7.Explain the concept of hidden reserves as it applies to the lower-of-cost-or-market rule.
8.The chief investment officer of a large mutual fund made the following statement:
"I prefer to use the debt/equity ratio instead of the debt/asset ratio because the latter ratio is sensitive to the measure of inventory where accountants can choose LIFO, FIFO, or weighted averaging. Therefore, I use the debt/equity ratio so that I do not have to worry about which inventory valuation method the accountant used when I run comparisons between companies."
Comment on the preceding statement.
9.Why is the lower-of-cost-or-market rule necessary in accounting?
10.After studying a financial accounting text, your roommate asserts that what is interesting about accountants is that they always measure what actually happens. Having studied inventory, you disagree with your roommate's assertion. Present an argument refuting your roommate's position that accountants measure what actually happens in context of knowledge acquired after reading the chapter entitled "Merchandise Inventory."
11.
If an entity understates its ending inventory for the current period, what is the effect on cost of goods sold and inventory carry over to the next year. Explain why.
12.Explain the relationship between the valuation of inventory and income measurement.