Intermediate Accounting - Chapter 9
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. - ANS-d. provides a method for inventory control and facilitates
determination of the periodic inventory for certain types of companies.
\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. - ANS-c. conventional retail method.
\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. - ANS-d. Income of the following year will be
understated.
\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. - ANS-d. Disclose the existence of the
purchase commitment.
\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. - ANS-c. Record unrealized losses of
$350,000 and disclose the existence of the purchase commitment.
\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. - ANS-a. is always
the middle value of replacement cost, net realizable value, and net realizable value less a
normal profit margin.
\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. - ANS-a. Verify the accuracy of the
perpetual inventory records.
\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. - ANS-a. this fact must be disclosed.
\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. - ANS-a. net realizable value.
\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. - ANS-b. as a current liability.
\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.
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. - ANS-d. provides a method for inventory control and facilitates
determination of the periodic inventory for certain types of companies.
\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. - ANS-c. conventional retail method.
\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. - ANS-d. Income of the following year will be
understated.
\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. - ANS-d. Disclose the existence of the
purchase commitment.
\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. - ANS-c. Record unrealized losses of
$350,000 and disclose the existence of the purchase commitment.
\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. - ANS-a. is always
the middle value of replacement cost, net realizable value, and net realizable value less a
normal profit margin.
\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. - ANS-a. Verify the accuracy of the
perpetual inventory records.
\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. - ANS-a. this fact must be disclosed.
\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. - ANS-a. net realizable value.
\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. - ANS-b. as a current liability.
\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.
