Chp.9

1. Which of the following is true about lower-of-cost-or-market?

It is inconsistent because losses are recognized but not gains.

It usually understates assets.

It can increase future income.

All of these.

2. Designated market value

Is always the middle value of replacement cost, net realizable value, and net realizablevalue less a normal profit margin.

Should always be equal to net realizable value.

May sometimes exceed net realizable value.

Should always be equal to net realizable value less a normal profit margin.

3. Why might inventory be reported at sales prices (net realizable value or market price) rather than cost?

When there are no significant costs of disposal.

When a non-cancellable contract exists to sell the inventory.

When there is a controlled market with a quoted price applicable to all quantities.

4. Net realizable value is

Acquisition cost plus costs to complete and sell.

Selling price.

Selling price plus costs to complete and sell.

Selling price less costs to complete and sell.

5. Which of the following is not required when using the retail inventory method?

All inventory items must be categorized according to the retail markup percentagewhich reflects the item's selling price.

A record of the total cost and retail value of goods purchased.

A record of the total cost and retail value of the goods available for sale.

T otal sales for the period.

6. The average days to sell inventory is computed by dividing

365 days by the inventory turnover ratio.

The inventory turnover ratio by 365 days.

Net sales by the inventory turnover ratio.

365 days by cost of goods sold.

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

Inventory composition.

Inventory location.

Inventory financing arrangements.

Inventory costing methods employed.

8. Which of the following is not an acceptable approach in applying the lower-of-cost-or- market method to inventory?

Inventory location.

Categories of inventory items.

Individual item.

Total of the inventory.

9. The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the

Net realizable value.

Net realizable value less normal profit margin.

Replacement cost.

Selling price less costs of completion and disposal.

10. 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?

Sales price

Net realizable value

Historical cost

Net realizable value reduced by a normal profit margin

11. Inventory may be recorded at net realizable value if

There is a controlled market with a quoted price.

There are no significant costs of disposal.

The inventory consists of precious metals or agricultural products

All of these.

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

Last-in, first-out.

First-in, first-out.

Conventional retail method.

Specific identification.

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

Increases the cost-retail ratio.

No effect on the cost-retail ratio.

Depends on the amount of the net markups.

Decreases the cost-retail ratio.

14. The gross profit method of inventory valuation is invalid when

A portion of the inventory is destroyed.

There is a substantial increase in inventory during the year

There is no beginning inventory because it is the first year of operation.

None of these.

15. 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

Include markups but not markdowns.

Include markups and markdowns.

Ignore both markups and markdowns.

Include markdowns but not markups.

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

Prevents understatement of the inventory value.

Allows for a normal profit to be earned.

Allows for items to be valued at replacement cost.

Prevents overstatement of the value of obsolete or damaged inventories.

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

Allowance method.

Sales method

Direct method

Both a and c.

18. 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

Selling price will be less than their replacement cost.

Replacement cost will be more than their net realizable value.

Cost will be less than their replacement cost

Future utility will be less than their cost.

19. 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

Net realizable value.

Original cost.

Market value.

Net realizable value less a normal profit margin.

20. The inventory turnover ratio is computed by dividing the cost of goods sold by

Beginning inventory.

Ending inventory.

Average inventory.

Number of days in the year.

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

Presented as a current liability.

Subtracted from ending inventory.

Presented as an appropriation of retained earnings.

Presented in the income statement.

22. Why are inventories stated at lower-of-cost-or-market?

To report a loss when there is a decrease in the future utility.

T o be conservative.

To report a loss when there is a decrease in the future utility below the original cost.

To permit future profits to be recognized.

23. The retail inventory method is based on the assumption that the

Final inventory and the total of goods available for sale contain the same proportion ofhigh-cost and low-cost ratio goods.

Ratio of gross margin to sales is approximately the same each period.

Ratio of cost to retail changes at a constant rate.

Proportions of markups and markdowns to selling price are the same.

24. In no case can "market" in the lower-of-cost-or-market rule be more than

Estimated selling price in the ordinary course of business.

Estimated selling price in the ordinary course of business less reasonably predictablecosts of completion and disposal.

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

FIFO.

Lower-of-average-cost-or-market.

Average cost.

LIFO.

26. 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,

This fact must be disclosed.

Disclosure is required only if prices have declined since the date of the order.

Disclosure is required only if prices have since risen substantially.

An appropriation of retained earnings is necessary.

27. Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and

The ending inventory is determined by a physical inventory count

A normal profit is not anticipated

There is a controlled market with a quoted price applicable to all quantities.

The internal revenue service is assured that the practice is not used only to distortreported net income.

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

There may be no markdowns in a given year.

This tends to give a better approximation of the lower of cost or market.

Markups are also ignored.

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

As a control measure in determining inventory shortages

For insurance information

To permit the computation of net income without a physical count of inventory

To defer income tax liability

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

Drop of future utility below its original cost.

Method of determining cost of goods sold.

Assumption to determine inventory flow

Change in inventory value to market value.

