MULTIPLE CHOICE—Conceptual
1. 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.
2. 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.
3. 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
4. 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.
5. 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.
6. 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.
7. 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.
8.
When the direct 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. Which method(s) may be used to record a
loss due to a price decline in the value of inventory?
a. Allowance method.
b. Sales method.
c. Direct method
d. Both a and c.
15. 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.
16. 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.
17. 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
18. 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.
19. 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.
20. 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.
21. 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.
22. 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.
23. In
2010, Orear Manufacturing signed a contract with a supplier to purchase raw
materials in 2011 for $700,000. Before the December 31, 2010 balance sheet
date, the market price for these materials dropped to $510,000. The journal
entry to record this situation at December 31, 2010 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
The gross profit
percentage applicable to the goods in ending inventory is different from the
percentage applicable to the goods sold during the period.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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 estimate inventories for annual statements.
c. It
may not be used by auditors.
d. None
of these.
34. 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.
35. 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.
36. 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.
37. 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 goods purchased.
c. A
record of the total cost and retail value of the goods available for sale.
d. Total
sales for the period.
38. 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
39. 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.
40. What method yields results that are
essentially the same as those of the conventional retail method?
a. FIFO.
b. Lower-of-average-cost-or-market.
c. Average cost.
d. LIFO.
41. What is the effect of net markups on the
cost-retail ratio when using the conventional retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.
42. What is the effect of freight-in on the
cost-retail ratio when using the conventional retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.
43. 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.
44. 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.
45. 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.
46. 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.
47. 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.
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