Question 1

Which of the following is/are not true regarding inventories when their replacement cost declines below acquisition cost?

Accepted Answer

U.S.GAAP does not permit firms to recognize subsequent value increases for inventory impairments.

Question 2

For manufacturing firms, the balance sheet reports the costs of incomplete items as

Accepted Answer

The balance sheet of a manufacturing firm reports the costs of incomplete items as Work-in-Process (WIP) Inventory. This is because WIP inventory comprises of partially completed goods that are in the production process but are yet to be completed. The costs included in WIP inventory include direct materials, direct labor, and manufacturing overheads.

Question 3

Mystical Duds estimates that unsold women's clothing with a carrying value of $500 million has minimal market value given a change in fashion.To reflect the minimal market value of the merchandise, Mystical Duds

Accepted Answer

The answer of Mystical Duds estimates that unsold women's clothing...

Question 4

Manufacturing overhead includes:

Accepted Answer

Manufacturing overhead encompasses all indirect costs associated with the production process. This includes costs that cannot be directly traced to specific products (A), expenditures related to the operation and maintenance of the manufacturing facilities such as utilities, taxes, insurance, and depreciation (B), salaries for supervisory personnel who oversee the production process (C), and any costs that benefit all products produced, rather than specific items (D). Therefore, all of the options listed (A through D) are components of manufacturing overhead, making E the correct choice.

Question 5

Which of the following is not true regarding the lower-of-cost-or-market basis for inventory valuation?

Accepted Answer

The lower-of-cost-or-market basis for inventory valuation does not report inventories on the balance sheet at amounts that are equal to the acquisition cost less a normal profit margin. This statement is false. The correct statement would be that it reports inventories on the balance sheet at amounts that are never greater, but may be less, than acquisition cost.

Question 6

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the specific identification system, and uses serial numbers or product bar codes to identify bi-level touring bicycle 2 as the unit sold.The cost of goods sold is _____, and the ending inventory is _____.

Accepted Answer

Since the specific identification method is used, the cost of goods sold will be the cost of the bicycle that was sold, which is bi-level touring bicycle 2 that costs $2,900. The ending inventory will be the cost of the remaining bicycles, which are bi-level touring bicycles 1 and 3 and have a total cost of $5,500 ($2,500 + $3,000). Therefore, the answer is A) $2,900 for cost of goods sold and $5,500 for ending inventory.

Question 7

Flower Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had a cost of $25,000 and a market value of $20,000.Which of the following is/are not true?

Accepted Answer

Choice D is the best answer because it correctly identifies the appropriate disclosure for the write-downs included in Cost of Goods Sold. Management's Discussion and Analysis is the appropriate section in which to discuss the scope of the asset impairment, as it provides users with a more detailed discussion of the financial results and conditions of the company than would be found in the financial statements alone. Choices A, B, and C are not true because they assume that the company is valuing its ending inventory using the lower of cost or market method, which is not stated in the question.

Question 8

Why might inventories increase in market value subsequent to acquisition?

Accepted Answer

A shortage of a key raw material can lead to increased market value for inventories containing that material due to scarcity.

Question 9

Forgone Company had beginning inventory of $19,000, purchases were $100,000, and ending inventory had a cost of $25,000 and a market value of $20,000.The same inventory increased $3,000 in market value in the subsequent period.Which of the following is/are not true?

Accepted Answer

The answer of Forgone Company had beginning inventory of $19,000,...

Question 10

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the FIFO cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.

Accepted Answer

Under the FIFO (First-In, First-Out) method, the cost of goods sold is based on the cost of the oldest inventory. Therefore, the cost of goods sold is $2,500 (the cost of the first bicycle). The ending inventory is the sum of the costs of the remaining bicycles: $2,900 + $3,000 = $5,900.

Question 11

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Suppose the cycling store uses the LIFO cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.

