ACCT Ch. 9 MC

Mosby Industries uses IFRS and has the following inventory values: Inventory cost (on December 31, 2016) = $2,500Inventory sales value (on December 31, 2016) = $2,360Inventory net realizable value (on December 31, 2016) = $2,310Inventory cost (on June 30, 2017) = $2,500Inventory sales value (on June 30, 2017) = $2,610Inventory net realizable value (on June 30, 2017) = $2,590 Under IFRS, what is the inventory carrying value on June 30, 2017? $2,610 $2,500 $2,320 $2,590

$2,500 IFRS defines "market" as Net Realizable Value. IFRS applies the lower-of-cost-and-net-realizable method when valuing inventory at year-end. Since the cost of $2,500 is lower than net realizable value of $2,590, the inventory is reported at cost.

IFRS permits the use of the LIFO cost flow assumption and specific identification where appropriate. True False

False IFRS permits the use of specific identification where appropriate but does not allow use of the LIFO cost flow assumption.

Net realizable value is defined as estimated selling price less purchase price. True False

False Net realizable value is equal to estimated selling price less cost of completion and disposal.

Colicchio Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of knife X001, and 3,000 units of knife X002. X001 normally sells for $20 per unit, and X002 for $10 per unit. If Colicchio sells 1,000 units of X002, what amount of gross profit should it recognize? $3,330. $1,000. $6,670. $10,000.

$3,330 The sales value of X001 is (3,000 X $20 each) $60,000 and the X002 units are (3,000 X $10 each) $30,000 totaling $90,000. Thus, the cost allocated to X002 based on relative sales values is ($30,000/$90,000) 33.33% of the $60,000 or $20,000. The cost per unit of X002 is ($20,000/3,000) $6.67 making 1,000 units worth $6,670 (cost of goods sold). Revenues of $10,000 ($10 x 1,000 units sold) less cost of goods sold of $6,670 results in a gross profit of $3,330.

Viewpoint Company's October 31 inventory was destroyed by fire. The company's beginning inventory was $500,000, and purchases for January through October were $1,200,000. Sales for the same period were $1,800,000. The company's normal gross profit percentage is 30% of sales. Using the gross profit method, the October 31 inventory is estimated to be $40,000. $300,000. $540,000. $440,000.

$440,000 (Beginning Inventory, $500,000 + Purchases, $1,200,000) = Cost of goods available for sale, $1,700,000- Estimated cost of goods sold, [Sales, $1,800,000 - (Sales, $1,800,000 X Gross profit percentage, .30)] = Estimated ending inventory, $440,000.

The Company uses lower-of-cost-or-market approach. The replacement cost of an inventory item is $75. Net realizable value is $82.50. Net realizable value less a normal profit margin is $69. The cost of the item is $76.50. The inventory item would be valued at: $75. $69. $82.50. $76.50.

$75

The replacement cost of an inventory item is $90. Net realizable value is $97.50. Net realizable value less a normal profit margin is $88.50. The cost of the item is $93. The designated market value used in applying Lower-of-Cost-or-Market is $93. $88.50. $97.50. $90.

$90

High Country Corporation acquired two inventory items at a lump-sum cost of $80,000. The acquisition included 6,000 units of product A, and 14,000 units of product B. Product A normally sells for $12 per unit, and product B for $4 per unit. If High Country sells 2,000 units of A, what amount of gross profit should it recognize? $4,750. $2,250. $750. $9,000.

$9000 The sales value of A is (6,000 units X $12 each) $72,000 and the B is (14,000 units X $4 each) $56,000 totaling $128,000. Thus, the cost allocated to A based on relative sales values is ($72,000 / $128,000) 56.25% of the $80,000 or $45,000. The cost per unit of A is ($45,000/6,000) $7.50 making 2,000 units worth $15,000 (Cost of goods sold). Revenues of $24,000 less Cost of goods sold of $15,000 results in a gross profit of $9,000.

When net realizable value is lower than cost, and the loss method applying the lower-of-cost-and-net-realizable approach of recording the write-down is used, what account is credited? A loss account. Cost of Goods Sold. Allowance to Reduce Inventory to NRV. Inventory.

Allowance to Reduce Inventory to NRV.

In the lower of cost or market rule, net realizable value is referred to as the: ceiling. current market. wall. floor.

Ceiling

When the cost-of-goods-sold method is used adjust cost to "net realizable value" in the lower-of-cost-and-net-realizable-value (LCNRV) approach, what account is debited? Cost of Goods Sold. Loss Due to Market Decline of Inventory to NRV. Inventory. Allowance to Reduce Inventory to Market Value.

