Deck 9: Inventories: Additional Valuation Issues

Question 1

Under International Financial Reporting Standards (IFRS), a company who recorded a loss on a purchase commitment in 2018 cannot record a recovery of that loss in 2019 if prices improve.

Answer 1

False

Question 2

The gross profit method can be used to approximate the dollar amount of inventory on hand.

Answer 2

True

Question 3

Biological assets, such as milking cows, are reported as non-current assets at fair value less costs to sale (net realizable value).

Answer 3

True

Question 4

In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative standalone sales value.

Question 5

If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should recognize a liability and corresponding loss in the period in which the market decline takes place.

Question 6

A basket purchase occurs when a company agrees to buy inventory weeks or months in advance.

Question 7

International Financial Reporting Standards (IFRS) require that a company record an inventory write-down as part of cost of goods sold.

Question 8

In late 2018, Daisy Company entered into a noncancelable purchase contract for which the contract price is now greater than the market price, and Daisy expects that losses will occur when the purchase is executed in early 2019. Under IFRS, Daisy should recognize a liability and corresponding loss in 2018.

Question 9

The lower-of-cost-or-net realizable method is used for inventory despite being less conservative than valuing inventory at net realizable value.

Question 10

Under International Financial Reporting Standards (IFRS), agricultural activity can result in the production of both agricultural produce and biological assets.

Question 11

When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.

Question 12

An inventory of wheat held by a broker-trader is valued at net realizable value.

Question 13

A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.

Question 14

Under International Financial Reporting Standards (IFRS), separate reporting of reversals of inventory write-downs in the period of sale are required.

Question 15

Most purchase commitments must be recorded as a liability.

Question 16

Agricultural produce is harvested from biological assets and is measured at fair value less costs to sell at the point of harvest.

Question 17

Under International Financial Reporting Standards (IFRS), net realizable value is the general rule for valuing commodities held by broker-traders.

Question 18

Application of the lower-of-cost-or-net realizable value rule results in inconsistency because a company may value inventory at cost in one year and at net realizable value in the next year.

Question 19

The unrealized gains and losses related to recording biological assets at their correct valuation are reported as part of other comprehensive income on the statement of comprehensive income.

Question 20

Under International Financial Reporting Standards (IFRS), when companies value inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations, companies price inventory on a total-inventory basis.

Question 21

When inventory declines in value below original (historical) cost what is the maximum amount that the inventory can be valued at?

A) Sales price
B) Net realizable value
C) Historical cost
D) Sales price reduced by estimated costs to sell

Question 22

IFRS requires inventory to be written down below its original cost in some situations, but inventory cannot be written up above its original cost.

Question 23

A disadvantage of the gross profit method is that it uses past percentages in determining the markup.

Question 24

Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

A) reporting of a loss when there is a decrease in the future utility below the original cost.
B) method of determining cost of goods sold.
C) assumption to determine inventory flow.
D) change in inventory value to net realizable value.

Question 25

The inventory turnover is computed by dividing the cost of goods sold by the ending inventory on hand.

Question 26

LCNRV of inventory

A) is always either the net realizable value or its cost.
B) should always be equal to net realizable value.
C) may sometimes be less than net realizable value.
D) should always be equal to net realizable value less costs to complete.

Question 27

In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss.

Question 28

In the retail inventory method, the term markup means a markup on the original cost of an inventory item.

Question 29

When the conventional retail method includes both net markups and net markdowns in the cost-to-retail ratio, it approximates a lower-of-cost-or-net realizable value valuation.

Question 30

Shake Company's inventory experienced a decline in value necessitating a write-down to lower of cost or net realizable value (LCNRV) of €230,000. This amount is material to Shake's income statement and the company follows IFRS. Where should Shake Company report this decline in value according to IFRS?
I. As a loss on the income statement.
II. As a separate component of other comprehensive income on the statement of comprehensive income.
III. As part of cost of goods sold on the income statement.

A) Shake must use I.
B) Shake must use I, II or III.
C) Shake must use I, or III.
D) Shake must use III.

Question 31

Under International Financial Reporting Standards (IFRS), which of the following is true regarding inventory write-downs and/or recovery of a write-down?

A) Recovery of inventory write-downs is prohibited under IFRS.
B) IFRS requires separate reporting of reversals of inventory write-downs.
C) IFRS requires companies to record write-downs in a separate loss account.
D) All of the choices are correct.

Question 32

Under U.S. GAAP, if inventory is written down under lower-of-cost-or-market, it may not be written back up to its original cost in a subsequent period.

