Question 1

Most purchase commitments must be recorded as a liability.

Accepted Answer

False

Question 2

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

Accepted Answer

A broker-trader values their inventory at net realizable value, which is the estimated selling price in the ordinary course of business, minus the estimated costs of completion and the estimated costs necessary to make the sale.

Question 3

Under International Financial Reporting Standards (IFRS), separate reporting of reversals of inventory write-downs in the period of sale are required.

Accepted Answer

According to IFRS, reversals of inventory write-downs must be separately reported in the period of sale. This ensures that the cost of goods sold is accurately reflected and that any overstatement of inventory value is corrected.

Question 4

Application of the lower-of-cost-or-net realizable value rule results in inconsistency because a company may value inventory at cost in one year and at net realizable value in the next year.

Accepted Answer

The lower-of-cost-or-net realizable value rule requires a company to value their inventory at the lower of its cost or net realizable value. This means that if the net realizable value of inventory drops below its cost, the inventory must be written down to its net realizable value. This can result in inconsistency because a company may value their inventory at cost in one year when its net realizable value is higher, and then value it at net realizable value in the next year when its cost is higher.

Question 5

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

Accepted Answer

Under IFRS, net realizable value is the general rule for valuing commodities held by broker-traders.

Question 6

A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.

Accepted Answer

According to the lower of cost or market (LCM) rule, if the future utility of the inventory item falls below its original cost, a company should abandon the historical cost principle and report the inventory at the lower of cost or market value. Therefore, the statement is true.

Question 7

Under International Financial Reporting Standards (IFRS), a company who recorded a loss on a purchase commitment in 2015 cannot record a recovery of that loss in 2016 if prices improve.

Accepted Answer

Under IFRS, if the conditions that led to the recognition of a loss on a purchase commitment change, such as an improvement in prices, the company can reverse the loss in subsequent periods.

Question 8

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

Accepted Answer

A basket purchase refers to the acquisition of a group of assets together for a single price, not specifically to the timing of inventory purchases.

Question 9

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

Accepted Answer

In a basket purchase, the cost of the individual assets acquired is allocated based on their relative standalone sales value. This is based on the idea that each asset has its own value independent of the other assets in the basket purchase.

Question 10

International Financial Reporting Standards (IFRS) require that a company record an inventory write-down as part of cost of goods sold.

Accepted Answer

The answer of International Financial Reporting Standards (IFRS) require that...

Question 11

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

Accepted Answer

Biological assets, such as milking cows, are reported as non-current assets at fair value less costs to sale (net realizable value) in accordance with International Accounting Standards (IAS) 41 Agriculture.

Question 12

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.

Accepted Answer

Under IFRS, companies usually apply the LCNRV rule on an item-by-item basis rather than on a total-inventory basis.

Question 13

In late 2015, Daisy Company entered into a noncancelable purchase contract for which the contract price is now greater than the market price, and Daisy expects that losses will occur when the purchase is executed in early 2016.Under IFRS, Daisy should recognize a liability and corresponding loss in 2015.

Accepted Answer

Under IFRS, when a company has an onerous contract, where the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received, it must recognize a liability and corresponding loss.

Question 14

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.

Accepted Answer

Unrealized gains and losses related to recording biological assets at their fair value are reported in the income statement, not in other comprehensive income, according to IAS 41 Agriculture.

Question 15

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

Accepted Answer

IFRS recognizes that agricultural activity can result in the production of both agricultural produce (e.g. harvested crops) and biological assets (e.g. livestock or trees used for timber). These two types of assets are accounted for differently under IFRS.

Question 16

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

Accepted Answer

This statement accurately reflects the accounting treatment for agricultural produce as outlined in International Accounting Standard (IAS) 41, Agriculture.

Question 17

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.

Accepted Answer

This statement is true. When the contract price exceeds the market price, the buyer has essentially agreed to pay more than the item is currently worth. This creates a liability for the buyer, and a corresponding loss should be recognized in the period in which the market decline occurs. This is known as the lower of cost or market (LCM) method of accounting for inventory.

Question 18

The gross profit method can be used to approximate the dollar amount of inventory on hand.

Accepted Answer

The gross profit method involves using the gross profit percentage to estimate the cost of goods sold, which can then be subtracted from the total cost of inventory purchased to estimate the cost of inventory on hand.

Question 19

The lower-of-cost-or-net realizable method is used for inventory despite being less conservative than valuing inventory at net realizable value.

Accepted Answer

The answer of The lower-of-cost-or-net realizable method is used for...

Question 20

When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.

Accepted Answer

The answer of When a buyer enters into a formal,...

Quiz 9: Inventories: Additional Valuation Issues