Intermediate Accounting, 9e (Spiceland)
Chapter 9 Inventories: Additional Issues
1) For companies that use FIFO or average cost, inventory is valued at the lower of cost or net
realizable value at the end of the reporting period.
2) Net realizable value is selling price less costs of completion, disposal, and transportation.
3) The primary motivation behind the lower of cost or net realizable value rule is consistency.
4) Lower of cost or net realizable value can be applied to individual inventory items, to logical
categories of inventory, or to the entire inventory.
5) Losses on reduction to NRV may be charged to either cost of goods sold or to a line item among
operating expenses.
6) An inventory written down due to the lower of cost or net realizable value may be written back
up if net realizable value increases.
7) For companies that use LIFO, inventory is valued at the lower of cost or net realizable value at
the end of the reporting period.
8) The market value for purposes of using the lower of cost or market (LCM) method is defined as
replacement cost, subject to a ceiling and a floor.
9) The primary motivation behind the lower of cost or market (LCM) rule is conservatism.
10) A reduction in reported inventory due to market value falling below cost would reduce net
income in the current period.
11) Under the LIFO retail method, the current period cost–to-retail percentage includes both net
markdowns and net markups.
12) Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for
the retail method.
13) The cost-to-retail percentage used in the retail method to approximate average cost
incorporates both markdowns and markups.
14) If the quantity of goods held in inventory decreased during the period, the dollar amount of
ending inventory can’t exceed the dollar amount of beginning inventory.
15) When changing from the average cost method to FIFO, the current year’s income includes the
cumulative after-tax difference that would have resulted if the company had used FIFO in all prior
years.
16) A change from LIFO to any other inventory method is accounted for retrospectively.
17) For a purchase commitment contained within a single fiscal year, if the market price is less
than the contract price, the purchase is recorded at the contract price.
18) For a purchase commitment extending beyond the current fiscal year, if the market price on the
purchase date declines from the previous year-end price, the purchase is recorded at the market
price.
19) International Financial Reporting Standards allow the reversal of an inventory write-down.
20) For companies using FIFO or average cost, inventory is valued at:
A) Net realizable value.
B) Cost.
C) Replacement cost.
D) Lower of cost or net realizable value.
21) An argument against use of the lower of cost or net realizable value rule is its lack of:
A) Relevance.
B) Reliability.
C) Consistency.
D) Objectivity.
22) Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000.
Information pertaining to that inventory is as follows:
Selling price
$
620,000
Costs to sell
30,000
Cost
520,000
What should be the reported value of Montana’s inventory?
A) $600,000.
B) $520,000.
C) $590,000.
D) $620,000.
23) Data related to the inventories of Costco Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
100
$
340
$
165
Cost
170
90
250
162
Costs to sell
30
15
25
10
In applying the lower of cost or net realizable value rule, the inventory of surgical equipment
would be valued at:
A) $230.
B) $240.
C) $170.
D) $152.
24) Data related to the inventories of Costco Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
100
$
340
$
165
Cost
170
90
250
162
Costs to sell
30
15
25
10
In applying the lower of cost or net realizable value rule, the inventory of surgical supplies would
be valued at:
A) $100.
B) $90.
C) $85.
D) $75.
25) Data related to the inventories of Costco Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
100
$
340
$
165
Cost
170
90
250
162
Costs to sell
30
15
25
10
In applying the lower of cost or net realizable value rule, the inventory of rehab equipment would
be valued at:
A) $315.
B) $340.
C) $225.
D) $250.
26) Data related to the inventories of Costco Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
100
$
340
$
165
Cost
170
90
250
162
Costs to sell
30
15
25
10
In applying the lower of cost or net realizable value rule, the inventory of rehab supplies would be
valued at:
A) $165.
B) $152.
C) $162.
D) $155.
27) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
140,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
45,000
Replacement
cost
120,000
130,000
110,000
41,000
Sales
commission
10
%
10
%
10
%
10
%
In applying the lower of cost or net realizable value rule, the inventory of skis would be valued at:
A) $162,000.
B) $128,000.
C) $120,000.
D) $180,000.
28) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
140,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
45,000
Replacement
cost
120,000
130,000
110,000
41,000
Sales
commission
10
%
10
%
10
%
10
%
In applying the lower of cost or net realizable value rule, the inventory of boots would be valued at:
A) $140,000.
B) $133,000.
C) $126,000.
D) $130,000.
29) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
140,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
45,000
Replacement
cost
120,000
130,000
110,000
41,000
Sales
commission
10
%
10
%
10
%
10
%
In applying the lower of cost or net realizable value rule, the inventory of apparel would be valued
at:
A) $108,000.
B) $90,000.
C) $110,000.
D) $99,000.
30) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
140,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
45,000
Replacement
cost
120,000
130,000
110,000
41,000
Sales
commission
10
%
10
%
10
%
10
%
In applying the lower of cost or net realizable value rule, the inventory of supplies would be valued
at:
A) $45,000.
B) $54,000.
C) $41,000.
D) $60,000.
31) For companies using LIFO, inventory is valued at:
A) Net realizable value.
B) Cost.
C) Replacement cost.
D) Lower of cost or market.
32) In applying LCM, market cannot be:
A) Less than net realizable value.
B) Greater than the normal profit.
C) Less than the normal profit margin.
D) Greater than net realizable value.
33) In applying LCM, market cannot be:
A) Less than net realizable value minus a normal profit margin.
B) Net realizable value less reasonable completion and disposal costs.
C) Greater than net realizable value reduced by an allowance for normal profit margin.
D) Less than cost.
34) Masterlink Co., in applying the lower of cost or market method, reports its inventory at net
realizable value. Which of the following statements is correct?
A) NRV is greater than replacement cost.
B) Cost is less than net realizable value.
C) Cost is greater than net realizable value.
D) Cost is less than NRV minus a normal profit margin.
35) Madison Co. has determined its year-end inventory on a LIFO basis to be $600,000.
Information pertaining to that inventory is as follows:
Selling price
$
720,000
Costs to sell
30,000
Normal profit margin
80,000
Replacement cost
620,000
What should be the reported value of Madison’s inventory?
A) $600,000.
B) $620,000.
C) $690,000.
D) $610,000.
36) Data related to the inventories of Kimzey Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
120
$
340
$
165
Cost
170
90
250
162
Replacement cost
240
80
235
158
Costs to sell
30
5
25
10
Normal gross profit ratio
30
%
30
%
30
%
20
%
In applying the lower of cost or market rule, the inventory of surgical equipment would be valued
at:
A) $230.
B) $240.
C) $170.
D) $152.
37) Data related to the inventories of Kimzey Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
120
$
340
$
165
Cost
170
90
250
162
Replacement cost
240
80
235
158
Costs to sell
30
5
25
10
Normal gross profit ratio
30
%
30
%
30
%
20
%
In applying the lower of cost or market rule, the inventory of surgical supplies would be valued at:
A) $100.
B) $90.
C) $80.
D) $75.
38) Data related to the inventories of Kimzey Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
120
$
340
$
165
Cost
170
90
250
162
Replacement cost
240
80
235
158
Costs to sell
30
5
25
10
Normal gross profit ratio
30
%
30
%
30
%
20
%
In applying the lower of cost or market rule, the inventory of rehab equipment would be valued at:
A) $315.
B) $247.
C) $150.
D) $235.
39) Data related to the inventories of Kimzey Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$
260
$
120
$
340
$
165
Cost
170
90
250
162
Replacement cost
240
80
235
158
Costs to sell
30
5
25
10
Normal gross profit ratio
30
%
30
%
30
%
20
%
In applying the lower of cost or market rule, the inventory of rehab supplies would be valued at:
A) $122.
B) $158.
C) $162.
D) $155.
40) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
150,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
48,000
Replacement
cost
120,000
130,000
110,000
50,000
Sales
commission
10
%
10
%
10
%
10
%
Normal gross
profit ratio
20
%
20
%
15
%
15
%
In applying the lower of cost or market rule, the inventory of skis would be valued at:
A) $162,000.
B) $128,000.
C) $120,000.
D) $126,000.
41) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
150,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
48,000
Replacement
cost
120,000
130,000
110,000
50,000
Sales
commission
10
%
10
%
10
%
10
%
Normal gross
profit ratio
20
%
20
%
15
%
15
%
In applying the lower of cost or market rule, the inventory of boots would be valued at:
A) $135,000.
B) $133,000.
C) $130,000.
D) $105,000.
42) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$
180,000
$
150,000
$
120,000
$
60,000
Cost
128,000
133,000
90,000
48,000
Replacement
cost
120,000
130,000
110,000
50,000
Sales
commission
10
%
10
%
10
%
10
%
Normal gross
profit ratio
20
%
20
%
15
%
15
%
In applying the lower of cost or market rule, the inventory of apparel would be valued at:
A) $108,000.
B) $ 90,000.
C) $110,000.
D) $115,000.