Multiple Choice questions. See att. Must be finished within next 30 minutes. Will tip 20 extra if 90 percent correct

1. Which one of the following statements is true with regard to the lower of cost or market rule? The lower of cost or market rule is primarily an application of the going concern assumption. If the direct method is used in applying the lower of cost or market rule, the loss or loss recovery due to market valuation changes is included in cost of goods sold. The lower of cost or market rule must be applied on an individual item basis for financial accounting purposes. With the application of the lower of cost or market rule using the direct method, the account, Allowance to Reduce Inventory to Market, is reported on the balance sheet as a contra asset. 3 The Rebecca Company provided the following data for its December 31, 2016, inventory maintained on the retail basis. Beginning inventory Purchases Markups (net) Markdowns (net) Sales At Cost $165,000 At Retail $225,000 275,000 446,000 45,750 (32,000) 575,000 What is the estimated inventory at December 31, 2016, valued at lower of average cost or market? 1. $70,522 2. $44,069 3. $62,951 4. $87,018 4.Exhibit 8-2 The Dormer Company uses the gross profit method to estimate its inventory in interim financial statements. The markup on cost is 50%. The following information is available: January 1, 2016, inventory balance Purchases Sales during January $12,500 25,000 24,000 Refer to Exhibit 8-2. The estimated cost of goods sold at January 31, 2016, is $21,500 $12,000 $16,000 $25,500 5. c= {"properties":{},"m Given the following information for the Tea Company: Date December 31, 2016 December 31, 2017 Cost $ 800 1,000 Market $ 800 1,000 December 31, 2018 1,200 1,060 Under the periodic system, if the allowance method of recording lower of cost or market is in use, which December 31, 2018entry is correct? Allowance to Reduce Inventory to Market 140 Loss Recovery Due to Market Valuation Inventory 140 140 Cost of Goods Sold Loss Due to Market Valuation 140 140 Allowance to Reduce Inventory to Market Cost of Goods Sold Inventory 140 140 140 6.When using the cost-to-retail ratio for the retail inventory method, net markdowns but not net markups are included in the computation of ending inventory for Average Cost inventory. neither net markups nor markdowns are included in the computation of ending inventory for FIFO inventory. net markups but not net markdowns are included in the computation of ending inventory for lower-of-cost-or-market inventory. net markups but not net markdowns are included in the computation of ending inventory for LIFO inventory. 7.Which application of the lower of cost or market rule will generally result in the lowest valuation for the ending inventory? To high-cost items but not to low-cost items To each major category of inventory To each item of the inventory To the total inventory in the aggregate 12 Which one of the following inventories may be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory? gold for a mining corporation athletic shoes for a retail store steel for a steel manufacturer automobiles for an automobile manufacturer 13 Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail ratio in a period of rising prices? LIFO FIFO average cost lower of average cost or market 14Which of the following is not a justification for valuing inventory above historical cost? Floor value above both market price and historical cost each item, the total of inventory, or major categories of inventory Inability to determine appropriate prices Interchangeability of the units of inventory 15.Which one of the following statements regarding the gross profit method is true? The gross profit method is a complicated method to use in practice. The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty. The gross profit method is often used to calculate the year-end inventory for financial accounting purposes. The gross profit method results in a more accurate inventory valuation than the retail inventory method. 16The gross profit method is not used to determine the cost of inventory destroyed by fire. develop a sales budget. check the cost generated by a perpetual inventory system. replace the year-end physical inventory. 17Relevance of the gross profit margin depends upon the accuracy of the gross profit percentage applying the overall profit margin to each individual department the net sales averaging prior periods' net sales and total sales to verify which is best to use 18When applying lower of cost or market, market value should not be less than net realizable value. replacement value less an allowance for a normal profit margin. replacement value. net realizable value less an allowance for a normal profit margin. 20 Although IFRS require the use of the lower of cost or market method to value inventory, some differences from GAAP still exist. Which of the following is not one of the differences? IFRS allow the reversal of a previous write-down. IFRS define market only as replacement value. IFRS eliminate the need to use a ceiling in determining market value. When write-downs occur, IFRS do not specify how the loss must be categorized in the income statement. 23 In comparison to the allowance method of applying the lower of cost or market rule to the valuation of inventory, the direct method has which of the following deficiencies? For the direct method, the loss or loss recovery due to market valuation changes is included in the cost of goods sold amount. The direct method reports a more conservative amount for net income. The direct method can only be used with a perpetual inventory system. The direct method makes changes to the historical cost of inventory reported on the balance sheet. 24 Generally, valuing inventory above cost violates the lower of cost or market rule and is never allowed. is acceptable only in selected industries and in certain circumstances. violates conservatism and is never allowed. is acceptable when revenue recognition is not applicable. 26Assume that there is a decline in inventory value in one period, then there is a reversal of value to the original or higher value and a later period. Which of the following statements about recognition of the loss is true? The decline in inventory value and related loss should never be recognized. The decline in inventory value and related loss should be recognized in the first period and reversed in the second period in all situations. The decline in inventory value and related loss should be recognized in the first period and reversed in the second period but only if the second period is within the same fiscal year. The decline in inventory value and related loss should be recognized in the first period and reversed in the second period but only if the second period is within a different fiscal year. 27 When comparing the lower of cost to market the purpose of the floor is to prevent an excessive gain from being recognized in the future. the process is consistent with the principle of conservatism because the goal is to limit excessive swings in gross margin. the purpose of the ceiling is to ensure that the write-down is sufficient to cover all expected gains. the appropriate market value is determined before comparing it to the cost. 29When applying lower of cost or market, market value should not exceed the net realizable value. should not exceed the net realizable value plus an allowance for a normal profit margin. should not exceed the net realizable value less an allowance for a normal profit margin. is defined as the selling price. 31If purchases are recorded correctly but ending physical inventory is understated, which one of the following situations occurs for the current year? Working capital is overstated and net income is understated. Working capital is understated and net income is overstated. Working capital and net income are understated. Working capital and net income are overstated. 33In general, it is argued that the lower of cost or market rule is supported most closely by which of the following theoretical assumptions? Representational faithfulness going concern revenue recognition historical cost 35If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory method, what is the effect on the cost-to-retail ratio? The numerator of the ratio will be higher, which results in a higher cost-to-retail ratio. The numerator of the ratio will be lower, which results in a lower cost-to-retail ratio. The denominator of the ratio will be higher, which results in a lower cost-to-retail ratio. The denominator of the ratio will be lower, which results in a higher cost-to-retail ratio. 39When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because the allowance method, unlike the direct method, reduces the value of inventory reported on the balance sheet. the allowance method reports smaller losses than the direct method. the allowance method reports the inventory loss or loss recovery in a separate income statement account. the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct method. 40Which one of the following statements is false concerning the retail inventory method? Abnormal inventory spoilage would be subtracted at both cost and retail in the determination of goods available for sale. In arriving at a cost-to-retail ratio, sales discounts are deducted from goods available for sale to determine ending inventory at retail. Employee discounts are subtracted from goods available for sale to compute ending inventory at retail. Purchase returns and allowances must be subtracted from both the cost and retail value of the purchases