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Ch 9 Intermediate Accounting test bank
Financial Accounting (University of Oxford)
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CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES
CHAPTER LEARNING OBJECTIVES
1. Describe and apply the lower-of-cost-or- net realizable value rule.
2. Identify other inventory valuation issues.
3. Determine ending inventory by applying the gross profit method.
4. Determine ending inventory by applying the retail inventory method.
5. Explain how to report and analyze inventory.
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9-2 Test Bank for Intermediate Accounting: IFRS Edition, 3e
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-net realizable method is used for inventory despite being less
conservative than valuing inventory at net realizable value.
3. Application of the lower-of-cost-or-net realizable value rule results in inconsistency
because a company may value inventory at cost in one year and at net realizable value in
the next year.
4. International Financial Reporting Standards (IFRS) require that a company record an
inventory write-down as part of cost of goods sold.
5. Under International Financial Reporting Standards (IFRS), when companies value
inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations,
companies price inventory on a total–inventory basis.
6. Biological assets, such as milking cows, are reported as non-current assets at fair value
less costs to sale (net realizable value).
7. The unrealized gains and losses related to recording biological assets at their correct
valuation are reported as part of other comprehensive income on the statement of
comprehensive income.
8. Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing commodities held by broker-traders.
9. Under International Financial Reporting Standards (IFRS), separate reporting of reversals
of inventory write-downs in the period of sale are required.
10. Under International Financial Reporting Standards (IFRS), agricultural activity can result in
the production of both agricultural produce and biological assets.
11. An inventory of wheat held by a broker-trader is valued at net realizable value.
12. Agricultural produce is harvested from biological assets and is measured at fair value less
costs to sell at the point of harvest.
13. In a basket purchase, the cost of the individual assets acquired is determined on the basis
of their relative standalone sales value.
14. A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.
15. Most purchase commitments must be recorded as a liability.
16. If the contract price on a noncancelable purchase commitment exceeds the market price,
the buyer should recognize a liability and corresponding loss in the period in which the
market decline takes place.
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Inventories: Additional Valuation Issues 9-3
17. When a buyer enters into a formal, noncancelable purchase contract, an asset and a
liability are recorded at the inception of the contract.
18. In late 2018, Daisy Company entered into a noncancelable purchase contract for which
the contract price is now greater than the market price, and Daisy expects that losses will
occur when the purchase is executed in early 2019. Under IFRS, Daisy should recognize
a liability and corresponding loss in 2018.
19. Under International Financial Reporting Standards (IFRS), a company who recorded a
loss on a purchase commitment in 2018 cannot record a recovery of that loss in 2019 if
prices improve.
20. The gross profit method can be used to approximate the dollar amount of inventory on
hand.
21. In most situations, the gross profit percentage is stated as a percentage of cost.
22. A disadvantage of the gross profit method is that it uses past percentages in determining
the markup.
23. 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-net realizable value valuation.
24. In the retail inventory method, the term markup means a markup on the original cost of an
inventory item.
25. In the retail inventory method, abnormal shortages are deducted from both the cost and
retail amounts and reported as a loss.
26. The inventory turnover is computed by dividing the cost of goods sold by the ending
inventory on hand.
27. The average days to sell inventory represents the average number of days’ sales for
which a company has inventory on hand.
28. Under IFRS, LIFO is permitted for financial reporting purposes if the company’s host
country permits it for tax purposes.
29. Under U.S. GAAP, if inventory is written down under lower-of-cost-or-market, it may not
be written back up to its original cost in a subsequent period.
30. IFRS requires inventory to be written down below its original cost in some situations, but
inventory cannot be written up above its original cost.