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

The beginning inventory plus the purchases equal total goods to be accounted for.

Goods not sold must be on hand.

The total amount of purchases and the total amount of sales remain relativelyunchanged from the comparable previous period.

32. Lower-of-cost-or-market

Is most conservative if applied to the total inventory.

Is most conservative if applied to major categories of inventory.

Is most conservative if applied to individual items of inventory.

Must be applied to major categories for taxes.

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

Last year's cost ratio and this year's index.

This year's cost ratio and this year's index.

Last year's cost ratio and last year's index

This year's cost ratio and last year's index.

34. Which statement is true about the retail inventory method?

It may not be used to estimate inventories for interim statements.

It may not be used to estimate inventories for annual statements.

It may not be used by auditors.

None of these.

35. 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?

The cost of sales of the following year will be understated.

The current year's income is understated.

The closing inventory of the current year is understated.

Income of the following year will be understated.

36. In 2010, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2011 for $700,000. Before the December 31, 2010 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2010 will result in a credit that should be reported

As a valuation account to Inventory on the balance sheet.

As a current liability.

As an appropriation of retained earnings.

On the income statement.

37. A major advantage of the retail inventory method is that it

Hides costs from competitors and customers.

Gives a more accurate statement of inventory costs than other methods.

Provides a method for inventory control and facilitates determination of the periodicinventory for certain types of companies.

38. When calculating the cost ratio for the retail inventory method,

If it is the conventional method, the beginning inventory is included and markdownsare deducted.

If it is the LIFO method, the beginning inventory is excluded and markdowns arededucted.

If it is the LIFO method, the beginning inventory is included and markdowns are notdeducted

If it is the conventional method, the beginning inventory is excluded and markdownsare not deducted.

39. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"?

Net realizable value

Net realizable value less a normal profit margin

Current replacement cost

Discounted present value

40. What condition is not necessary in order to use the retail method to provide inventory results?

Retailer keeps a record of the total costs of products sold for the period.

Retailer keeps a record of the total costs and retail value of goods purchased.

Retailer keeps a record of the total costs and retail value of goods available for sale.

Retailer keeps a record of sales for the period.

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

The cost flow assumption need not correspond to the actual physical flow of goods.

The assumption selected may be changed each accounting period.

The FIFO assumption uses the earliest acquired prices to cost the items sold during aperiod.

The LIFO assumption uses the earliest acquired prices to cost the items on hand atthe end of an accounting period.

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

Verify the accuracy of the perpetual inventory records.

Verity the accuracy of the physical inventory.

To estimate cost of goods sold.

To provide an inventory value of LIFO inventories.

43. 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?

Record unrealized gains of $350,000 and disclose the existence of the purchase commitment.

No impact.

Record unrealized losses of $350,000 and disclose the existence of the purchase commitment.

Disclose the existence of the purchase commitment.

44. When the direct method is used to record inventory at market

A loss is recorded directly in the inventory account by crediting inventory and debitingloss on inventory decline.

Only the portion of the loss attributable to inventory sold during the period is recordedin the financial statements.

The market value figure for ending inventory is substituted for cost and the loss isburied in cost of goods sold.

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

It may be used to estimate inventories for interim statements.

It may be used to estimate inventories for annual statements.

It may be used by auditors.

None of these.

46. What is the effect of net markups on the cost-retail ratio when using the conventional retail method?

Increases the cost-retail ratio.

No effect on the cost-retail ratio.

Depends on the amount of the net markdowns.

Decreases the cost-retail ratio.

47. At the end of the fiscal year, Alpha 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?he end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase

Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.

No impact.

Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.

Disclose the existence of the purchase commitment.

Chp.9

1. Which of the following is true about lower-of-cost-or-market?

2.

What first name or nickname would you like us to use?

2. Designated market value

3. Why might inventory be reported at sales prices (net realizable value or market price) rather than cost?

4. Net realizable value is

5. Which of the following is not required when using the retail inventory method?

6. The average days to sell inventory is computed by dividing

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

8. Which of the following is not an acceptable approach in applying the lower-of-cost-or- market method to inventory?

9. The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the

10. 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?

11. Inventory may be recorded at net realizable value if

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

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

14. The gross profit method of inventory valuation is invalid when

15. 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

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

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

18. 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

19. 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

20. The inventory turnover ratio is computed by dividing the cost of goods sold by

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

22. Why are inventories stated at lower-of-cost-or-market?

23. The retail inventory method is based on the assumption that the

24. In no case can "market" in the lower-of-cost-or-market rule be more than

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

26. 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,

27. Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and

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

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

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

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

32. Lower-of-cost-or-market

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

34. Which statement is true about the retail inventory method?

37. A major advantage of the retail inventory method is that it

38. When calculating the cost ratio for the retail inventory method,

39. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"?

40. What condition is not necessary in order to use the retail method to provide inventory results?

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

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

44. When the direct method is used to record inventory at market

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

46. What is the effect of net markups on the cost-retail ratio when using the conventional retail method?