Question 33

The average days to sell inventory represents the average number of days' sales for which a company has inventory on hand.

Question 34

In most situations, the gross profit percentage is stated as a percentage of cost.

Question 35

Net realizable value is

A) fair value plus estimated costs to complete and make a sale.
B) selling price.
C) selling price plus estimated costs to complete and make a sale.
D) selling price less estimated costs to complete and make a sale.

Question 36

Which of the following statements is incorrect regarding the lower-of-cost-or-net realizable value (LCNRV)?

A) Net realizable value (NRV) is the selling price less estimated costs to complete and estimated costs to make a sale.
B) In most situations, companies price inventory on a total-inventory basis.
C) One of two methods may be used to record the income effect of valuing inventory at net realizable value.
D) Companies use an allowance account, the "Allowance to Reduce Inventory to Net Realizable Value."

Question 37

Which method(s) may be used to record a loss due to a price decline in the value of inventory?

A) Loss method.
B) Sales method.
C) Cost-of-goods-sold method.
D) Both the loss method and the cost-of-goods-sold method.

Question 38

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

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.

Question 39

Which of the following is not an acceptable method of applying the lower-of-cost-or-net realizable value method to inventory?

A) Inventory location.
B) Groups of inventory items.
C) Individual item.
D) Total of the inventory.

Question 40

Under IFRS, LIFO is permitted for financial reporting purposes if the company's host country permits it for tax purposes.

Question 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.

Question 42

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 LCNRV.
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.

Question 43

An inventory method which is designed to approximate inventory valuation at the lower of cost or net realizable value is

A) last-in, first-out.
B) first-in, first-out.
C) conventional retail method.
D) specific identification.

Question 44

What method yields results that are essentially the same as those of the conventional retail method?

A) FIFO.
B) Lower-of-average-cost-or-net realizable value.
C) Average cost.
D) LIFO.

Question 45

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.

Question 46

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.

Question 47

Under International Financial Reporting Standards (IFRS), agricultural activity results in which of the following types of assets?
I. Agricultural produce
II. Biological assets

A) I only.
B) II only.
C) I and II.
D) Neither I nor II.

Question 48

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 are correct.

Question 49

Agricultural produce is

A) Harvested from biological assets.
B) Valued at the time of harvest at its cost to produce.
C) Valued at each reporting period at its fair value less costs to sell.
D) All of the choices are correct regarding agricultural produce.

Question 50

The inventory turnover 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.

Question 51

Commodity broker-traders

A) Produce or raise commodities such as corn, wheat, or precious metals.
B) Hold their inventory primarily to sell the commodities in the near term and generate a profit from price fluctuations.
C) Value their inventories at the lower-of-cost-or-net realizable value (LCNRV).
D) All of the choices are correct regarding broker-traders.

Question 52

Under International Financial Reporting Standards (IFRS), net realizable value is the general rule for valuing which of the following types of inventory?

A) Commodities held by broker-traders.
B) Computer components held for sale to manufacturers.
C) Inventories priced on an item by-item basis, but not those priced on a total-inventory basis.
D) All of the choices are held at NRV under IFRS.

Question 53

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 LCNRV. 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.

Question 54

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) It may be used when fire or other catastrophe destroys the inventory.

Question 55

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 net realizable value.
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.

Question 56

If a material amount of inventory has been ordered through a formal purchase contract at the statement of financial position 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.

Question 57

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.

Question 58

Situations in which net realizable value is used to value inventory include

A) agricultural inventory.
B) minerals and mineral products.
C) commodities held by broker-traders.
D) All of these are correct.

Question 59

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.

Question 60

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 are correct.

Question 61

Which of the following statements is correct regarding International Financing Reporting Standards (IFRS) and U.S. GAAP with regard to inventory?

A) LIFO (last-in, first-out) is permitted under IFRS but not under U.S. GAAP.
B) When applying lower-of-cost-or-market, U.S. GAPP defines market as net realizable value.
C) IFRS permits valuing inventories at fair value, similar to the accounting for property, plant, and equipment.
D) Under U.S. GAPP, if inventory is written down under lower-of-cost-or-market, it may not be written back up to its original cost in a subsequent period.

Question 62

Replenish, Inc. develops and produces sports drinks for sale throughout the United States and Europe. The International Accounting Standards Board (IASB) prohibits Replenish, Inc. from using which of the following cost flow assumptions for its inventory?

A) LIFO (last-in, first-out).
B) Specific identification.
C) Weighted-average.
D) The IASB allows any of these cost flow assumptions as long as the company uses it consistently.