1. On January 5, 2016, the FASB issued Accounting Standards Update 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities."

Required: Summarize the accounting requirements to accounting for investments in securities that were in existence prior to the release of ASU 2016-01. How did ASU 2016-01 change those requirements? How did ASU 2016-01 impact accounting for investments in debt securities.

2. Cost for inventory purposes should be determined by the inventory cost-flow method most clearly reflecting periodic income.

Required: Describe the fundamental cost-flow assumptions of the average cost, FIFO, and LIFO inventory cost-flow methods. Discuss the reasons for using LIFO in an inflationary economy. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, what is the proper accounting treatment, and under what concept is that treatment justified?

3. Steel Company, a wholesaler that has been in business for two years, purchases its inventories from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase.

Steel uses the lower of FIFO cost or market method to value inventories. The original cost of the inventories is above replacement cost and below the net realizable value. The net realizable value less the normal profit margin is below the replacement cost.

Required: In general, what criteria should be used to determine which costs should be included in inventory? In general, why is the lower of cost or market rule used to report inventory? At what amount should Steel's inventories be reported on the balance sheet? Explain the application of the lower of cost or market rule in this situation. What would have been the effect on ending inventories and net income for the second year had Steel used the lower of average cost or market inventory method instead of the lower of FIFO cost or market inventory method? Why?