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Ch 9 TF

QuestionAnswer
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
Created by: agoodname