Question 1

The most common approach to implementing the LCNRV or LCM rule for inventory valuation is to apply it to

Accepted Answer

Applying the LCNRV (Lower of Cost or Net Realizable Value) or LCM (Lower of Cost or Market) rule to each individual item of inventory separately is the most common approach, as it ensures that inventory is not overstated and reflects the most accurate valuation.

Question 2

The gross profit method is an appropriate method for determining the cost of inventory for interim financial statements.

Accepted Answer

The gross profit method is often used to estimate inventory costs for interim financial statements because it provides a quick and reasonable approximation without the need to perform a full physical inventory count.

Question 3

Precious metals can be valued above costs because they are immediately marketable at a quoted market price.

Accepted Answer

Precious metals like gold and silver have intrinsic value and are considered liquid assets because they can be easily sold in the market at prevailing prices, making them valued above their production or acquisition costs.

Question 4

Exhibit 8-1
Rival Inc. uses the lower of cost or market rule in valuing its inventory. Assume the company uses the LIFO method and that one unit has a ceiling constraint of $45.50. The following is other information concerning this unit: 
-Refer to Exhibit 8-1. The selling price of this unit must be

Accepted Answer

Given there's no specific Exhibit 8-1 provided, the correct answer cannot be determined without additional context or information about the unit's cost, desired profit margin, or any other factors that would influence the selling price. However, in a typical scenario, the selling price is calculated based on the cost of goods sold plus a markup for profit. Without the specific details from Exhibit 8-1, a precise explanation for why option C ($52.80) is correct cannot be provided.

Question 5

An auditor may not use the gross profit method to verify the accuracy of the reported cost of inventory.

Accepted Answer

An auditor may use the gross profit method as a means to estimate inventory costs and verify the accuracy of the reported cost of inventory, especially in situations where it is impractical to conduct a physical inventory count. This method is used as an analytical procedure to assess the reasonableness of inventory values.

Question 6

If a company recognizes a loss due to inventory write-down then the inventory value subsequently increases due to a market reversal the following year, GAAP does not permit the loss to be recovered.

Accepted Answer

Under GAAP, once an inventory write-down is recognized, it cannot be reversed if the market value of the inventory increases in subsequent periods.

Question 7

The purpose of dollar-value LIFO retail method is to eliminate the effects of price changes during a period.

Accepted Answer

The dollar-value LIFO (Last In, First Out) retail method is designed to adjust for changes in the price levels of inventory items, thereby eliminating the effects of inflation or deflation during the accounting period.

Question 8

If a purchase on credit is omitted from the purchase account in error and ending inventory is correctly determined, net income for the period would be understated.

Accepted Answer

If a purchase on credit is omitted, expenses are understated, leading to an overstatement of net income, not an understatement.

Question 9

Under the dollar-value LIFO the cost-to-retail ratio includes net markups and net markdowns from both the current period and beginning inventory. during the current period.

Accepted Answer

Under the dollar-value LIFO method, the cost-to-retail ratio includes net markups but excludes net markdowns. Markdowns are not considered in the calculation because they do not reflect the current cost of purchasing inventory.

Question 10

An advantage of the retail inventory method over the gross profit is the retail method uses current-period estimates whereas the gross profit used past periods.

Accepted Answer

The retail inventory method calculates inventory based on the current selling price of goods, thus reflecting current-period estimates, whereas the gross profit method often relies on historical gross profit margins to estimate inventory, using data from past periods.

Question 11

When applying lower of cost or market under the LIFO or retail inventory method, market value should not be less than

Accepted Answer

Under the lower of cost or market rule, the market value should not be less than the net realizable value less an allowance for a normal profit margin. This ensures that inventory is not understated.

Question 12

A company using the periodic inventory system to record the reduction of inventory to NRV would record the following journal entry to record inventory at market using the allowance method:

Accepted Answer

The answer of A company using the periodic inventory system...

Question 13

The lower-of-cost-or-market rule must be applied to each individual inventory item but not to groups of items

Accepted Answer

The lower-of-cost-or-market rule can be applied to individual items, categories of items, or the entire inventory, depending on the method chosen by the company for best matching their inventory cost with market realities.

Question 14

Which application of the LCNRV or LCM rule will generally result in the lowest valuation for the ending inventory?

Accepted Answer

Applying the Lower of Cost or Net Realizable Value (LCNRV) or Lower of Cost or Market (LCM) rule to each item of the inventory typically results in the lowest valuation for the ending inventory. This is because any reduction in value of individual items due to market conditions or damage is directly accounted for, without being offset by the values of other items or categories.

Question 15

Under the LIFO or retail inventory method the Net Realizable Value is considered the ceiling that prevents inventory from being valued at amount higher than what the company could reasonably sell it.

Accepted Answer

Under the LIFO (Last In, First Out) or retail inventory method, the Net Realizable Value acts as a ceiling to prevent inventory from being valued higher than the amount for which it could reasonably be sold, ensuring that inventory is not overstated on the financial statements.

Question 16

When applying lower of cost or net realizable value under the FIFO, average cost, or specific identification method, market value

Accepted Answer

Market value, in the context of lower of cost or net realizable value accounting, is defined as the net realizable value. This reflects the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Question 17

The gross profit method is more sensitive to price changes than the FIFO method and produces a more accurate estimate of current period ending inventory.

Accepted Answer

The FIFO (First-In, First-Out) method is more sensitive to price changes because it assumes that the oldest inventory is sold first, thus the ending inventory is based on the most recent prices. The gross profit method estimates inventory based on a gross profit margin, which may not accurately reflect current market prices.

Question 18

Reporting inventory at the lower of cost or market provides a representationally faithful value of inventory; therefore, the application of the lower of cost or market rule is consistent with the materiality principle.

Accepted Answer

The lower of cost or market rule is consistent with the conservatism principle, not the materiality principle. The conservatism principle guides accountants to choose the less optimistic estimate when faced with uncertainty, to avoid overstating assets and income. The materiality principle, on the other hand, concerns the significance of financial information's impact on decision-making, allowing entities to disregard trivial amounts that would not influence the decisions of users of financial statements.

Question 19

If ending inventory is overstated for the current period due to a costing error but purchases are correct, the balance sheet at the end of the succeeding year would be correctly stated.

Accepted Answer

The error in ending inventory will self-correct in the succeeding year as the overstated ending inventory becomes the beginning inventory for the next period, affecting cost of goods sold and net income, but the balance sheet will be correct by the end of the succeeding year.

Question 20

A company using the periodic inventory system to record the reduction of inventory to NRV value would record the following journal entry to close beginning inventory using the direct method:

Accepted Answer