Inventories
TRUE-FALSE—Conceptual
1. A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.
2. The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value.
3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating inventory.
4. Application of the lower-of-cost-or-market rule results in inconsistency because a company may value inventory at cost in one year and at market in the next year.
5. GAAP requires reporting inventory at net realizable value, even if above cost, whenever there is a controlled market with a quoted price applicable to all quantities.
6. A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures.
7. In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value.
8. A basket purchase occurs when a company agrees to buy inventory weeks or months in advance.
9. Most purchase commitments must be recorded as a liability.
10. If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should record any expected losses on the commitment in the period in which the market decline takes place.
11. When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.
12. The gross profit method can be used to approximate the dollar amount of inventory on hand.
13. In most situations, the gross profit percentage is stated as a percentage of cost.
14. A disadvantage of the gross profit method is that it uses past percentages in determining the markup.
15. When the conventional retail method includes both net markups and net markdowns in the cost-to-retail ratio, it approximates a lower-of-cost-or-market
1. A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.
2. The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value.
3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating inventory.
4. Application of the lower-of-cost-or-market rule results in inconsistency because a company may value inventory at cost in one year and at market in the next year.
5. GAAP requires reporting inventory at net realizable value, even if above cost, whenever there is a controlled market with a quoted price applicable to all quantities.
6. A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures.
7. In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value.
8. A basket purchase occurs when a company agrees to buy inventory weeks or months in advance.
9. Most purchase commitments must be recorded as a liability.
10. If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should record any expected losses on the commitment in the period in which the market decline takes place.
11. When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.
12. The gross profit method can be used to approximate the dollar amount of inventory on hand.
13. In most situations, the gross profit percentage is stated as a percentage of cost.
14. A disadvantage of the gross profit method is that it uses past percentages in determining the markup.
15. When the conventional retail method includes both net markups and net markdowns in the cost-to-retail ratio, it approximates a lower-of-cost-or-market