Chapter 9: Inventories Additional Valuation Issues

Question 1

When does a company abandon historical cost principle?

Answer 1

When the future utility of the asset drops below its original cost

Question 2

What is net realizable value?

Answer 2

Estimated selling price in the ordinary course of business.

Less (-) estimated cost of completion
Less (-) disposal
Less (-) transportation

Question 3

The use of the lower-of-cost or net realizable value method works well when…

Answer 3

The decline in value of a company’s inventory

Question 4

Which approach compares cost to net realizable value?

Answer 4

Lower of cost net realizable value

Question 5

Which approach compares a designated market value of inventory to cost?

Answer 5

Lower of cost or market

Question 6

What are the two limitations of lower of cost or market?

Answer 6

Ceiling ( net realizable value) and floor ( net realizable value minus a Borneo profit margin)

Question 7

What is the purpose for ceiling limitation?

Answer 7

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

Question 8

What is the purpose for floor limitation?

Answer 8

Deters understatement of inventory and overstatement of loss in current period.