In determining lower-of-cost-or-market, market is the expected selling price under normal operations.
Net realizable value is selling price less costs of completion and disposal.
The primary motivation behind LCM is consistency.
The purpose of ceilings and floors in LCM is to prevent profit distortion.
Losses on reduction to LCM may be charged to either cost of goods sold or to a current loss account
without distorting financial statement ratios.
Inventory written down due to LCM may be written back up if market values go back up.
In using the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns
and net markups.
Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail
The cost-to-retail percentage used in the retail method to approximate
average costs considers both
markdowns and markups.
10. If the quantity of goods held in inventory decreased during the period, the dollar amount of ending
inventory cannot exceed the dollar amount of beginning inventory.
11. For a change from the average cost method to FIFO, the current year's income includes the cumulative
after-tax difference that would have resulted if the company had used FIFO in all prior years.
12. A change from LIFO to any other inventory method is accounted for retrospectively.
13. For a purchase commitment contained within a single fiscal year, if the market price is less than the
contract price, the purchase is recorded at the contract price.
14. For a purchase commitment extending beyond the current fiscal year, if the market price on the purchase
date declines from the previous year-end price, the purchase is recorded at the market price.
15. International Financial Reporting Standards allow the reversal of an inventory write-down.
16. Match each phrase with the correct term placing the letter designating the best term in the space provided
by the phrase.
1. Change from
LIFO to FIFO
Estimates value of inventory based on historical
2. LIFO retail
Requires retrospective treatment. __
3. Net markup
Added in arriving at ending inventory at retail. __
4. Gross profit
Beginning inventory is not included in the calculation
of the current period's cost-to-retail percentage.
Required for a change from FIFO to average cost. __
17. Match each phrase with the correct term placing the letter designating the best term in the space provided
by the phrase.
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