Ch. 9: Inventories: Additional Valuation Issues

The average days to sell inventory is computed by dividing a. 365 days by the inventory turnover. b. the inventory turnover by 365 days. c. net sales by the inventory turnover. d. 365 days by cost of goods sold.

a. 365 days by the inventory turnover.

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.

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

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.

a. Increases the cost-to-retail ratio.

Which of the following is not an acceptable approach in applying the lower-of-cost-and net realizable value method to inventory? a. Inventory location. b. Categories of inventory items. c. Individual item. d. Total of the inventory.

a. Inventory location.

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.

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

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.

a. Verify the accuracy of the perpetual inventory records.

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.

a. When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal.

Lower-of-cost or net realizable value 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.

a. drop of future utility below its original cost.

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.

a. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.

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.

a. include markups but not markdowns.

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.

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

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.

a. net realizable value.

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.

a. the same quantity of the same goods at a fixed price.

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.

a. this fact must be disclosed.

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.

b. Inventory location.

Which statement is true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for annual statements. b. It may be used to estimate inventories for interim statements. c. It eliminates the need for physical inventories. d. When calculated on selling price, it will always be more than the related percentage based on cost.

b. It may be used to estimate inventories for interim statements.

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

b. Net realizable value

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.

b. The assumption selected may be changed each accounting period.

In 2017, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2018 for $700,000. Before the December 31, 2017 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2017 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.

b. as a current liability.

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.

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

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.

b. if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted.

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.

b. net realizable value less normal profit margin.

The original cost of an inventory item is above the replacement cost and the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. As a result, under the lower-of-cost-or-market method, the inventory item should be reported at the a. net realizable value. b. net realizable value less the normal profit margin. c. replacement cost. d. original cost.

b. net realizable value less the normal profit margin.

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.

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

Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used as the designated market value a. when it is below the net realizable value less the normal profit margin. b. when it is below the net realizable value and above the net realizable value less the normal profit margin. c. when it is above the net realizable value. d. regardless of net realizable value.

b. when it is below the net realizable value and above the net realizable value less the normal profit margin.

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.

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

29. 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. Replacement cost, Net realizable value, or Net realizable value less a normal profit margin. d. Discounted present value

c. Replacement cost, Net realizable value, or Net realizable value less a normal profit margin.

Which of the following is true of normal shortages? a. They do not include theft and shrinkage. b. They are 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.

c. These goods are no longer available for sale.

Why are inventories stated at lower-of-cost and net realizable value? 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.

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

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.

c. conventional retail method.

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.

c. is most conservative if applied to individual items of inventory.

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.

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

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.

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

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.

d. Both the cost-of-goods-sold method and the loss method.

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.

d. Decreases the cost-to-retail ratio.

Which of the following statements regarding the recording of inventory at net realizable value is inaccurate? a. GAAP permits recording of inventory at net realizable value when there is a controlled market with a quoted price applicable to all quantities. b. GAAP permits net realizable value for inventory when there are no significant costs of disposal involved. c. GAAP permits net realizable value in cases where the product is available for immediate delivery. d. GAAP is not similar to IFRS regarding the use of net realizable values for agricultural and mineral products.

d. GAAP is not similar to IFRS regarding the use of net realizable values for agricultural and mineral products.

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.

d. Income of the following year will be understated.

Which of the following accounts is credited in the loss method of writing-down of inventory to its net realizable value? a. Allowance to Reduce Inventory to NRV b. Loss Due to Decline of Inventory to NRV c. Cost of Goods Sold d. Inventory

d. Inventory

Which of the following statements is incorrect regarding the lower-of-cost-or-market rule? 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. It incorporates both gains and losses in value that occur during the course of business.

d. It incorporates both gains and losses in value that occur during the course of business.

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.

d. Only disclose the existence of the purchase commitment.

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.

d. Prevents overstatement of the value of obsolete or damaged inventories.

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.

d. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

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 expedite physical inventory counts. c. It may not be used by auditors. d. There are different versions of the retail inventory method.

d. There are different versions of the retail inventory method.

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

d. To defer income tax liability

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. applying a blanket gross profit rate to merchandise that have widely varying rates of gross profit.

d. applying a blanket gross profit rate to merchandise that have widely varying rates of gross profit.

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.

d. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.

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, sell, and transport

d. selling price less costs to complete, sell, and transport

When the cost-of-goods-sold method is used to record inventory at net realizable value 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.

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

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.

d. to measure the real increase in inventory.