Question 1

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

Accepted Answer

The purpose of the dollar-value LIFO retail method is to eliminate the effects of price changes during a period by expressing inventory in terms of the total retail value at the end of the period and then converting it to the cost level using a cost-to-retail percentage. This allows companies to more accurately track changes in inventory levels and COGS, without being affected by price fluctuations.

Question 2

The Net Realizable Value is considered the ceiling or the upper bound that prevents inventory from being valued at amount higher than what the company could reasonably sell it.

Accepted Answer

This statement is true. The Net Realizable Value is the estimated selling price of inventory less any estimated costs of completion, disposal, and transportation. It is considered the ceiling or upper limit for valuing inventory as it represents the amount that the company could reasonably sell the inventory for. Any value assigned above the Net Realizable Value would be unrealistic and potentially lead to overvaluing inventory.

Question 3

Under the dollar-value LIFO the cost-to-retail ratio includes net markups and net markdowns but includes the beginning inventory.

Accepted Answer

Under the dollar-value LIFO method, the cost-to-retail ratio includes net markups but excludes net markdowns and the beginning inventory.

Question 4

Ending inventory is overstated due to a costing error but purchases are correct. The balance sheet would be correct in the succeeding year because the previous years error would have been counterbalanced.

Accepted Answer

This statement is true because the overstatement of ending inventory in the previous year would have resulted in an understatement of cost of goods sold and overstatement of net income in the previous year. However, when the correct balance is established in the succeeding year, it would result in a decrease in net income for that year, which would counterbalance the previous year's error. As a result, the balance sheet would be correct in the succeeding year.

Question 5

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

Accepted Answer

The statement is incorrect because the periodic inventory system does not use the direct method to record the reduction of inventory to market. Instead, it uses the lower of cost or market method to adjust the inventory balance to its market value. The journal entry to close beginning inventory in this case would simply be a debit to Cost of Goods Sold and a credit to Beginning Inventory.

Question 6

Exhibit 8-1 Rival Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of $45.50. The following is other information concerning this unit: 
$\begin{array}{ll}
\$ 3.80 & \text { Estimated transportation costs for delivery } \
7.50 & \text { Normal profit margin } \
3.60 & \text { Packaging costs prior to delivery }
\end{array}$
- Refer to Exhibit 8-1. The floor constraint of this unit must be

Accepted Answer

The answer of Exhibit 8-1 Rival Inc. uses the lower...

Question 7

The gross profit method is an excellent method to determine the cost of inventory for interim financial statements. The method of estimation must be disclosed.

Accepted Answer

The statement is true. The gross profit method can be used for interim financial statements, but it is important to disclose that it is an estimation method. This is because the gross profit method requires assumptions and estimates for the cost of goods sold, which can affect the accuracy of the inventory cost calculation. Full disclosure helps to prevent any misunderstandings or misinterpretations of the financial statements by the users.

Question 8

One of the main advantages to 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 takes current-period estimates of cost and retail value to determine the ending inventory, while the gross profit method uses past periods' data to estimate the cost of goods sold and gross profit margin. This makes the retail method more accurate in reflecting current inventory levels and costs.

Question 9

A purchase on credit is omitted from the purchase account in error, ending inventory is correct. The effect on the current year financial statements would be net income is understated because purchases are understated also causing cost of goods sold to be understated.

Accepted Answer

If purchases are understated, cost of goods sold is also understated, which would overstate net income, not understate it.

Question 10

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

Accepted Answer

The gross profit method is less sensitive to price changes and may not accurately reflect current period ending inventory, as it relies on historical gross profit margins.

Question 11

The most common approach to implementing the lower of cost or market rule for inventory valuation is to apply it

Accepted Answer

The lower of cost or market rule should be applied separately to each item of inventory rather than to major categories or the total inventory. This is because the cost and market value can vary significantly between different items in inventory, and applying the rule separately ensures that each item is valued at its appropriate cost or market value.

Question 12

GAAP allows a company to report its inventory above cost with justifiable exceptions which include the inability to determine a cost.

Accepted Answer

GAAP's guidelines for valuing inventory include the "lower of cost or market" method, which allows a company to report its inventory above cost in certain circumstances, such as when determining a cost is not possible. This is consistent with the principle of conservatism, which encourages companies to err on the side of caution when reporting financial information.

Question 13

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 are traded on international commodity exchanges, and their prices are quoted in various currencies. This makes them easily marketable and investors can sell them quickly at the prevailing market price, which may be higher than their production costs.

Question 14

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

Accepted Answer

The answer of An auditor would most likely not use...

Question 15

When comparing the lower of cost to market

Accepted Answer

The answer of When comparing the lower of cost to...

Question 16

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

Accepted Answer

This journal entry is used in the allowance method of recording inventory at market using the periodic inventory system. Therefore, the statement is true.

Question 17

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 18

Which application of the lower of cost or market rule will generally result in the lowest valuation for the ending inventory?

Accepted Answer

Applying the lower of cost or market rule to each item of the inventory will generally result in the lowest valuation for the ending inventory. This is because each individual item may have experienced a decline in market value, while other items in the same major category or the total inventory may still be valued at their historical cost.

Question 19

Exhibit 8-1 Rival Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of $45.50. The following is other information concerning this unit: 
$\begin{array}{ll}
\$ 3.80 & \text { Estimated transportation costs for delivery } \
7.50 & \text { Normal profit margin } \
3.60 & \text { Packaging costs prior to delivery }
\end{array}$
- Refer to Exhibit 8-1. The selling price of this unit must be

Accepted Answer