ACCT 3001 Chapter 9 - Conceptual

$12.

A dudad has an original cost of $15 and a replacement cost of $12. The cost of completion and disposal is $2. If the dudad has a net realizable value of $16 and a normal profit margin of $5, its inventory value should be: A. $15. B. $12. C. $16. D. $14.

Income of the following year will be understated.

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.

Disclose the existence of the purchase commitment.

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. Disclose the existence of the purchase commitment.

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

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. Disclose the existence of the purchase commitment.

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

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.

$15.46

Given the acquisition cost of product ALPHA is $17, the net realizable value for product ALPHA is $16.70, the normal profit for product ALPHA is $1.24, and the market value (replacement cost) for product ALPHA is $14.72, what is the proper per unit inventory price for product ALPHA? a. $17.00. b. $15.46 c. $14.72. d.$16.70.

$38.49.

Given the acquisition cost of product Dominoe is $43.31, the net realizable value for product Dominoe is $38.49, the normal profit for product Dominoe is $4.32, and the market value (replacement cost) for product Dominoe is $40.68, what is the proper per unit inventory price for product Dominoe? a. $40.68. b. $34.18. c. $38.49. d. $43.31

$58.

Given the acquisition cost of product Z is $64, the net realizable value for product Z is $58, the normal profit for product Z is $5, and the market value (replacement cost) for product Z is $60, what is the proper per unit inventory price for product Z? a. $64. b. $60. c. $53. d. $58.

$40.

Given the historical cost of product Dominoe is $43, the selling price of product Dominoe is $60, costs to sell product Dominoe are $11, the replacement cost for product Dominoe is $40, and the normal profit margin is 20% of sales price, what is the amount that should be used to value the inventory under the lower-of-cost-or-market method? a. $43. b. $37. c. $40. d. $49.

$43.

Given the historical cost of product Dominoe is $43, the selling price of product Dominoe is $60, costs to sell product Dominoe are $11, the replacement cost for product Dominoe is $40, and the normal profit margin is 20% of sales price, what is the cost amount that should be used in the lower-of-cost-or-market comparison? a. $49. b. $40. c. $37. d. $43.

$80.

Given the historical cost of product Z is $80, the selling price of product Z is $95, costs to sell product Z are $11, the replacement cost for product Z is $83, and the normal profit margin is 40% of sales price, what is the amount that should be used to value the inventory under the lower-of-cost-or-market method? a. $46. b. $80. c. $84. d. $83.

$84.

Given the historical cost of product Z is $80, the selling price of product Z is $95, costs to sell product Z are $11, the replacement cost for product Z is $83, and the normal profit margin is 40% of sales price, what is the market value that should be used in the lower-of-cost-or-market comparison? a. $80. b. $84. c. $83. d. $46.

Verify the accuracy of the perpetual inventory records.

How is the gross profit method used as it relates to inventory valuation? a. Verify the accuracy of the perpetual inventory records. b. Verity the accuracy of the physical inventory. c. To estimate cost of goods sold. d. To provide an inventory value of LIFO inventories.

this fact must be disclosed.

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.

net realizable value less a normal profit margin. ("Designated market" is middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. Therefore, in this question where replacement cost is below cost and less than the floor, net realizable value less a normal profit margin is the amount that should be used for purposes of inventory valuation.)

If a unit of inventory has declined in value below original cost, and the replacement cost is less than the net realizable value less a normal profit margin, the amount to be used for purposes of inventory valuation under LCM is: A. original cost. B. replacement cost. C. net realizable value. D. net realizable value less a normal profit margin.

net realizable value.

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.

as a current liability.

In 2012, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2013 for $700,000. Before the December 31, 2012 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2012 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.

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

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.

all of these.

Inventory may be recorded at net realizable value if a. there is a controlled market with a quoted price. b. there are no significant costs of disposal. c. the inventory consists of precious metals or agricultural products. d. all of these.

