6.3 Learning Objective 6-3
1) When applying the lower-of-cost-or-market rules to inventory valuation in the United States, market value generally refers to the selling price of the inventory.
2) IFRS defines market value for inventory as net realizable value.
3) Under the disclosure principle, the inventory accounting method used by a company must be described in the footnotes.
4) A company uses LIFO in one year, then switches to FIFO and then to average-cost. This is a violation of the:
A) disclosure principle
B) historical cost principle.
C) consistency principle.
D) conservatism principle.
5) Under U.S. GAAP, inventories are reported on the balance sheet at:
A) historical cost only.
B) current replacement cost only.
C) net realizable value only.
D) A and B.
6) Following IFRS, the lower-of-cost-or-market rule requires a company to report inventories at the lower of:
A) historical cost or current sales price.
B) historical cost or net realizable value.
C) current replacement cost or historical cost.
D) FIFO cost or LIFO cost.
7) When applying the lower-of-cost-or-market rule to inventories, market value generally refers to ________ under U.S. GAAP and ________ under IFRS.
A) current replacement cost; historical cost
B) historical cost; net realizable value
C) historical cost; current replacement cost
D) current replacement cost; net realizable value
8) Which of the following is a CORRECT statement about the lower-of-cost-or market rule?
A) Under GAAP, once inventory has been written down to market value, the write-downs can be reversed in future periods.
B) Under GAAP, the lower-of-cost-or-market rule is optional.
C) Under IFRS, lower-of-cost-or-market write-downs cannot be reversed.
D) Under IFRS, lower-of-cost-or-market write-downs can be reversed.
9) Perfect Catering Company's ending inventory was $106,700 at historical cost and $113,500 at current replacement cost. Before consideration of the lower-of-cost-or-market rule, the company's cost of goods sold was $60,000. Following U.S. GAAP, which of the following statements reflect the correct application of the lower-of-cost-or-market rule?
A) The Ending Inventory balance will be $106,700, and Cost of Goods Sold will be $60,000.
B) The Ending Inventory balance will be $113,500, and Cost of Goods Sold will be $60,000.
C) The Ending Inventory balance will be $106,700, and Cost of Goods Sold will be $66,800.
D) The Ending Inventory balance will be $113,500, and Cost of Goods Sold will be $53,200.
10) Mariah Company has inventory at the end of the year with a historical cost of $75,000. Mariah Company uses the perpetual inventory system. Under the LCM rules, the current replacement cost is $72,600. Under U.S. GAAP, the journal entry to record the write-down to LCM will:
A) debit Cost of Goods Sold for $2,400 and credit Inventory for $2,400.
B) debit Cost of Goods Sold for $2,400 and credit Purchases for $2,400.
C) debit Inventory for $2,400 and credit Cost of Goods Sold for $2,400.
D) debit Purchases for $2,400 and credit Cost of Goods Sold for $2,400.