| Question |
Answer |
| 1. A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost. |
T |
| 2. The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value. |
F |
| 3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating inventory. |
F |
| 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. |
T |
| 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. |
F |
| 6. A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures. |
T |
| 7. In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value. |
T |
| 8. A basket purchase occurs when a company agrees to buy inventory weeks or months in advance. |
F |
| 9. Most purchase commitments must be recorded as a liability. |
F |
| 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. |
T |
| 11. When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract. |
F |
| 12. The gross profit method can be used to approximate the dollar amount of inventory on hand. |
T |
| 13. In most situations, the gross profit percentage is stated as a percentage of cost. |
F |
| 14. A disadvantage of the gross profit method is that it uses past percentages in determining the markup. |
T |
| 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. |
F |
| 16. In the retail inventory method, the term markup means a markup on the original cost of an inventory item. |
F |
| 17. In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss. |
T |
| 18. The inventory turnover ratio is computed by dividing the cost of goods sold by the ending inventory on hand. |
F |
| 19. The average days to sell inventory represents the average number of days’ sales for which a company has inventory on hand. |
T |
| *20. The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period. |
T |
BIOL3326 Forms