A will always be equal to or less than B. (Increases in the market prices of some inventory items tend to offset decreases in other inventory items when the lower-of-cost-or-market (LCM) rule is applied to the inventory as a whole. Thus, the inventory valuation that results from applying the LCM method to individual items in inventory (alternative A) will always be equal to or less than the inventory valuation that results from applying the LCM rule to the inventory as a whole (alternative B).)

Let A equal the reported inventory value if the lower-of-cost-or-market rule is applied to individual items of inventory; B equals the reported inventory value if the lower of cost or market rule is applied to the inventory as a whole. Which of the following best describes the relationship between A and B? A. A will always be equal to B. B. A will always be equal to or less than B. C. A will always be equal to or greater than B. D. A can never be equal to B.

$40.

Lexington Company sells product 1976NLC for $50 per unit. The cost of one unit of 1976NLC is $45, and the replacement cost is $43. The estimated cost to dispose of a unit is $10, and the normal profit is 40%. At what amount per unit should product 1976NLC be reported, applying lower-of-cost-or-market? a. $20. b. $40. c. $43. d. $45.

is most conservative if applied to individual items of inventory.

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.

drop of future utility below its original cost.

Lower-of-cost-or-market 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.

$350,000.

Mortenson Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is $150,000. The total selling price is $360,000, and estimated costs of disposal are $10,000. At what amount should the inventory of 5,000 pounds be reported in the balance sheet? a. $140,000. b. $150,000. c. $350,000. d. $360,000.

$24. (30-6=24; 24-(30x.4)=12; cost =27)

Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of 2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a unit is $6, and the normal profit is 40%. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market? a. $12. b. $24. c. $26. d. $27.

$32. (40-8=32; 32-(40x.4)=16; cost =36)

Muckenthaler Company sells product 2005WSC for $40 per unit. The cost of one unit of 2005WSC is $36, and the replacement cost is $35. The estimated cost to dispose of a unit is $8, and the normal profit is 40%. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market? a. $16. b. $32. c. $35. d. $36.

selling price less costs to complete and sell.

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 and sell.

there is a controlled market with a quoted price applicable to all quantities. (With no significant disposal costs and a controlled market, net realizable value is an appropriate inventory valuation approach. For example, inventories of certain minerals are ordinarily reported at selling prices because there is often a controlled market without significant costs of disposal. A similar treatment is given to agricultural products that are immediately marketable at fixed prices. Also, this method proves to be valuable when cost figures are too difficult to obtain.)

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.

$234.

Robust Inc. has the following information related to an item in its ending inventory. Acer Top has a cost of $251, a replacement cost of $234, a net realizable value of $266, and a normal profit margin of $34. What is the final lower-of-cost-or-market inventory value for Acer Top? a. $232. b. $251. c. $234. d. $266.

$447.

Robust Inc. has the following information related to an item in its ending inventory. Packit (Product # 874) has a cost of $524, a replacement cost of $402, a net realizable value of $468, and a normal profit margin of $21. What is the final lower-of-cost-or-market inventory value for Packit? a. $447. b. $524. c. $402. d. $468.

$3,100.

Robust Inc. has the following information related to an item in its ending inventory. Product 66 has a cost of $3,250, a replacement cost of $3,100, a net realizable value of $3,200, and a normal profit margin of $200. What is the final lower-of-cost-or-market inventory value for product 66? a. $3,200. b. $3,100. c. $3,250. d. $3,100.

$485,000.

Rodriguez Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is $210,000. The total selling price is $490,000, and estimated costs of disposal are $5,000. At what amount should the inventory of 5,000 pounds be reported in the balance sheet? a. $205,000. b. $210,000. c. $485,000. d. $490,000.

365 days by the inventory turnover ratio.

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

presented as a current liability.

