Flower Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had a cost of $25,000 and a market value of $20,000.Which of the following is/are not true?
A)Cost of Goods Sold is $5,000 larger when the firm records ending inventory at lower of cost or market than when it records the inventory at acquisition cost.
B)The loss of $5,000 increases Cost of Goods Sold by $5,000 and therefore reduces net income by $5,000, compared to the acquisition cost basis.
C)The firm should disclose the existence of large write-downs included in Cost of Goods Sold in the notes so that users of financial statements understand the components of the Cost of Goods Sold account.
D)The firm should disclose the existence of large write-downs included in Cost of Goods Sold in Managements' Discussion and Analysis so that users of financial statements understand the scope of the asset impairment.
E)none of the above

Question

Quizplus · Accepted Answer

Choice D is the best answer because it correctly identifies the appropriate disclosure for the write-downs included in Cost of Goods Sold. Management's Discussion and Analysis is the appropriate section in which to discuss the scope of the asset impairment, as it provides users with a more detailed discussion of the financial results and conditions of the company than would be found in the financial statements alone. Choices A, B, and C are not true because they assume that the company is valuing its ending inventory using the lower of cost or market method, which is not stated in the question.

Flower Company Had Beginning Inventory of $19,000, Purchases Were $100,000