Chapter 7

A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost
A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost
A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
A company should abandon the historical cost principle when the future utility of the
inventory item falls below its original cost.
1. A company should abandon the historical cost principle when the future utility of the inventory
item falls below its original cost.
TRUE
2. The lower-of-cost-or-net realizable method is used for inventory despite being less
conservative than valuing inventory at net realizable value
FALSE
3. 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 inthe next year.
TRUE
4. International Financial Reporting Standards (IFRS) require that a company record an inventory
write-down as part of cost of goods sold
FALSE
5. 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.
FALSE
6. Biological assets, such as milking cows, are reported as non-current assets at fair valueless costs to
sale (net realizable value).
TRUE
7. 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.
FALSE
8. Under International Financial Reporting Standards (IFRS), net realizable value is the general
rule for valuing commodities held by broker-traders.
TRUE
9. Under International Financial Reporting Standards (IFRS), separate reporting of reversals of
inventory write-downs in the period of sale are required.
TRUE
10. Under International Financial Reporting Standards (IFRS), agricultural activity can result in the
production of both agricultural produce and biological assets.
TRUE
11. An inventory of wheat held by a broker-trader is valued at net realizable value.
TRUE
12. Agricultural produce is harvested from biological assets and is measured at fair value less costs to sell
at the point of harvest.
TRUE
13. In a basket purchase, the cost of the individual assets acquired is determined on the basis of their
relative standalone sales value
TRUE
14. A basket purchase occurs when a company agrees to buy inventory weeks or months in advance
FALSE
15. Most purchase commitments must be recorded as a liability.
FALSE
16. 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 themarket decline takes
place
TRUE
17. When a buyer enters into a formal, noncancelable purchase contract, an asset and aliability are
recorded at the inception of the contract
FALSE
18. 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 recognizea liability and corresponding loss in
2018
TRUE
19. Under International Financial Reporting Standards (IFRS), a company who recorded aloss on a
purchase commitment in 2018 cannot record a recovery of that loss in 2019 if prices improve
FALSE
20. The gross profit method can be used to approximate the dollar amount of inventory on hand
TRUE
21. In most situations, the gross profit percentage is stated as a percentage of cost
FALSE
22. A disadvantage of the gross profit method is that it uses past percentages in determining the markup
TRUE
23. 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
FALSE
24. In the retail inventory method, the term markup means a markup on the original cost of aninventory
item.
FALSE
25. In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts
and reported as a loss
TRUE
26. The inventory turnover is computed by dividing the cost of goods sold by the ending inventory on
hand.
FALSE
27. The average days to sell inventory represents the average number of days’ sales for which a
company has inventory on hand.
TRUE
28. Under IFRS, LIFO is permitted for financial reporting purposes if the company’s host country
permits it for tax purposes.
FALSE
29. 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.
TRUE
30. IFRS requires inventory to be written down below its original cost in some situations, but inventory
cannot be written up above its original cost.
TRUE
31. LCNRV of inventory
International Financial Reporting Standards (IFRS) require that a company record an
32. inventory write-down as part of cost of goods so31. LCNRV of inventorya.
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
32. Lower-of-cost-or-net realizable valuea.
a. gives the lowest valuation if applied to the total inventory.
b. gives the lowest valuation if applied to major groups of inventory.
c. gives the lowest valuation if applied to individual items of inventory.
d. must be applied to major groups for taxes
33. When the cost-of-goods-sold method is used to record inventory at net realizable valuea.
a. there is a direct reduction in the selling price of the product that results in a loss beingrecorded on the
income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debitingloss on
inventory decline.
c. only the portion of the loss attributable to inventory sold during the period is recordedin the financial
statements.
d. the net realizable value figure for ending inventory is substituted for cost and the lossis buried in cost
of goods sold.
34. Lower-of-cost-or-net realizable value as it applies to inventory is best described as thea.
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
35. 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
36. Which of the following is not an acceptable method of applying the lower-of-cost-or-netno trealizable
value method to inventory?
a. Inventory location.
b. Groups of inventory items.
c. Individual item.
d. Total of the inventory
37. Which method(s) may be used to record a loss due to a price decline in the value ofinventory?
a. Loss method.
b. Sales method.
c. Cost-of-goods-sold method.
d. Both the loss method and the cost-of-goods-sold method
38. When inventory declines in value below original (historical) cost what is the maximum amount that
the inventory can be valued at?
a. Sales priceb
b. Net realizable valuec.
c. Historical costd.
d. Sales price reduced by estimated costs to sell
39. 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.
40. 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.
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
41. Which of the following statements is regarding the lower-of-cost-or-net incorrect realizable
value (LCNRV)?
a. Net realizable value (NRV) is the selling price less estimated costs to complete andestimated 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 atnet realizable
value.
d. Companies use an allowance account, the “Allowance to Reduce Inventory to NetRealizable
Value.
42. 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
43. 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-inventorybasis.
 d. All of the choices are held at NRV under IFRS.
44. 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
45. 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.
46. 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 aprofit 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.
47. Situations in which net realizable value is used to value inventory includea.
a. agricultural inventory.
b. minerals and mineral products.
c. commodities held by broker-traders.
d. All of these are correct
48. 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
49. The credit balance that arises when a net loss on a purchase commitment is recognized should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement
50. In 2018, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2019 for
700,000. Before the December 31, 2018 statement of financial position date, the market price for these
materials dropped to 510,000. The journal entry to record this€situation at December 31, 2018 will
result in a credit that should be reported
a. as a valuation account to Inventory on the statement of financial position.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
51. 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.
52. 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?

53. Record unrealized gains of

350,000 and disclose the existence
of the purchase commitment.€
54. b. No impact.
55. c. Record unrealized losses of
350,000 and disclose the existence
of the purchase commitment.€
56. d. Disclose the existence of the
purchase commitment
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.
53. 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
54. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
 b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus
purchases, the result is the amount of inventory on hand.
d. The totanumber of purchases and the total amount of sales remain relatively unchanged
from the comparable previous period.
55. The gross profit method of inventory valuation is invalida 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
56.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
57. 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.
58. An inventory method which is designed to approximate inventory valuation at the lower ofcost or net
realizable value is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.
59. 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 ofhigh-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
60. 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
61. 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 nomarkdown goods have
been sold
62. To produce an inventory valuation which approximates the lower-of-cost-or-net realizable value using the
conventional retail inventory method, the computation of the ratio of costto retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.
63. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentagewhich reflects the
item’s selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period
64. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
65. 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
66. 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.
67. 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
68. 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
69. Which of the following is not a common disclosure for inventories?
a. Inventory composition.
b. Inventory location.
c. Inventory financing arrangements.
d. Inventory costing methods employed
70. Which of the following statements is false regarding an assumption of inventory cost flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period
.c. The FIFO assumption uses the earliest acquired prices to cost the items sold during aperiod.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand atthe end of an accounting
period
71. The average days to sell inventory is computed by dividing
a. 365 days by the inventory turnover.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover.
d. 365 days by cost of goods sold
72. 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.
73. Replenish, Inc. develops and produces sports drinks for sale throughout the United Statesand 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 itconsistently.
74. Which of the following statements is correct regarding International Financing ReportingStandards (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 realizablevalue.
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 maynot be written back up
to its original cost in a subsequent period.
31. The lower-of-cost-or-net
realizable method is used
for inventory despite being
less
32. conservative than valuing
inventory at net realizable value