Chapter 9: Inventories: Additional Valuation Issues - True or False

The retail inventory method is not useful for interim reports.

FALSE -- Because a fairly quick and reliable measure of inventory value is usually needed, the retail inventory method is particularly useful for any type of interim report.

The gross margin expressed as a percentage of cost is normally less than the gross margin expressed as a percentage of sales.

FALSE -- Because selling price is greater than cost and the gross margin amount is the same for both, gross margin percentage based on selling price will always be less than the related percentage based on cost.

If the contracted price under a purchase commitment is less than market and it is expected that gains will occur when the purchase is effected, gains should be recognized in the period during which such increases in market prices take place.

FALSE -- If the contracted price is in excess of market and it is expected that LOSSES will occur when the purchase is effected, LOSSES (and not gains) should be recognized in the period during which such declines in market prices take place.

The account "Unrealized Holding Gain or Loss (Purchase Commitments) should be included in the stockholders' equity section of the balance sheet.

FALSE -- If the contracted price of a purchase commitment is in excess of market price and it is expected that losses will occur when the purchase is effected, an Unrealized Holding Gain or Loss (Purchase Commitments) should be recognized and an Estimated Liability on Purchase Commitments (NOT Shareholders' Equity) should be credited. The loss is reported on the Income Statement under other expenses and losses, and the liability is reported in the liability section on the balance sheet.

Net Realizable Value is the estimated selling price in the normal course of business less the normal profit margin.

FALSE -- Net Realizable Value is defined as selling price less the estimated cost of completion, disposal and transportation. When the normal profit margin is subtracted from NRV, the resulting amount is referred to as Net Realizable Value Less a Normal Profit Margin.

The application of the LCNRV to the inventory as a whole would yield a more conservative inventory value than would application of the rule to each individual item.

FALSE -- The LCNRV rule may be applied directly to each item or to the total of the inventory. When the LCNRV rule is applied to the inventory as a whole, increases in the market prices of some items offset decreases in the market prices in other items to some extent. Thus, the application of the LCNRV rule to individual items gives the most conservative valuation for balance sheet purposes.

The conventional retail method includes net markdowns but excludes net markups in the computation of the cost to retail percentage.

FALSE -- The conventional retail inventory method is designed to approximate the lower of average cost or market. Thus, the cost percentage computation includes markups but not markdowns. When a company has an additional markup, it normally indicates that the market value of that item has increased. If the company has a net markdown, it means that a decline in the utility of that item has occurred. Therefore, if the attempt is to approximate lower of cost or market, markdowns are considered a current loss and are not involved in the calculation of the cost to retail ratio.

The allocation of a lump sum cost among the individual units on the basis of relative sales value assumes that each individual unit should show the me dollar amount of profit.

FALSE -- When the relative sales value method is used, it is used because the items being valued vary in terms of such characteristics as shape, size, attractiveness, and so on. Because of these types of differences, the amount of gross profit generated by each item will be different.

As used in the lower of cost or market rule, market should not exceed net realizable value.

TRUE

Gross margin is the excess of selling price over cost.

TRUE

Instead of crediting the Inventory account for market adjustments, companies generally use an allowance account.

TRUE

It is acceptable practice to write down inventory to market when market is lower than cost, but it is NOT acceptable to write up inventory to market when market is higher than cost.

TRUE

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

TRUE

No asset or liability is recognized at the inception of a purchase commitment because the contract is "executory" in nature.

TRUE

Regardless of which version is used, the retail inventory method is sanctioned by the IFRS

TRUE

The basis upon which inventory amounts are stated (lower of cost or market) and the method used in determining cost (LIFO, FIFO, average cost, etc.,) should be disclosed in the notes of the financial statements.

TRUE

The conventional retail inventory method is designed to approximate the lower of average cost or market

TRUE

The inclusion of both net markups and net markdowns in the computation of the cost to retail percentage yields an inventory valuation that approximates cost.

TRUE

The recognition of inventories at selling price less cost of disposal means that income is usually recognized before the goods are transferred to an outside party.

TRUE

The retail method assumes that the mix of the ending inventory is the same as the mix of the total goods available for sale.

TRUE

The use of the gross profit method for interim reports does not preclude the need for a physical inventory to be taken at least annually.

TRUE

Under the Lower of Cost or Market Rule, the income statement may show a larger net income in future periods than would be justified if the inventory were carried forward at cost.

TRUE

Under the lower of cost or market rule, an item of inventory should not be valued at an amount in excess of net realizable value.

TRUE

Under the lower of cost or market rule, the income statement may show a larger net income in future periods than would be justified if the inventory were carried forward at cost.

TRUE

When inventory is written down to market, this new basis is considered to be the cost basis for future periods.

TRUE