True False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. T 16. T 21. F 26. F
2. F 7. F 12. T 17. F 22. T 27. T
3. T 8. T 13. T 18. T 23. F 28. F
4. F 9. T 14. F 19. F 24. F 29. T
5. F 10. T 15. F 20. T 25. T 30. T
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Ch 9 Intermediate Accounting test bank
Financial Accounting (University of Oxford)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by olinder seth ()
, lOMoARcPSD|59658805
CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES
CHAPTER LEARNING OBJECTIVES
1. Describe and apply the lower-of-cost-or- net realizable value rule.
2. Identify other inventory valuation issues.
3. Determine ending inventory by applying the gross profit method.
4. Determine ending inventory by applying the retail inventory method.
5. Explain how to report and analyze inventory.
Downloaded by olinder seth ()
, lOMoARcPSD|59658805
9-2 Test Bank for Intermediate Accounting: IFRS Edition, 3e
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-net realizable method is used for inventory despite being less
conservative than valuing inventory at net realizable value.
3. Application of the lower-of-cost-or-net realizable value rule results in inconsistency
because a company may value inventory at cost in one year and at net realizable value in
the next year.
4. International Financial Reporting Standards (IFRS) require that a company record an
inventory write-down as part of cost of goods sold.
5. Under International Financial Reporting Standards (IFRS), when companies value
inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations,
companies price inventory on a total–inventory basis.
6. Biological assets, such as milking cows, are reported as non-current assets at fair value
less costs to sale (net realizable value).
7. The unrealized gains and losses related to recording biological assets at their correct
valuation are reported as part of other comprehensive income on the statement of
comprehensive income.
8. Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing commodities held by broker-traders.
9. Under International Financial Reporting Standards (IFRS), separate reporting of reversals
of inventory write-downs in the period of sale are required.
10. Under International Financial Reporting Standards (IFRS), agricultural activity can result in
the production of both agricultural produce and biological assets.
11. An inventory of wheat held by a broker-trader is valued at net realizable value.
12. Agricultural produce is harvested from biological assets and is measured at fair value less
costs to sell at the point of harvest.
13. In a basket purchase, the cost of the individual assets acquired is determined on the basis
of their relative standalone sales value.
14. A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.
15. Most purchase commitments must be recorded as a liability.
16. If the contract price on a noncancelable purchase commitment exceeds the market price,
the buyer should recognize a liability and corresponding loss in the period in which the
market decline takes place.
Downloaded by olinder seth ()
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Inventories: Additional Valuation Issues 9-3
17. When a buyer enters into a formal, noncancelable purchase contract, an asset and a
liability are recorded at the inception of the contract.
18. In late 2018, Daisy Company entered into a noncancelable purchase contract for which
the contract price is now greater than the market price, and Daisy expects that losses will
occur when the purchase is executed in early 2019. Under IFRS, Daisy should recognize
a liability and corresponding loss in 2018.
19. Under International Financial Reporting Standards (IFRS), a company who recorded a
loss on a purchase commitment in 2018 cannot record a recovery of that loss in 2019 if
prices improve.
20. The gross profit method can be used to approximate the dollar amount of inventory on
hand.
21. In most situations, the gross profit percentage is stated as a percentage of cost.
22. A disadvantage of the gross profit method is that it uses past percentages in determining
the markup.
23. 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-net realizable value valuation.
24. In the retail inventory method, the term markup means a markup on the original cost of an
inventory item.
25. In the retail inventory method, abnormal shortages are deducted from both the cost and
retail amounts and reported as a loss.
26. The inventory turnover is computed by dividing the cost of goods sold by the ending
inventory on hand.
27. The average days to sell inventory represents the average number of days’ sales for
which a company has inventory on hand.
28. Under IFRS, LIFO is permitted for financial reporting purposes if the company’s host
country permits it for tax purposes.
29. Under U.S. GAAP, if inventory is written down under lower-of-cost-or-market, it may not
be written back up to its original cost in a subsequent period.
30. IFRS requires inventory to be written down below its original cost in some situations, but
inventory cannot be written up above its original cost.
True False Answers—Conceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. T 16. T 21. F 26. F
2. F 7. F 12. T 17. F 22. T 27. T
3. T 8. T 13. T 18. T 23. F 28. F
4. F 9. T 14. F 19. F 24. F 29. T
5. F 10. T 15. F 20. T 25. T 30. T
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