7.06- Lower of Cost or Market

Question 1

Which two ACCOUNTING PRINCIPLES relate to the LOWER OF COST OR MARKET RULE?

Answer 1

• Conservatism

- Matching

Question 2

What is COST in LOWER OF COST OR MARKET?

Answer 2

The Original cost of the product

Question 3

What is MARKET in LOWER OF COST OR MARKET?

Answer 3

The middle number of the ceiling, floor, and replacement cost

Question 4

How do you find the CEILING for MARKET?

Answer 4

It is the NET REALIZABLE VALUE

NRV= selling price - disposal costs

Question 5

What are the three DISPOSAL COSTS?

Answer 5

• Cost to complete
• Freight Out
• Sales Commissions

Question 6

How do you find the FLOOR for MARKET?

Answer 6

NRV- normal Profit Margin

Question 7

INVENTORY VALUATION is based on what 3 things?

Answer 7

• Individual items
• Categories
• Total inventory

Question 8

At what period in time are LOSSES recognized on an INCOME STATEMENT?

Answer 8

IMMEDIATELY

Question 9

Can LOSSES in inventory be recovered once recognized under GAAP?

Answer 9

NO!

Question 10

What is the journal entry for a LOSS in inventory?

Answer 10

• Debit- Loss on inventory due to market decline

- Credit- Inventory

Question 11

What are the two MARKETS in which a company operates?

Answer 11

• The market where they purchase the goods for sale

- The market where they sell the goods