FAR 4

Question 1

How do you calculate Interest Revenue earned?

Answer 1

Total interest revenue is the amount received over the term of the note less the present value of the note: 5($5,009) - $19,485 = $5,560.

Question 2

When a note receivable is determined to be impaired, how is the loss or expense determined?

Answer 2

A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received.

Question 3

Under IFRS, a cash generating unit (CGU) is:

Answer 3

The smallest group of assets that generates independent cash flows from continuing use.

Question 4

In a period of rising prices, FIFO:

Answer 4

Results in highest net income and higher Ending Inventory.

Question 5

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

Answer 5

Dollar-value LIFO.

Question 6

When using Lower of Cost or Market, what is the ceiling?

Answer 6

Net Realizable Value

Question 7

In LCM, Net Realizable Value is calculated how?

Answer 7

NRV = Estimated Selling Price - Estimated Cost of Disposal

Question 8

In LCM, Market Value is the same as:

Answer 8

Current Replacement Cost

Question 9

In LCM, Cost is?

Answer 9

Original purchase price

Question 10

In LCM, what is the floor?

Answer 10

Floor = NRV - Normal Profit Margin

Question 11

Replacement Value (Market Value) vs. Cost?

Answer 11

Cost is the purchase price. MV is the replacement cost limited by the Floor and Ceiling (whichever is the middle figure between Floor, Replacement Cost and Ceiling).

Question 12

When marking up a specific line of household items for resale, a retailer computes its markup as 40% of cost. For purposes of estimating ending inventory using the gross margin method, what percentage is applied to sales when estimating cost of goods sold?

Answer 12

The gross margin method applies the cost to sales ratio to sales in order to derive an estimate of cost of goods sold. Subtracting the resulting estimate of cost of goods sold from the cost of goods available for sale yields an estimate of ending inventory without counting the items. This firm determines the selling price to be 140% of cost because the markup is 40% of cost. Cost plus markup yields selling price. Therefore, the cost to sales ratio is 1.00/1.40 or .71.

Question 13

Union Corp. uses the first-in, first-out retail method of inventory valuation. The following information is available:

                                        Cost  Retail     Beginning inventory  $12,000  $ 30,000     Purchases                    60,000  110,000     Net additional markups             10,000     Net markdowns                         20,000     Sales revenue                             90,000  

If the lower of cost or market rule is disregarded, what would be the estimated cost of the ending inventory?

Answer 13

The cost to retail ratio under FIFO is: [$60,000/($110,000 + $10,000 - $20,000)] = .60.
Ending inventory at retail is $30,000 + $110,000 + $10,000 - $20,000 - $90,000 = $40,000.
Ending inventory at cost, therefore, is .60($40,000) = $24,000.

Question 14

How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory?

Answer 14

Although the result is approximate, by excluding net markdowns from the denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a lower ending inventory valuation.

Question 15

Using the Cost-to-Retail method, how do you find EI (Cost)?

Answer 15

EI(cost) = EI(retail) x C/R

Question 16

Average, LCM in the Cost-to-Retail Method differs how?

Answer 16

Average, LCM – The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator, but excludes net markdowns from the cost ratio calculation.

Question 17

In October of year one, a firm committed to a purchase of inventory at a total cost of $26,000. The contract is irrevocable and specifies a delivery date in March of year two. At the end of year one, the market value of the inventory under contract is worth $23,000 at current cost. Choose the correct reporting for the year one financial statements:

Answer 17

A liability of $3,000 is reported in the Balance Sheet.

Question 18

On January 2 of the current year, LTTI Co. entered into a three-year, non-cancelable contract to buy up to 1 million units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

Answer 18

$52,000 - The un-purchased minimum for the next 3 years.

Question 19

A company determined the following values for its inventory as of the end of its fiscal year:
Historical cost $100,000
Current replacement cost 70,000
Net realizable value 90,000
Net realizable value less normal profit margin 85,000
Fair value 95,000

Answer 19

$90,000 - Since historical cost is greater than any of the other values, the question is to what value should the inventory be marked down? This answer is correct because it is the net realizable value and the IFRS requires the lower of cost or net realizable value.

Question 20

IFRS requires inventory to be carried at what value?

Answer 20

IFRS requires that inventory be reported at the lower of cost (historical) or net realizable value.

Question 21

How is NRV calculated for IFRS?

Answer 21

Estimated selling price less any cost to complete or sell.