9-2 Test Bank for Intermediate Accounting: IFRS Edition, 3e

CHAPTER 9 TRUE-FALSE—Conceptual

INVENTORIES: ADDITIONAL VALUATION ISSUES 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-net realizable method is used for inventory despite being less
CHAPTER LEARNING OBJECTIVES conservative than valuing inventory at net realizable value.

3. Application of the lower-of-cost-or-net realizable value rule results in inconsistency

1. Describe and apply the lower-of-cost-or- net realizable value rule. because a company may value inventory at cost in one year and at net realizable value in
2. Identify other inventory valuation issues. the next year.
3. Determine ending inventory by applying the gross profit method. 4. International Financial Reporting Standards (IFRS) require that a company record an
4. Determine ending inventory by applying the retail inventory method. inventory write-down as part of cost of goods sold.
5. Explain how to report and analyze inventory.
5. Under International Financial Reporting Standards (IFRS), when companies value
inventory using the lower-of-cost-or-net realizable value (LCNRV), in most situations,
companies price inventory on a total–inventory basis.

6. Biological assets, such as milking cows, are reported as non-current assets at fair value
less costs to sale (net realizable value).

7. The unrealized gains and losses related to recording biological assets at their correct
valuation are reported as part of other comprehensive income on the statement of
comprehensive income.

8. Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing commodities held by broker-traders.

9. Under International Financial Reporting Standards (IFRS), separate reporting of reversals

of inventory write-downs in the period of sale are required.

10. Under International Financial Reporting Standards (IFRS), agricultural activity can result in
the production of both agricultural produce and biological assets.

11. An inventory of wheat held by a broker-trader is valued at net realizable value.

12. Agricultural produce is harvested from biological assets and is measured at fair value less
costs to sell at the point of harvest.

13. In a basket purchase, the cost of the individual assets acquired is determined on the basis
of their relative standalone sales value.

14. A basket purchase occurs when a company agrees to buy inventory weeks or months in
advance.

15. Most purchase commitments must be recorded as a liability.

16. If the contract price on a noncancelable purchase commitment exceeds the market price,
the buyer should recognize a liability and corresponding loss in the period in which the
market decline takes place.
 Inventories: Additional Valuation Issues 9-3 9-4 Test Bank for Intermediate Accounting: IFRS Edition, 3e

17. When a buyer enters into a formal, noncancelable purchase contract, an asset and a
liability are recorded at the inception of the contract.
MULTIPLE CHOICE—Conceptual
18. In late 2018, Daisy Company entered into a noncancelable purchase contract for which 31. LCNRV of inventory
the contract price is now greater than the market price, and Daisy expects that losses will a. is always either the net realizable value or its cost.
occur when the purchase is executed in early 2019. Under IFRS, Daisy should recognize b. should always be equal to net realizable value.
a liability and corresponding loss in 2018. c. may sometimes be less than net realizable value.
d. should always be equal to net realizable value less costs to complete.
19. Under International Financial Reporting Standards (IFRS), a company who recorded a
loss on a purchase commitment in 2018 cannot record a recovery of that loss in 2019 if 32. Lower-of-cost-or-net realizable value
prices improve. a. gives the lowest valuation if applied to the total inventory.
b. gives the lowest valuation if applied to major groups of inventory.
20. The gross profit method can be used to approximate the dollar amount of inventory on c. gives the lowest valuation if applied to individual items of inventory.
hand. d. must be applied to major groups for taxes.
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21. In most situations, the gross profit percentage is stated as a percentage of cost. 33. When the cost-of-goods-sold method is used to record inventory at net realizable value
a. there is a direct reduction in the selling price of the product that results in a loss being
22. A disadvantage of the gross profit method is that it uses past percentages in determining recorded on the income statement prior to the sale.
the markup. b. a loss is recorded directly in the inventory account by crediting inventory and debiting
loss on inventory decline.
23. When the conventional retail method includes both net markups and net markdowns in the c. only the portion of the loss attributable to inventory sold during the period is recorded
cost-to-retail ratio, it approximates a lower-of-cost-or-net realizable value valuation. in the financial statements.
d. the net realizable value figure for ending inventory is substituted for cost and the loss
24. In the retail inventory method, the term markup means a markup on the original cost of an is buried in cost of goods sold.
inventory item.
34. Lower-of-cost-or-net realizable value as it applies to inventory is best described as the
25. In the retail inventory method, abnormal shortages are deducted from both the cost and a. reporting of a loss when there is a decrease in the future utility below the original cost.
retail amounts and reported as a loss. b. method of determining cost of goods sold.
c. assumption to determine inventory flow.
26. The inventory turnover is computed by dividing the cost of goods sold by the ending d. change in inventory value to net realizable value.
inventory on hand.
35. Why are inventories stated at lower-of-cost-or-net realizable value?
27. The average days to sell inventory represents the average number of days’ sales for a. To report a loss when there is a decrease in the future utility.
which a company has inventory on hand. b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
28. Under IFRS, LIFO is permitted for financial reporting purposes if the company’s host d. To permit future profits to be recognized.
country permits it for tax purposes.
36. Which of the following is not an acceptable method of applying the lower-of-cost-or-net
29. Under U.S. GAAP, if inventory is written down under lower-of-cost-or-market, it may not realizable value method to inventory?
be written back up to its original cost in a subsequent period. a. Inventory location.
b. Groups of inventory items.
30. IFRS requires inventory to be written down below its original cost in some situations, but c. Individual item.
inventory cannot be written up above its original cost. d. Total of the inventory.