Cost of Goods Sold

The method of recording inventory at net realizable cost that substitutes the net realizable cost for the historical cost and reports the loss as a part of cost of goods sold is the: loss method. replacement method. gross profit method. cost of goods sold method.

Cost of goods sold The method that substitutes the net realizable cost for historical cost and reports the loss as a part of the cost of goods sold is the cost of goods sold method.

IFRS uses a floor to determine market for inventory valuation. True False

False

The conventional retail inventory method includes both net markups and net markdowns to calculate the cost-to-retail ratio. True False

False

The cost-of-goods-sold method of recording inventory at net realizable value under the lower-of-cost and net-realizable value (LCNRV) rule establishes a separate contra asset account and a loss account to record the write-off. True False

False The loss method, not the cost-of-goods-sold method, uses a separate contra account and loss account to record the write-off.

The gross profit method of estimating inventory is acceptable for both interim and annual financial reports. True False

False The gross profit method is not acceptable for annual financial reports. However, it can be used for interim periods.

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 replacement cost will be more than their net realizable value. future utility will be less than their cost. cost will be less than their replacement cost. selling price will be less than their replacement cost.

Future utility will be less than their cost

Which of the following statements about IFRS for inventory accounting is not true? IFRS prohibits the use of LIFO. IFRS defines market value as replacement cost subject to the constraints of a ceiling and floor. IFRS allows reversals of write-downs up to the amount of the previous write-down. IFRS provide less detailed guidelines than GAAP for inventory accounting.

IFRS defines market value as replacement cost subject to the constraints of a ceiling and floor. The statement that IFRS defines market value as replacement cost subject to the constraints of a ceiling and floor is not true. IFRS defines market value as net realizable value without regard to the ceiling and floor constraints required by GAAP.

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 answer choices are correct.

It may be used to estimate inventories for annual statements.

A decrease in the original sales price of an item is called a: markdown. markup. markdown cancellation. markup cancellation.

Markdown

Which of the following statements is true regarding IFRS and inventories? IFRS permits the option of valuing inventories at fair value. GAAP and IFRS permit the use of the same inventory cost flow assumptions. With respect to inventories, IFRS defines market as net realizable value. IFRS allows inventory to be written up above its original cost.

With respect to inventories, IFRS defines market as net realizable value.

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 or products are available for immediate delivery. all of these answer choices are correct.

all of these answer choices are correct.

The lower limit (floor) for inventory valuation is defined as the selling price less: a normal profit margin. estimated costs of completion and disposal (net realizable value) less a normal profit margin. the net realizable value. estimated costs of completion and disposal.

estimated costs of completion and disposal (net realizable value) less a normal profit margin.

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 predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. 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.

estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

The percentage markup on cost can be computed by dividing gross profit on selling price by 100%: plus gross profit on selling price. minus markup on cost. minus gross profit on selling price. plus markup on cost.

minus gross profit on selling price.

In applying the lower of cost or market rule, the floor is defined as: current replacement cost. net realizable value. historical cost. net realizable value less a normal profit margin.

net realizable value less a normal profit margin.

Inventories of certain minerals and agricultural products are valued at: lower of cost or market. cost. replacement cost. net realizable value.

net realizable value.

The relative sales value method is used throughout the: meat-packing industry. agricultural products industry. mining industry. petroleum industry.

petroleum industry

The term market in the phrase "lower of cost or market" generally means the: replacement cost. floor. net realizable value. ceiling.

replacement cost

In applying Lower-of-Cost-or-Market, the designated market value is the lower of net realizable value or replacement cost. the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin. net realizable value less a normal profit margin. the higher of replacement cost or net realizable value less a normal profit margin.

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

Which of the following is not permitted under IFRS? the use of the LIFO cost flow assumption. lower-of-cost-or-market valuation. reversals of lower-of-cost-or-market write-downs. reporting of any type of inventory at net realizable value.

the use of the LIFO cost flow assumption.

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, disclosure is required only if prices have since risen substantially. an appropriation of retained earnings is necessary. disclosure is required only if prices have declined since the date of the order. this fact should be disclosed.

this fact should be disclosed.

An estimated loss on purchase commitments is reported: as an allowance account to be offset against a related asset. under Other Expenses and Losses. as a valuation account. as a deduction from purchases.

under Other Expenses and Losses.