Question 1

Which of the following best describes the Lower-of-Cost-or-Net Realizable Value (LCNRV) rule?

Accepted Answer

Inventory is valued at the lower of historical cost or net realizable value, where net realizable value is the estimated selling price less costs of completion, disposal, and transportation.

Question 2

A company has inventory with a cost of $$1,200, an estimated selling price of 1$$,500, estimated costs of completion of $$100, and estimated selling costs of 300. $$What is the net realizable value (NRV) of the inventory?

Accepted Answer

$1,100

Question 3

Under the lower-of-cost-or-market (LCM) rule, what is the 'ceiling' for market value?

Accepted Answer

Net realizable value

Question 4

A retailer has inventory with a cost of $$900, replacement cost of 850$$, NRV of $$1,000, and NRV less a normal profit margin of 800. $$According to the LCM rule, what value should be used for inventory?

Accepted Answer

$850

Question 5

Why is the LIFO inventory method an exception to the LCNRV rule?

Accepted Answer

Because LIFO inventory values are typically below NRV and replacement cost, but can result in higher values in rare cases, so LCM is used to constrain the value.

Question 6

A company signs a non-cancellable purchase commitment for inventory at $$50,000. At year-end, the market price drops to 40$$,000. What is the appropriate accounting treatment?

Accepted Answer

Recognize a loss of $10,000 in the current period.

Question 7

Which of the following is NOT a step in the gross profit method of estimating ending inventory?

Accepted Answer

Add estimated gross profit to beginning inventory to determine ending inventory.

Question 8

Lowery Stores has a beginning inventory of $$60,000, purchases of 200$$,000, and sales of $280,000. If the gross profit on selling price is 30%, what is the estimated cost of goods sold?

Accepted Answer

$196,000

Question 9

Given a gross profit on selling price of 25%, what is the equivalent percentage markup on cost?

Accepted Answer

33\frac{1}{3}\%

Question 10

If a product costs $$15 and sells for 20$$, what is the gross profit percentage on selling price?

Accepted Answer

20%

Question 11

Which of the following best describes the retail inventory method?

Accepted Answer

It estimates ending inventory by applying a cost-to-retail percentage to ending inventory at retail.

Question 12

Kelvie Company has beginning inventory at cost of $$14,000 and at retail of 20$$,000. Purchases at cost are $$63,000 and at retail are 90$$,000. Sales are $85,000. What is the cost-to-retail percentage?

Accepted Answer

$77,000 \div 110,000 = 70\%

Question 13

Which of the following is true regarding markup cancellations in the retail inventory method?

Accepted Answer

They are decreases in prices previously marked up above the original retail price.

Question 14

A company uses the FIFO retail inventory method. Which cost pool does it use to compute the cost-to-retail percentage?

Accepted Answer

The total set of new purchases during the period

Question 15

Which journal entry is correct when adjusting inventory to NRV using the cost-of-goods-sold method?

Accepted Answer

Debit Cost of Goods Sold, Credit Inventory

Question 16

Which of the following is a limitation of the lower-of-cost-or-market method?

Accepted Answer

Market value cannot be lower than NRV less a normal profit margin.

Question 17

If a company uses the average cost method, which inventory valuation rule should it apply?

Accepted Answer

Lower-of-cost-or-net realizable value

Question 18

A company has inventory with a cost of $$100, NRV of 90$$, and replacement cost of $95. Under the LCNRV rule, what value should be reported?

Accepted Answer

$90

Question 19

Which of the following is NOT a reason for using the gross profit method?

Accepted Answer

Continuous use for annual financial statements

Chapter 8: Inventories – Additional Valuation Issues (Intermediate Accounting)

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