Ch 9

Question 0

How does IFRS and. GAAP define “market”

Answer 0

IFRS market = net realizable value

GAAP market = replacement cost subject to certain
constraints

Question 1

How do companies record inventories that lose value?

Answer 1

Company abandons historical cost principal
When revenue producing ability drops

Report inventories at lower-of-market-cost each period

Question 2

Market

Answer 2

Cost to replace item by purchase or reproduction

Companies value goods at cost or cost to replace,
Whichever is lower

Question 3

Cost of inventory

Answer 3

Acquisition price of inventory computed using historical
Cost methods (FIFO, LIFO etc.)

Question 4

A company should charge a loss of utility (ability to produce revenues) Against revenues…

Answer 4

In the period when the loss occurs, not in period of sale

Question 5

Lower-of-cost-or-market method is considered what kind of approach to inventory valuation?

Answer 5

Conservative approach

Question 6

Net realizable value (NRV)

Answer 6

Estimated selling price in ordinary course of business,
Less reasonably predictable costs of completion
And disposal

Question 7

General lower-of-cost-or-market rule: company values inventory at the lower-of-cost-or-market, with…

Answer 7

Market limited to amount no more than net realizable value

Or less than net realizable value less normal profit margin

Question 8

Upper limit (ceiling), lower limit (floor)

Answer 8

Net realizable value of inventory

LL: net realizable value less normal profit margin

Question 9

IFRS, determining market?

Answer 9

IFRS does not use ceiling or floor to determine market

Question 10

Designated market cost

Answer 10

Amount company compares to cost

Always middle value of replacement cost, net realizable
value and net realizable value less normal profit margin

Question 11

Recording market instead of cost: Cost of goods sold method

Answer 11

Debits cost of goods sold for the write down of inventory

To market

Question 12

Recording market instead of cost: Loss method

Answer 12

Debits loss acct. for write down of inventory to market

Question 13

4 Conceptual deficiencies of lower cost market rule?

Answer 13

1 decreases in value of asset charged in period
of loss of utility, increases of asset recognized in point
of sale

2 inconsistency as rule may lead to value of inventory
at cost in 1 year and at market the next year

3 effect on balance sheet conservative, effect on income
Statement may not be

4 normal profit = past experience measure so may
Be used for income manipulation

Question 14

Lump-sum purchase AKA Basket purchase

Answer 14

Company buys group of units in single purchase

Question 15

Relative sales value

Answer 15

Allocate value of each unit by on basis of relative sales value
Per unit

Question 16

Purchase commitments

Answer 16

Agreements to buy inventories weeks, months or

Years in advance

Question 17

If a contract price is greater than market price and the buyer expects losses will occur when the purchase is effected in purchase commitments…

How should this be accounted for?

Answer 17

Company should recognize losses in periods where

Declines in market prices take place

Question 18

Hedging, Purchaser in purchase commitment…

Answer 18

simultaneously Enters into contract which agrees to
sell in future Same quantity of same goods at fixed price

Company holds buy position in purchase commitment
And sell position in futures contract in same commodity

Question 19

3 assumptions of Gross Profit Method AKA Gross margin method?

Answer 19

1 beginning inventory + purchases
= total goods to be accounted for

2 goods Not sold must be on hand

3 sales reduced to cost
deducted from (opening inventory + purchases)
= ending inventory

Question 20

Gross profit percentage

Answer 20

percentage of selling price

Question 21

Gross profit equation?

Answer 21

Cost + gross profit = selling price

Question 22

Retailer formula: gross profit on selling price

Answer 22

Gross profit on selling price =

% markup on cost)/(100% + percentage markup on cost

Question 23

Retailer equation: Percentage markup on cost equation

Answer 23

% markup on cost =

Gross profit on selling price)/(100% - gross profit on selling price

Question 24

3 major disadvantages of gross profit method for inventory?

Answer 24

1 provides an estimate
2 uses past percentages
3 blanket (widely varying) gross profit rate is inaccurate

Question 25

3 items retail inventory method keeps record of?

Answer 25

1) total cost and retail value of goods purchased
2) total cost and retail value of goods available for sale
3) sales for period

Question 26

Cost-to-retail ratio

Answer 26

Cost-to-retail ratio =
total goods available for sale (at cost)
/total goods available at retail price

Question 27

Retail inventory method is advantageous (3 ways) because it can…

Answer 27

Approximate inventory balance without physical count,

Estimate losses, serve as control device

Question 28

Retail Inventory method is useful for interim reports because such reports usually need..

Answer 28

Quick and reliable measure of inventory

Question 29

Control device

Answer 29

Helps company explain deviations from physical count

At end of year

Question 30

Markup

Answer 30

Additional markup of original retail price

Question 31

Markup cancellations

Answer 31

Decreases in price of merchandise that retailer had

Marked up above original retail price

Question 32

Markdowns

Answer 32

Decreases in original sales prices

Used in competitive markets

Question 33

Markdown cancellations

Answer 33

Occur when markdowns are later offset by increases

In prices of goods that retailers had marked down

Question 34

Value of ending inventory equation?

Answer 34

Value of ending inventory = ending inventory at retail X cost ratio

Question 35

Conventional retail inventory method AKA Lower-of-cost-or-market approach

Answer 35

Cost ratio using markups but not mark downs

Approximates lower-of-average-cost-or-market ratio

Question 36

Comprehensive conventional retail inventory method format:

Cost-to-retail ratio equation?

Answer 36

Cost-to-retail ratio =
Cost of goods available/
original retail price of goods available, + net mark ups

Question 37

How are freight costs treated in retail method?

Answer 37

Part of purchase costs

Question 38

How are purchase returns treated in the retail method?

Answer 38

Ordinarily considered as reduction of price at both

cost and retail

Question 39

How are purchase discounts and allowances treated using the retail method?

Answer 39

Considered as reduction of cost of purchases

Question 40

Retail method: treatment of sales returns and allowances?

Answer 40

Considered proper adjustments to gross sales

Question 41

When sales are considered gross, under the retail method, companies…

Answer 41

Don’t recognize sales discounts

Question 42

Retail method: transfer in from another department

Answer 42

Reported in same way as purchases from outside company

Question 43

Retail method: normal shortages

Answer 43

Deduction in retail column

Question 44

Retail method: abnormal shortages

Answer 44

Deducted from both the cost and retail columns

Reported as special inventory amount or as loss

Question 45

Retail method: Employee discounts

Answer 45

Deducted from retail column

Question 46

One noticeable characteristic of retail inventory method is?

Answer 46

Has an averaging effect on varying rates of gross profit

Question 47

Inventory turnover, definition, equation?

Answer 47

Measures # of times on avg. a company sells the inventory
During the period, measures liquidity of inventory

Inventory turnover = cost of goods sold/avg. inventory

Question 48

Avg. days to sell inventory

Answer 48

Represents avg # of days in year to sell inventory

= 365/inventory turnover