ACC 304 Week 3 Quiz – Strayer NEW

Click On The Link Below to Purchase A+ Graded Material

Instant Download

http://budapp.net/ACC-304-Week-3-Quiz-Strayer-NEW-ACC304W3Q.htm

Week 3 Quiz 2: Chapter 9

INVENTORIES:  ADDITIONAL VALUATION ISSUES

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

    1.     A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.

    2.     The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value.

    3.     The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating inventory.

    4.     Application of the lower-of-cost-or-market rule results in inconsistency because a company may value inventory at cost in one year and at market in the next year.

    5.     GAAP requires reporting inventory at net realizable value, even if above cost, whenever there is a controlled market with a quoted price applicable to all quantities.

    6.     A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures.

    7.     In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value.

    8.     A basket purchase occurs when a company agrees to buy inventory weeks or months in advance.

    9.     Most purchase commitments must be recorded as a liability.

  10.     If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should record any expected losses on the commitment in the period in which the market decline takes place.

  11.     When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.

  12.     The gross profit method can be used to approximate the dollar amount of inventory on hand.

  13.     In most situations, the gross profit percentage is stated as a percentage of cost.

  14.     A disadvantage of the gross profit method is that it uses past percentages in determining the markup.

  15.     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-market valuation.

  16.     In the retail inventory method, the term markup means a markup on the original cost of an inventory item.

  17.     In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss.

  18.     The inventory turnover ratio is computed by dividing the cost of goods sold by the ending inventory on hand.

  19.     The average days to sell inventory represents the average number of days’ sales for which a company has inventory on hand.

*20.     The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

  21.     Which of the following is true about lower-of-cost-or-market?

a.   It is inconsistent because losses are recognized but not gains.

b.   It usually understates assets.

c.   It can increase future income.

d.   All of these.

  22.     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.

  23.     When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term "market"?

a.   Net realizable value

b.   Net realizable value less a normal profit margin

c.   Current replacement cost

d.   Discounted present value

  24.     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.

  25.     Designated market value

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

b.   should always be equal to net realizable value.

c.   may sometimes exceed net realizable value.

d.   should always be equal to net realizable value less a normal profit margin.

  26.     Lower-of-cost-or-market

a.   is most conservative if applied to the total inventory.

b.   is most conservative if applied to major categories of inventory.

c.   is most conservative if applied to individual items of inventory.

d.   must be applied to major categories for taxes.

  27.     An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true?

a.   The cost of sales of the following year will be understated.

b.   The current year's income is understated.

c.   The closing inventory of the current year is understated.

d.   Income of the following year will be understated.

^S28.     When the cost-of-goods-sold method is used to record inventory at market

a.   there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.

b.   a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.

c.   only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.

d.   the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

  29.     Lower-of-cost-or-market as it applies to inventory is best described as the

a.   drop of future utility below its original cost.

b.   method of determining cost of goods sold.

c.   assumption to determine inventory flow.

d.   change in inventory value to market value.

  30.     The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the

a.   net realizable value.

b.   net realizable value less normal profit margin.

c.   replacement cost.

d.   selling price less costs of completion and disposal.

  31.     What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?

a.   Prevents understatement of the inventory value.

b.   Allows for a normal profit to be earned.

c.   Allows for items to be valued at replacement cost.

d.   Prevents overstatement of the value of obsolete or damaged inventories.

  32.     Why are inventories stated at lower-of-cost-or-market?

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.

  33.     Which of the following is not an acceptable approach in applying the lower-of-cost-or-market method to inventory?

a.   Inventory location.

b.   Categories of inventory items.

c.   Individual item.

d.   Total of the inventory.

  34.     Which method(s) may be used to record a loss due to a price decline in the value of inventory?

a.   Cost-of-goods-sold.

b.   Sales method.

c.   Loss method

d.   Both a and c.

  35.     Why might inventory be reported at sales prices (net realizable value or market price) rather than cost?

a.   When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal.

b.   When there are no significant costs of disposal.

c.   When a non-cancellable contract exists to sell the inventory.

d.   When there is a controlled market with a quoted price applicable to all quantities.

^S36.     Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and

a.   the ending inventory is determined by a physical inventory count.

b.   a normal profit is not anticipated.

c.   there is a controlled market with a quoted price applicable to all quantities.

d.   the internal revenue service is assured that the practice is not used only to distort reported net income.

  37.     When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?

a.   Sales price

b.   Net realizable value

c.   Historical cost

d.   Net realizable value reduced by a normal profit margin

  38.     Net realizable value is

a.   acquisition cost plus costs to complete and sell.

b.   selling price.

c.   selling price plus costs to complete and sell.

d.   selling price less costs to complete and sell.

  39.     If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable value, the amount to be used for purposes of inventory valuation is

a.   net realizable value.

b.   original cost.

c.   market value.

d.   net realizable value less a normal profit margin.

  40.     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.

  41.     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.

  42.     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.

^P43.     In 2012, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2013 for $700,000. Before the December 31, 2012 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2012 will result in a credit that should be reported

a.   as a valuation account to Inventory on the balance sheet.

b.   as a current liability.

c.   as an appropriation of retained earnings.

d.   on the income statement.

  44.     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 lower of cost or market. 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.

  45.     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 lower of cost or market. 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?

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.

  46.     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.

^S47.     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 total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previou