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The method of recording inventory that debits cost of goods sold for the write-down of the inventory to market is the:
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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
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Chapter 9
interm account 1
| Question | Answer |
|---|---|
| The method of recording inventory that debits cost of goods sold for the write-down of the inventory to market is the: | Cost of goods sold method. |
| 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 | future utility will be less than their cost. |
| In applying Lower-of-Cost-or-Market, the designated market value is | the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin |
| historical cost is abandoned when | future utility (revenue-producing ability of the asset drops below its original cost. |
| Market Value = | Replacement Cost |
| Value goods at cost or cost to replace | which ever is lower |
| Loss should be recorded when | loss occurs (not in period of sale). |
| Why use Replacement Cost (RC) for Market? | Decline in the RC usually = decline in selling price |
| Why use Replacement Cost (RC) for Market? | RC allows a consistent rate of Gross Profit |
| If reduction in RC fails to indicated reduction in utlity | then 2 additional valuations limitations are used |
| 2 Additional valuations of limitations are | Ceiling - Net realizable value & Floor Net realizable value less a normal profit margin. |
| Ceiling | Net realizable value Top possible value. Prevents overstatement of the value of obsolete damaged or shopworn inventories |
| Floor | lowest value Deters understatement of inventory and overstatement of the loss in the current period. |
| Cost to retail Ratio | Total goods available for sale at cost divided by the total goods available at retail. |
| Dollar-value LIFO retail method | Method of estimating the cost of ending inventory by calculating the dollar increase in retail inventory layers with price indexes. |
| Gross profit method | A method of estimating the ending inventory |
| LIFO retail method | A method of estimating the cost of ending inventory which excludes the beginning inventory in the cost to retail ratio |
| Lower (floor) limit | In applying the lower-of- cost of market method the market cannot be valued less than net realizable value less a normal profit margin. |
| Lower of Cost or market (LCM) | A basis whereby inventory is stated at the lower of cost or market (current replacement cost). |
| Markdown | A decrease below the original retail price. |
| Markup Cancellation | A decrease in the selling price of an item that had been previously marked up above the original retail price. A markup cancellation will never reduce the selling price below the original retail price. |
| Net Realizable Value | The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal |
| Original Retail price | The price at which the item was originally marked for sale. |
| Purchase commitments | Agreements to buy inventory weeks, months, years in advance. |
| Retail inventory method | A method used to estimate the cost of the ending inventory by applying a cost to retail ratio to the ending inventory at retail. |
| Upper (ceiling) limit | In applying the lower-of-cost-or market method, the market cannot be valued more than net realizable value. |
| Net Realizable Value | Selling price - less disposal & Completion cost |
| Net RV - Profit | Replacement cost (designated Market) |
| Use of allowance - Multiple periods | Leave allowance account on books & merely adjust balance at the Next year-end to agree with the discrepancy between cost & Lower of Cost or market at balance sheet date. |
| Computation of Gross Profit Percentage -- at retail | Markup/Retail = % at retail |
| Computation of Gross profit Percentage -- on Cost | Markup/cost = % on cost |
| Gross profit on selling price = | Percentage markup on cost/100% + Percentage of markup on cost |
| Percentage markup on cost = | Gross profit on selling price/100% - Gross profit on Selling Price |
| The direct method of recording inventory at market under the lower of cost or market rule establishes a separate contra asset account and a loss account to record the write-off. | False |
| The direct method of recording inventory at market under the lower of cost or market rule establishes a separate contra asset account and a loss account to record the write-off. | True |
| In applying the lower of cost or market rule, the floor is defined as: | net realizable value less a normal profit margin. |
| In the lower of cost or market rule, net realizable value is referred to as the: | Ceiling |
| When the direct method is used adjust cost to “market”, what account is debited? | Cost of goods sold |
| Inventory may be recorded at net realizable value if | There is a controlled market with a quoted price. |
| Inventory may be recorded at net realizable value if | The inventory consist of precious metals or agricultural products |
| Inventory may be recorded at net realizable value if | There are no significant costs of disposal |
| he LIFO retail method assumes that markups and markdowns apply to both beginning inventory and goods purchased during the period. | False |
| Correct! The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period. | True |
| The relative sales value method is used throughout the: | Petroleum Industry |
| 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, | The fact must be disclosed |
| The gross profit method is not acceptable for annual financial reports. However, it can be used for interim periods. | True |
| Which of the following is included in the calculation of the cost-to-retail ratio under the conventional retail inventory method? | Markups & Markup Cancellations |
| Which one of the following is deducted in computing the cost-to-retail ratio? | Abnormal Shortages |
| The conventional retail inventory method includes both net markups and net markdowns to calculate the cost-to-retail ratio. | False Does not include net markdowns |
| Which of the following is not permitted under IFRS? | LIFO cost flow assumption |
| IFRS permits the use of specific identification | where appropriate but does not allow use of the LIFO cost flow assumption. |
| Companies may value inventories at net realizable value if cost is too difficult to determine. | True |
| When is the relative sales value method used? | When purchasing a group of varying units like basket purchases |
| Medi Corporation, contracted in 2013 to purchase 2,000 lbs of a spice mix at $5.15 per pound, delivery to be made in May of 2014. By December 31, 2013, the price per pound of the spice mixture had risen to $5.65 per pound. In 2013, Medi should recognize | No gain or loss |
| The gross profit method of estimating ending inventory is not acceptable for: | Annual financial statements |
| The inventory turnover ratio is computed by dividing: | COGS by average inventory |
| The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period. | True |
| Which of the following statements is true regarding IFRS and inventories? | With respect to inventories IFRS defines” market” as net realizable value. |
| The percentage markup on cost can be computed by dividing gross profit by 100% | Minus gross profit |
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smcdo11