The credit balance that arises when a net loss on a purchase commitment is recognized should be a. presented as a current liability. b. subtracted from ending inventory. c. presented as an appropriation of retained earnings. d. presented in the income statement.

can distort income data. (The fact that it is accepted practice to recognize decreases in the value of inventory prior to the point of sale, but not increases can distort income data. The tradeoff between relevance and representational faithfulness is best illustrated by the differences between the cost-of-goods-sold and the loss method of recognizing inventory write downs.)

The fact that it is accepted practice to recognize decreases in the value of inventory prior to the point of sale, but not increases, A. illustrates the materiality concept. B. can distort income data. C. emphasizes relevance over representational faithfulness. D. emphasizes representational faithfulness over relevance.

net realizable value less normal profit margin.

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.

none of these. (The gross profit percentage applicable to the goods in ending inventory is different from the percentage applicable to the goods sold during the period.)

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. none of these.

average inventory.

The inventory turnover ratio is computed by dividing the cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. number of days in the year.

future utility will be less than their cost. (Inventories are recorded at their cost. However, if inventory declines in value below its original cost, a major departure from the historical cost principle occurs. Whatever the reason for a decline-damage, physical deterioration, obsolescence, changes in price levels, or other causes-a company should write down the inventory to net realizable value to report this loss. A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost.

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.

less than net realizable value less a normal profit margin. (If replacement cost is less than net realizable value less a normal profit margin, then replacement cost is below the lower limit for market value. When this occurs, market is defined as the lower limit (NRV minus a normal profit margin).)

Under the lower-of-cost-or-market-rule, designated market will be replacement cost except when replacement cost is: A. higher than cost. B. less than net realizable value. C. less than net realizable value less a normal profit margin. D. less than cost.

Prevents overstatement of the value of obsolete or damaged inventories.

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.

Net realizable value

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

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

When the cost-of-goods-sold method is used to record inventory at market 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.

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

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.

The middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. ("Designated market" as used in the lower-of-cost-or-market method is the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.)

When using the lower-of-cost-or-market method, what is the meaning of "designated market"? A. Discounted present value. B. Net realizable value. C. The middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. D. Net realizable value less a normal profit margin.

Current replacement cost

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

Both a and c.

Which method(s) may be used to record a loss due to a price decline in the value of inventory? a. Cost-of-goods-sold. b. Sales method. c. Loss method d. Both a and c.

The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period. (The gross profit method assumes a constant gross profit percentage, but makes no assumptions about the total amount of sales or purchases. Alternatively (A), (B), and (C) are basic assumptions of the gross profit method.)

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.

Inventory location.

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.

Inventory location.

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

All of these.

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.

The loss in utility (revenue-producing ability) that results from a decline in the market value of inventory should be charged against revenues in the period in which it occurs. (The general rule is that the historical cost principle is abandoned when the future utility (revenue producing ability) of the inventory is no longer as great as its original cost. It is no easier to keep track of market value than it is to keep track of cost, and cost does not lose its relevance if market value remains in excess. The balance sheet valuation is not the most significant reason for lower-of-cost-or-net realizable.)

Which of the following represents the best justification for the departure from the historical cost principle that results when lower-of-cost-or-net realizable is used? A. It is easier to keep track of market value than it is to keep track of cost as market value is available from any supplier. B. Cost loses its relevance for the determination of cost of goods sold if the cost of inventory has been incurred in an earlier accounting period. C. The balance sheet valuation of inventory is the most important consideration in the preparation of financial statements. D. The loss in utility (revenue-producing ability) that results from a decline in the market value of inventory should be charged against revenues in the period in which it occurs.

The assumption selected may be changed each accounting period.

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.

It may be used to estimate inventories for annual statements.

Which statement is not true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for interim statements. b. It may be used to estimate inventories for annual statements. c. It may be used by auditors. d. None of these.

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

Why are inventories stated at lower-of-cost-or-market? a. To report a loss when there is a decrease in the future utility. b. To be conservative. 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.

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

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.