Inventories

Topics: Inventory, Revenue, Generally Accepted Accounting Principles Pages: 12 (3446 words) Published: September 17, 2014
TRUE-FALSE—Conceptual

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

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

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

4.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.

5.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.

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

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

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

9.Most purchase commitments must be recorded as a liability.

10.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.

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

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

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

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

15.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.

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

17.In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss.
18.The inventory turnover ratio is computed by dividing the cost of goods sold by the ending inventory on hand.

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

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

True False Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
1.
T
6.
T
11.
F
16.
F
2.
F
7.
T
12.
T
17.
T
3.
F
8.
F
13.
F
18.
F
4.
T
9.
F
14.
T
19.
T
5.
F
10.
T
15.
F
20.
T

MULTIPLE CHOICE—Conceptual

21.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.

22.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.

23.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

24.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...
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