True False Answers—Conceptual 37. Which method(s) may be used to record a loss due to a price decline in the value of
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. inventory?
1. T 6. T 11. T 16. T 21. F 26. F a. Loss method.
2. F 7. F 12. T 17. F 22. T 27. T b. Sales method.
3. T 8. T 13. T 18. T 23. F 28. F c. Cost-of-goods-sold method.
4. F 9. T 14. F 19. F 24. F 29. T d. Both the loss method and the cost-of-goods-sold method.
5. F 10. T 15. F 20. T 25. T 30. T
 Inventories: Additional Valuation Issues 9-5 9-6 Test Bank for Intermediate Accounting: IFRS Edition, 3e

38. When inventory declines in value below original (historical) cost what is the maximum 44. Under International Financial Reporting Standards (IFRS), agricultural activity results in
amount that the inventory can be valued at? which of the following types of assets?
a. Sales price I. Agricultural produce
b. Net realizable value II. Biological assets
c. Historical cost a. I only.
d. Sales price reduced by estimated costs to sell b. II only.
c. I and II.
39. Net realizable value is d. Neither I nor II.
a. fair value plus estimated costs to complete and make a sale.
b. selling price. 45. Agricultural produce is
c. selling price plus estimated costs to complete and make a sale. a. Harvested from biological assets.
d. selling price less estimated costs to complete and make a sale. b. Valued at the time of harvest at its cost to produce.
c. Valued at each reporting period at its fair value less costs to sell.
40. Shake Company’s inventory experienced a decline in value necessitating a write-down to d. All of the choices are correct regarding agricultural produce.
lower of cost or net realizable value (LCNRV) of €230,000. This amount is material to
Shake’s income statement and the company follows IFRS. Where should Shake 46. Commodity broker-traders
Company report this decline in value according to IFRS? a. Produce or raise commodities such as corn, wheat, or precious metals.
I. As a loss on the income statement. b. Hold their inventory primarily to sell the commodities in the near term and generate a
II. As a separate component of other comprehensive income on the statement profit from price fluctuations.
of comprehensive income. c. Value their inventories at the lower-of-cost-or-net realizable value (LCNRV).
III. As part of cost of goods sold on the income statement. d. All of the choices are correct regarding broker-traders.
a. Shake must use I.
b. Shake must use I, II or III. 47. Situations in which net realizable value is used to value inventory include
c. Shake must use I, or III. a. agricultural inventory.
d. Shake must use III. b. minerals and mineral products.
c. commodities held by broker-traders.
41. Which of the following statements is incorrect regarding the lower-of-cost-or-net d. All of these are correct.
realizable value (LCNRV)?
a. Net realizable value (NRV) is the selling price less estimated costs to complete and 48. If a material amount of inventory has been ordered through a formal purchase contract at
estimated costs to make a sale. the statement of financial position date for future delivery at firm prices,
b. In most situations, companies price inventory on a total-inventory basis. a. this fact must be disclosed.
c. One of two methods may be used to record the income effect of valuing inventory at b. disclosure is required only if prices have declined since the date of the order.
net realizable value. c. disclosure is required only if prices have since risen substantially.
d. Companies use an allowance account, the “Allowance to Reduce Inventory to Net d. an appropriation of retained earnings is necessary.
Realizable Value.”
49. The credit balance that arises when a net loss on a purchase commitment is recognized
42. Under International Financial Reporting Standards (IFRS), which of the following is true should be
regarding inventory write-downs and/or recovery of a write-down? a. presented as a current liability.
a. Recovery of inventory write-downs is prohibited under IFRS. b. subtracted from ending inventory.
b. IFRS requires separate reporting of reversals of inventory write-downs. c. presented as an appropriation of retained earnings.
c. IFRS requires companies to record write-downs in a separate loss account. d. presented in the income statement.
d. All of the choices are correct.
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50. In 2018, Orear Manufacturing signed a contract with a supplier to purchase raw materials
43. Under International Financial Reporting Standards (IFRS), net realizable value is the in 2019 for €700,000. Before the December 31, 2018 statement of financial position date,
general rule for valuing which of the following types of inventory? the market price for these materials dropped to €510,000. The journal entry to record this
a. Commodities held by broker-traders. situation at December 31, 2018 will result in a credit that should be reported
b. Computer components held for sale to manufacturers. a. as a valuation account to Inventory on the statement of financial position.
c. Inventories priced on an item by-item basis, but not those priced on a total-inventory b. as a current liability.
basis. c. as an appropriation of retained earnings.
d. All of the choices are held at NRV under IFRS. d. on the income statement.
 Inventories: Additional Valuation Issues 9-7 9-8 Test Bank for Intermediate Accounting: IFRS Edition, 3e

