chapter 9

Question 1

Net realizable value

Answer 1

a company abandons the historical cost principle when the future utility of the asset drops below its original costs.
inventory value -estimated cost of completion and to sell =NRV

Question 2

Losses

Answer 2

Should be reported against revenues in the period in which the loss occur, not in the period of sale

Question 3

Which one of these methods is the most conservative?

Answer 3

LCM if applied to individual items of inventory

Question 4

General LCM Rule

Answer 4

a company values inventory at the LCM, with market limited to an amount that is not more than NRV or less than Floor

Question 5

Ceiling

Answer 5

Prevents overstatement of the value of obsolete,damaged or shopworn inventories

Question 6

Floor

Answer 6

is not to be less than net realizable value reduced by an allowance for an approximately normal profit margin

Question 7

Loss Method

Answer 7

Loss Due to Decline of Inventory to NRV

Allowance to Reduce inventory to NRV

Question 8

Purchase Commitments

Answer 8

• generally seller retains title to the merchandise
• buyer recognizes no asset or liability
• if material, disclose in financial statement