Accepted Answer

Under the LIFO (Last In, First Out) method, the last bicycle purchased (costing $3,000) is considered sold first. Therefore, the cost of goods sold is $3,000, and the ending inventory is the sum of the costs of the remaining bicycles: $2,500 + $2,900 = $5,400.

Question 12

The market value for inventory valuation purposes generally means

Accepted Answer

The market value for inventory valuation purposes generally means replacement cost, which is the cost to replace the inventory with new items at their current cost. This is often used as an alternative to historical cost, which is the cost of the inventory when it was first purchased.

Question 13

U.S.GAAP specifies that, in the context of inventories, market means

Accepted Answer

U.S. GAAP specifies that market refers to replacement cost, except that market value cannot be higher than the net realizable value and cannot be lower than the net realizable value after reducing a normal profit margin. This is known as the lower of cost or market (LCM) rule.

Question 14

The lower-of-cost-or-market basis for inventory valuation

Accepted Answer

The lower-of-cost-or-market (LCM) basis for inventory valuation is a conservative accounting policy that recognizes losses from decreases in market value before a sale occurs. It also recognizes gains from increases in market value above original acquisition cost only when a sale occurs. As a result, inventories are reported on the balance sheet at amounts that are never greater, but may be less, than acquisition cost. Therefore, all of the options given in the question are correct.

Question 15

Brussels Products began its Belgian operations on January 1. The following is the journal entry for the total payroll for January of €60,000: €40,000 paid to factory workers and €20,000 paid to marketing and administrative personnel:

Accepted Answer

The correct entry separates the costs between manufacturing labor (€40,000 to Work-in-Process Inventory) and non-manufacturing salaries (€20,000 to Salaries Expense), reflecting the nature of the expenses accurately.

Question 16

Brussels Products began its Belgian operations on January 1.The following is the journal entry for the issuance, to producing departments of raw materials costing €20,000:

Accepted Answer

The issuance of raw materials is a conversion of one asset, Raw Materials Inventory, to another asset, Work-in-Process Inventory. Therefore, the journal entry should include only these two accounts. Choice D correctly reflects this by debiting Work-in-Process Inventory and crediting Raw Materials Inventory.

Question 17

Which of the following is true regarding the remeasurement of inventories upward to an amount exceeding their acquisition cost?

Accepted Answer

All the statements provided are true regarding the remeasurement of inventories upward. A) highlights the conservative approach of acquisition cost, B) and C) discuss the potential for increased selling prices and the realization of benefits, and D) notes the accounting treatment under both U.S. GAAP and IFRS, which delays recognition of inventory valuation increases until the sale occurs.

Question 18

City Bicycle City Bicycle , a cycling store has a beginning inventory of one bi-level touring bicycle 1, for which it paid $2,500.Suppose that during the period the store purchases bi-level touring bicycle 2 for $2,900 and bi-level touring bicycle 3 for $3,000, and that it sells one bicycle for $5,500.The three bicycles are physically identical; the store acquired them at different times as their acquisition costs changed, so only their costs differ.
Using the City Bicycle example, suppose the cycling store uses the weighted-average cost-flow assumption.The cost of goods sold is _____, and the ending inventory is _____.

Accepted Answer

The weighted-average cost is calculated by averaging the cost of all bicycles: ($2,500 + $2,900 + $3,000) / 3 = $2,800. The cost of goods sold is $2,800, and the ending inventory is the average cost multiplied by the remaining bicycles: $2,800 * 2 = $5,600.

Question 19

IFRS specifies that, in the context of inventories, market means

Accepted Answer

Under IFRS, inventories are measured at the lower of cost and net realizable value, where net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Question 20

Which of the following is/are true regarding the Finished Goods Inventory account?

Accepted Answer

All the statements provided are true regarding the Finished Goods Inventory account. A) accurately describes the purpose of the account, B) explains the process of transferring costs upon sale, and C) details the correct journal entry for such a sale.

Quiz 9: Working Capital