51. At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase
commitment for the purchase of 1 million gallons of jet fuel at a price of €4.10 per gallon 58. An inventory method which is designed to approximate inventory valuation at the lower of
for delivery during the coming summer. The company prices its inventory at the LCNRV. cost or net realizable value is
If the market price for jet fuel at the end of the year is €4.50, how would this situation be a. last-in, first-out.
reflected in the annual financial statements? b. first-in, first-out.
a. Record unrealized gains of €400,000 and disclose the existence of the purchase commitment. c. conventional retail method.
b. No impact. d. specific identification.
c. Record unrealized losses of €400,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment. 59. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of
52. At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for high-cost and low-cost ratio goods.
the purchase of 1 million gallons of jet fuel at a price of €4.60 per gallon for delivery during b. ratio of gross margin to sales is approximately the same each period.
the coming summer. The company prices its inventory at the LCNRV. If the market price c. ratio of cost to retail changes at a constant rate.
for jet fuel at the end of the year is €4.25, how would this situation be reflected in the d. proportions of markups and markdowns to selling price are the same.
annual financial statements?
a. Record unrealized gains of €350,000 and disclose the existence of the purchase commitment. 60. Which statement is true about the retail inventory method?
b. No impact. a. It may not be used to estimate inventories for interim statements.
c. Record unrealized losses of €350,000 and disclose the existence of the purchase commitment. b. It may not be used to estimate inventories for annual statements.
d. Disclose the existence of the purchase commitment. c. It may not be used by auditors.
d. None of these are correct.
53. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records.
61. When the conventional retail inventory method is used, markdowns are commonly ignored
b. Verity the accuracy of the physical inventory.
in the computation of the cost to retail ratio because
c. To estimate cost of goods sold.
a. there may be no markdowns in a given year.
d. To provide an inventory value of LIFO inventories.
b. this tends to give a better approximation of the lower of cost or net realizable value.
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54. Which of the following is not a basic assumption of the gross profit method? c. markups are also ignored.
a. The beginning inventory plus the purchases equal total goods to be accounted for. d. this tends to result in the showing of a normal profit margin in a period when no
b. Goods not sold must be on hand. markdown goods have been sold.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand. 62. To produce an inventory valuation which approximates the lower-of-cost-or-net realizable
d. The total amount of purchases and the total amount of sales remain relatively value using the conventional retail inventory method, the computation of the ratio of cost
unchanged from the comparable previous period. to retail should
a. include markups but not markdowns.
55. The gross profit method of inventory valuation is invalid when b. include markups and markdowns.
a. a portion of the inventory is destroyed. c. ignore both markups and markdowns.
b. there is a substantial increase in inventory during the year. d. include markdowns but not markups.
c. there is no beginning inventory because it is the first year of operation.
d. None of these are correct. S
63. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage
56. Which statement is not true about the gross profit method of inventory valuation? which reflects the item’s selling price.
a. It may be used to estimate inventories for interim statements. b. A record of the total cost and retail value of goods purchased.
b. It may be used to estimate inventories for annual statements. c. A record of the total cost and retail value of the goods available for sale.
c. It may be used by auditors. d. Total sales for the period.
d. It may be used when fire or other catastrophe destroys the inventory.
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57. A major advantage of the retail inventory method is that it 64. Which of the following is not a reason the retail inventory method is used widely?
a. provides reliable results in cases where the distribution of items in the inventory is a. As a control measure in determining inventory shortages
different from that of items sold during the period. b. For insurance information
b. hides costs from competitors and customers. c. To permit the computation of net income without a physical count of inventory
c. gives a more accurate statement of inventory costs than other methods. d. To defer income tax liability
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.
 Inventories: Additional Valuation Issues 9-9 9 - 10 Test Bank for Intermediate Accounting: IFRS Edition, 3e

