Deck 9: Inventories: Additional Valuation Issues

Question 1

The purpose of the "floor" in lower-of-cost-or-market considerations is to avoid overstating inventory.

Answer 1

False

Question 2

A disadvantage of the gross profit method is that it uses past percentages in determining the markup.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value.

Question 5

When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.

Question 6

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.

Question 7

According to FASB concepts statement No.6, purchase commitments include only the right to receive assets.

Question 8

The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period.

Question 9

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

Question 10

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

Question 11

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.

Question 12

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.

Question 13

The average days to sell inventory represents the average number of days' sales for which a company has inventory on hand.

Question 14

The inventory turnover ratio is computed by dividing the cost of goods sold by the ending inventory on hand.

Question 15

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

Question 16

The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value.

Question 17

A basket purchase occurs when a company agrees to buy inventory weeks or months in advance.

Question 18

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

Question 19

A markup cancellation can exceed the original markup but a markdown cancellation cannot exceed the original markdown.

Question 20

A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures.

Question 21

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

Question 22

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.

Question 23

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 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.

Question 24

Which of the following accounts is credited in the loss method of writing-down of inventory to its market value?

A) Inventory
B) Loss Due to Decline of Inventory to market
C) Cost of Goods Sold
D) Allowance to Reduce Inventory to Market

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

Inventory may be recorded at net realizable value if

A) there is a controlled market with a quoted price.
B) there are no significant costs of disposal.
C) the inventory consists of precious metals or agricultural products.
D) All of these answers are correct.

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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

Question 35

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.

Question 36

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.

Question 37

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 if the expected reductions do not materialize.
D) All of these answers are correct.

Question 38

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

A) there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.
B) a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.
C) only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.
D) the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

Question 39

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

A) drop of future utility below its original cost.
B) method of determining cost of goods sold.
C) assumption to determine inventory flow.
D) change in inventory value to market value.

Question 40

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

A) Prevents understatement of the inventory value.
B) Allows for a normal profit to be earned.
C) Allows for items to be valued at replacement cost.
D) Prevents overstatement of the value of obsolete or damaged inventories.

Question 41

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

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

Question 42

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.

Question 43

In 2014, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2015 for $700,000. Before the December 31, 2014 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2014 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.

Question 44

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.

Question 45

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.

Question 46

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.

Question 47

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.

Question 48

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.

Question 49

The retail inventory method is based on the assumption that the

A) final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
B) ratio of gross margin to sales is approximately the same each period.
C) ratio of cost to retail changes at a constant rate.
D) proportions of markups and markdowns to selling price are the same.

Question 50

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.

Question 51

Which of the following is true of normal shortages?

A) it is ignored in the income statement of a company.
B) it is 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.

Question 52

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 answers are correct.

Question 53

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.

Question 54

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 estimate inventories for annual statements.
C) It may not be used by auditors.
D) None of these answers are correct.

Question 55

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 answers are correct.

Question 56

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.

Question 57

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

Question 58

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.

Question 59

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.

Question 60

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.

Question 61

Robust Inc. has the following information related to an item in its ending inventory. Product 66 has a cost of $812, a replacement cost of $775, a net realizable value of $800, and a normal profit margin of $50. What is the final lower-of-cost-or-market inventory value for product 66?

A) $800.
B) $775.
C) $812.
D) $762.

Question 62

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

A) last year's cost ratio and this year's index.
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.

Question 63

Given the acquisition cost of product Dominoe is $29, the net realizable value for product Dominoe is $26, the normal profit for product Dominoe is $3, and the market value (replacement cost) for product Dominoe is $27, what is the proper per unit inventory price for product Dominoe?

A) $27.
B) $23.
C) $26.
D) $29

Question 64

Given the acquisition cost of product ALPHA is $34, the net realizable value for product ALPHA is $33.50, the normal profit for product ALPHA is $2.50, and the market value (replacement cost) for product ALPHA is $29.50, what is the proper per unit inventory price for product ALPHA?

A) $34.00.
B) $31.00
C) $29.50.
D) $33.50.

Question 65

Given the historical cost of product Z is $40, the selling price of product Z is $50, costs to sell product Z are $6, the replacement cost for product Z is $41, 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) $22.
B) $40.
C) $42.
D) $41.

Question 66

Muckenthaler Company sells product 2005WSC for $40 per unit. The cost of one unit of 2005WSC is $36, and the replacement cost is $35. The estimated cost to dispose of a unit is $8, and the normal profit is 40%. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market?

A) $16.
B) $32.
C) $35.
D) $36.

Question 67

Robust Inc. has the following information related to an item in its ending inventory. Packit (Product # 874) has a cost of $131, a replacement cost of $101, a net realizable value of $117, and a normal profit margin of $5. What is the final lower-of-cost-or-market inventory value for Packit?

A) $112.
B) $131.
C) $101.
D) $117.

Question 68

Given the acquisition cost of product Z is $80, the net realizable value for product Z is $72, the normal profit for product Z is $6, and the market value (replacement cost) for product Z is $75, what is the proper per unit inventory price for product Z?

A) $80.
B) $75.
C) $66.
D) $72.

Question 69

Lexington Company sells product 1976NLC for $60 per unit. The cost of one unit of 1976NLC is $54, and the replacement cost is $52. The estimated cost to dispose of a unit is $12, and the normal profit is 40%. At what amount per unit should product 1976NLC be reported, applying lower-of-cost-or-market?

A) $24.
B) $48.
C) $52.
D) $54.

Question 70

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.

Question 71

Given the historical cost of product Dominoe is $22, the selling price of product Dominoe is $30, costs to sell product Dominoe are $5, the replacement cost for product Dominoe is $20, 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) $25.
B) $20.
C) $19.
D) $22.

Question 72

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.

Question 73

Given the historical cost of product Dominoe is $22, the selling price of product Dominoe is $30, costs to sell product Dominoe are $5, the replacement cost for product Dominoe is $20, and the normal profit margin is 20% of sales price, what is the amount that should be used to value the inventory under the lower-of-cost-or-market method?

A) $22.
B) $19.
C) $20.
D) $25.

Question 74

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

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 75

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.

Question 76

The reason for eliminating the price change in inventory is:

A) to measure the dollar increase in inventory.
B) to inflate profits of a company.
C) to increase the cost of inventory.
D) to measure the real increase in inventory.

Question 77

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: In pricing its ending inventory using the lower-of-cost-or-market, what unit values should Oslo use for products #1 and #2, respectively?

A) $20.00 and $32.50.
B) $23.00 and $32.50.
C) $23.00 and $30.00.
D) $22.50 and $27.00.

Question 78

The average days to sell inventory is computed by dividing

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

Question 79

Given the historical cost of product Z is $40, the selling price of product Z is $50, costs to sell product Z are $6, the replacement cost for product Z is $41, 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) $40.
B) $42.
C) $41.
D) $22.

Question 80

Robust Inc. has the following information related to an item in its ending inventory. Acer Top has a cost of $125, a replacement cost of $117, a net realizable value of $133, and a normal profit margin of $17. What is the final lower-of-cost-or-market inventory value for Acer Top?

A) $116.
B) $125.
C) $117.
D) $133.