Chapter 9 Flashcards


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1

Net realizable value is defined as estimated selling price less purchase price.
A. True
B. False

B. False

2

A decline in the replacement cost of an item usually precipitates a decline in the item's selling price.
A. True
B. False

A. True

3

Designated market value is the lower of replacement cost or net realizable value less a normal profit margin.
A. True
B. False

B. False

4

The departure from cost when the lower of cost or market rule is applied is justified because the loss of utility is charged against revenues in the period in which the loss occurs.
A. True
B. False

A. True

5

The direct method of recording inventory at market under the lower of cost or market rule establishes a separate contra asset account and a loss account to record the write-off.
A. True
B. False

B. False

6

In applying the lower of cost or market rule, market may be represented by:
A.
current replacement cost.
B.
net realizable value.
C.
net realizable value less a normal profit margin.
D.
Any of these may be correct.

D.
Any of these may be correct.

7

In applying the lower of cost or market rule, the floor is defined as:
A.
current replacement cost.
B.
historical cost.
C.
net realizable value.
D.
net realizable value less a normal profit margin.

D.
net realizable value less a normal profit margin.

8

In the lower of cost or market rule, net realizable value is referred to as the:
A.
current market.
B.
ceiling.
C.
floor.
D.
wall.

B.
ceiling.

9

When the direct method is used adjust cost to “market”, what account is debited?
A.
Inventories.
B.
Cost of Goods Sold.
C.
Loss Due to Market Decline of Inventories.
D.
Allowance to Reduce Inventory to Market Value.

B.
Cost of Goods Sold.

10

When market is lower than cost, and the indirect method of recording the write-down is used, what account is credited?
A.
A loss account.
B.
Merchandise Inventory.
C.
Allowance to Reduce Inventory to Market.
D.
Cost of Goods Sold.

C.
Allowance to Reduce Inventory to Market.

11

The term market in the phrase "lower of cost or market" generally means the:
A.
ceiling.
B.
floor.
C.
net realizable value.
D.
replacement cost.

D.
replacement cost.

12

The lower limit (floor) for inventory valuation is defined as the selling price less:
A.
a normal profit margin.
B.
estimated costs of completion and disposal.
C.
estimated costs of completion and disposal and a normal profit margin.
D.
the net realizable value.

C.
estimated costs of completion and disposal and a normal profit margin.

13

The replacement cost of an inventory item is $50. Net realizable value is $55. Net realizable value less a normal profit margin is $46. The cost of the item is $51. The inventory item would be valued at:
A.
$46.
B.
$50.
C.
$51.
D.
$55.

B.
$50.

14

The replacement cost of an inventory item is $60. Net realizable value is $65. Net realizable value less a normal profit margin is $59. The cost of the item is $62. The designated market value used in applying Lower-of-Cost-or-Market is
A.
$59.
B.
$60.
C.
$62.
D.
$65.

B.
$60.

15

The method of recording inventory at market that substitutes the market value for cost and reports the loss as a part of cost of goods sold is the:
A.
allowance method.
B.
direct method.
C.
indirect method.
D.
replacement method.

B.
direct method.

16

The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their
A.
selling price will be less than their replacement cost.
B.
replacement cost will be more than their net realizable value.
C.
cost will be less than their replacement cost.
D.
future utility will be less than their cost.

D.
future utility will be less than their cost.

17

In applying Lower-of-Cost-or-Market, the designated market value is
A.
the higher of replacement cost or net realizable value less a normal profit margin.
B.
net realizable value less a normal profit margin.
C.
the lower of net realizable value or replacement cost.
D.
the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin.

D.
the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin

18

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.
B.
estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
C.
estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin.
D.
estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.

B.
estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

19

Inventory may be recorded at net realizable value if
A.
there is a controlled market with a quoted price.
B.
there are no significant costs of disposal.
C.
the inventory consists of precious metals or agricultural products.
D.
all of these.

D.
all of these

20

Inventories of certain minerals and agricultural products are valued at:
A.
cost.
B.
lower of cost or market.
C.
net realizable value.
D.
replacement cost.

C.
net realizable value.

21

A basket purchase is a group of varying units bought in a single lump-sum purchase.
A. True
B. False

A. True

22

When is the relative sales value method used?
A.
When purchasing damaged inventory.
B.
When purchasing a group of like items.
C.
When purchasing a group of varying units.
D.
When purchasing a commodity.

C.
When purchasing a group of varying units.

23

Bronte Corporation acquired two inventory items at a lump-sum cost of $160,000. The acquisition included 6,000 units of product A, and 14,000 units of product B. Product A normally sells for $24 per unit, and product B for $8 per unit. If Bronte sells 2,000 units of A, what amount of gross profit should it recognize?
A.
$1,500.
B.
$4,500.
C.
$18,000.
D.
$9,500.

he sales value of A is (6,000 units X $24 each) $144,000 and B is (14,000 units X $8 each) $112,000 totaling $256,000. Thus, the cost allocated to A based on relative sales values is ($144,000 / $256,000) 56.25% of the $160,000 or $90,000. The cost per unit of A is ($90,000/6,000) $15.00 making 2,000 units worth $30,000. Revenues of $48,000 less $30,000 results in a gross profit of $18,000.

24

Crown Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of product X001, and 3,000 units of product X002. X001 normally sells for $20 per unit, and X002 for $10 per unit. If Crown sells 1,000 units of X002, what amount of gross profit should it recognize?
A.
$1,000.
B.
$3,330.
C.
$6,670.
D.
$10,000.

The sales value of X001 is (3,000 X $20 each) $60,000 and the X002 units are (3,000 X $10 each) $30,000 totaling $90,000. Thus, the cost allocated to X002 based on relative sales values is ($30,000/$90,000) 33.33% of the $60,000 or $20,000. The cost per unit of X002 is ($20,000/3,000) $6.67 making 1,000 units worth $6,670. Revenues of $10,000 less cost of $6,670 results in a gross profit of $3,330.

25

The relative sales value method is used throughout the:
A.
agricultural products industry.
B.
meat-packing industry.
C.
mining industry.
D.
petroleum industry.

D.
petroleum industry.

26

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.

A.
this fact must be disclosed.