximate the dollar amount of inventory on hand.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

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. 
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.

Question 18

A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.

Accepted Answer

A) True 
 B)False

Question 19

An inventory method which is designed to approximate inventory valuation at the lower of cost or net realizable value is

Accepted Answer

A) last-in, first-out. 
B) first-in, first-out. 
C) conventional retail method. 
D) specific identification. 
A) last-in, first-out. 
B) first-in, first-out. 
C) conventional retail method. 
D) specific identification.

Question 20

Shake Company's inventory experienced a decline in value necessitating a write-down to lower of cost or net realizable value (LCNRV) of $230,000.This amount is material to Shake's income statement and the company follows IFRS.Where should Shake Company report this decline in value according to IFRS?
I.As a loss on the income statement.
II.As a separate component of other comprehensive income on the statement of comprehensive income.
III.As part of cost of goods sold on the income statement.

Accepted Answer

A) Shake must use I. 
B) Shake must use I, II or III. 
C) Shake must use I, or III. 
D) Shake must use III. 
A) Shake must use I. 
B) Shake must use I, II or III. 
C) Shake must use I, or III. 
D) Shake must use III.

Exam 9: Inventories: Additional Valuation Issues

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

Under International Financial Reporting Standards (IFRS), a company who recorded a loss on a purchase commitment in 2015 cannot record a recovery of that loss in 2016 if prices improve.

Under International Financial Reporting Standards (IFRS), when companies value inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations, companies price inventory on a total-inventory basis.

Application of the lower-of-cost-or-net realizable value rule results in inconsistency because a company may value inventory at cost in one year and at net realizable value in the next year.

In the retail inventory method, the term markup means a markup on the original cost of an inventory item.

Which of the following statements is correct regarding International Financing Reporting Standards (IFRS) and U.S.GAAP with regard to inventory?

Why are inventories stated at lower-of-cost-or-net realizable value?

Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

Situations in which net realizable value is used to value inventory include

When inventory declines in value below original (historical) cost what is the maximum amount that the inventory can be valued at?

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

Agricultural produce is harvested from biological assets and is measured at fair value less costs to sell at the point of harvest.

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

The gross profit method can be used to approximate the dollar amount of inventory on hand.

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

A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.

An inventory method which is designed to approximate inventory valuation at the lower of cost or net realizable value is

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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