1 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 2 The 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 3 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 4 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 5 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 keep track of the market value of the inventory 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 6 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 7 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 b c d net realizable value original cost market value net realizable value less a normal profit margin 8 In 2014 Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2015 for 700 000 Before the December 31 2014 balance sheet date the market price for these materials dropped to 510 000 The journal entry to record this situation at December 31 2014 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 9 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 Only disclose the existence of the purchase commitment 10 A major advantage of the retail inventory method is that it a provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period b hides costs from competitors and customers c gives a more accurate statement of inventory costs than other methods d provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies 11 An inventory method which is designed to approximate inventory valuation at the lower of cost or market is a last in first out b first in first out c conventional retail method d specific identification 12 To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method the computation of the ratio of cost to retail should a include markups but not markdowns b include markups and markdowns c ignore both markups and markdowns d include markdowns but not markups 13 Which of the following is not a reason the retail inventory method is used widely a As a control measure in determining inventory shortages b For insurance information c To permit the computation of net income without a physical count of inventory d To defer income tax liability 14 Which of the following is true of normal shortages a it is ignored in the income statement of a company b it is deducted from both the cost and retail columns c These goods are no longer available for sale d This loss is considered in calculating cost to retail ratio 15 What is the effect of freight in on the cost to retail ratio when using the conventional retail method a Increases the cost to retail ratio b No effect on the cost to retail ratio c Depends on the amount of the net markups d Decreases the cost to retail ratio 16 Which of the following is not a common disclosure for inventories a Inventory composition b Inventory location c Inventory financing arrangements d Inventory costing methods employed 17 Which of the following statements is false regarding an assumption of inventory cost flow a The cost flow assumption need not correspond to the actual physical flow of goods b The assumption selected may be changed each accounting period c The FIFO assumption uses the earliest acquired prices to cost the items sold during a period d The LIFO assumption uses the earliest acquired prices to cost the items on hand at the end of an accounting period 18 LYZ sells product P for 40 per unit The cost of one unit of P is 36 and the replacement cost is 35 The