65. What condition is not necessary in order to use the retail method to provide inventory
results? 73. Replenish, Inc. develops and produces sports drinks for sale throughout the United States
a. Retailer keeps a record of the total costs of products sold for the period. and Europe. The International Accounting Standards Board (IASB) prohibits Replenish,
b. Retailer keeps a record of the total costs and retail value of goods purchased. Inc. from using which of the following cost flow assumptions for its inventory?
c. Retailer keeps a record of the total costs and retail value of goods available for sale. a. LIFO (last-in, first-out).
d. Retailer keeps a record of sales for the period. b. Specific identification.
c. Weighted-average.
66. What method yields results that are essentially the same as those of the conventional d. The IASB allows any of these cost flow assumptions as long as the company uses it
retail method? consistently.
a. FIFO.
b. Lower-of-average-cost-or-net realizable value. 74. Which of the following statements is correct regarding International Financing Reporting
c. Average cost. Standards (IFRS) and U.S. GAAP with regard to inventory?
d. LIFO. a. LIFO (last-in, first-out) is permitted under IFRS but not under U.S. GAAP.
b. When applying lower-of-cost-or-market, U.S. GAPP defines market as net realizable
67. What is the effect of net markups on the cost-retail ratio when using the conventional retail
value.
method?
c. IFRS permits valuing inventories at fair value, similar to the accounting for property,
a. Increases the cost-retail ratio.
plant, and equipment.
b. No effect on the cost-retail ratio.
d. Under U.S. GAPP, if inventory is written down under lower-of-cost-or-market, it may
c. Depends on the amount of the net markdowns.
not be written back up to its original cost in a subsequent period.
d. Decreases the cost-retail ratio.
68. What is the effect of freight-in on the cost-retail ratio when using the conventional retail
method? Multiple Choice Answers—Conceptual
a. Increases the cost-retail ratio. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
b. No effect on the cost-retail ratio.
31. a 38. b 45. a 52. c 59. a 66. b 73. a
c. Depends on the amount of the net markups.
32. c 39. d 46. b 53. a 60. d 67. d 74. d
d. Decreases the cost-retail ratio.
33. d 40. c 47. d 54. d 61. b 68. a
69. Which of the following is not a common disclosure for inventories? 34. a 41. b 48. a 55. d 62. a 69. b
a. Inventory composition. 35. c 42. b 49. a 56. b 63. a 70. b
b. Inventory location. 36. a 43. a 50. b 57. d 64. d 71. a
c. Inventory financing arrangements.
37. d 44. c 51. d 58. c 65. a 72. c
d. Inventory costing methods employed.
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70. Which of the following statements is false regarding an assumption of inventory cost flow?
correct.”
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period. 55. The gross profit percentage applicable to the goods in ending inventory is different from
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during a the percentage applicable to the goods sold during the period.
period. 60. Many answers are possible.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at
the end of an accounting period.
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71. The average days to sell inventory is computed by dividing
a. 365 days by the inventory turnover.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover.
d. 365 days by cost of goods sold.
72. The inventory turnover is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.