Inventory Valuation And Write-Downs
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CPA Financial Accounting and Reporting (FAR) › Inventory Valuation And Write-Downs
Under U.S. GAAP, what is the amount per unit at which Omega Corp. should report this product in its year-end balance sheet?
$110
$115
$120
$150
Explanation
For entities using FIFO, inventory is valued at the lower of cost or net realizable value (LCNRV). Cost is $120. Net Realizable Value (NRV) is the estimated selling price less reasonably predictable costs of completion and disposal. NRV = $150 - $40 = $110. Since NRV ($110) is lower than cost ($120), the inventory should be reported at $110 per unit.
According to U.S. GAAP, what is the carrying value of this inventory item on the December 31, Year 1 balance sheet?
$428
$460
$480
$500
Explanation
For entities using LIFO, inventory is valued at the lower of cost or market (LCM). Cost is $500. 'Market' is the replacement cost ($460), but it cannot exceed a ceiling (Net Realizable Value) or be less than a floor (NRV minus a normal profit margin).
- Ceiling (NRV) = Selling Price - Costs to sell = $520 - $40 = $480.
- Floor = NRV - Normal Profit Margin = $480 - (10% * $520) = $480 - $52 = $428.
Since the replacement cost ($460) is between the floor ($428) and the ceiling ($480), the designated market value is $460. The final carrying value is the lower of cost ($500) or market ($460), which is $460.
What is the amount of the loss on inventory write-down that Pioneer should recognize in its income statement for the year?
$25,000
$0
$15,000
$10,000
Explanation
The company needs the ending balance in the allowance account to be $25,000. The beginning balance was $15,000. To increase the allowance from $15,000 to $25,000, the company must recognize an additional loss of $10,000 ($25,000 required balance - $15,000 beginning balance). The journal entry would be a debit to Loss on Inventory Write-Down for $10,000 and a credit to the Allowance for Inventory Valuation for $10,000.
What is the total Cost of Goods Sold that GlobeTech should report on its income statement for the year?
$2,400,000
$2,300,000
$2,250,000
$2,350,000
Explanation
First, calculate the cost of goods sold before any write-down: Beginning Inventory ($800,000) + Purchases ($2,200,000) - Ending Inventory at cost ($700,000) = $2,300,000. Next, calculate the required inventory write-down: Cost ($700,000) - NRV ($650,000) = $50,000. This write-down is typically included in the cost of goods sold. Therefore, the total COGS is $2,300,000 + $50,000 = $2,350,000.
What is the total value of Catalyst's inventory after applying the LCNRV rule at the category level?
$173,000
$171,000
$176,000
$180,000
Explanation
When applying LCNRV at the category level, the total cost and total NRV for each category are compared, and the lower of the two totals is used for that category's valuation.
For Category A:
Total Cost = $30,000 + $40,000 = $70,000.
Total NRV = $28,000 + $45,000 = $73,000.
The lower amount is the total cost, $70,000.
For Category B:
Total Cost = $50,000 + $60,000 = $110,000.
Total NRV = $52,000 + $55,000 = $107,000.
The lower amount is the total NRV, $107,000.
Total inventory value = Value of Category A + Value of Category B = $70,000 + $107,000 = $177,000.
For the purpose of applying the lower of cost or market rule, what is the designated market value of this inventory item?
$78
$85
$88.50
$92
Explanation
Under the lower of cost or market (LCM) rule, 'market' is the middle value of three amounts: replacement cost, the ceiling (NRV), and the floor (NRV less a normal profit margin). In this case, the values are:
- Ceiling (NRV): $92
- Replacement Cost: $85
- Floor (NRV - normal profit): $78
The replacement cost of $85 falls between the floor ($78) and the ceiling ($92). Therefore, the designated market value is the replacement cost, $85.
What is the correct ending inventory balance to be reported on the December 31, Year 2 balance sheet?
$600,000
$500,000
$700,000
$540,000
Explanation
The question asks for the correct ending inventory balance on the balance sheet. Inventory must be reported at the lower of its cost or net realizable value (assuming FIFO/WA). The cost of the ending inventory is $600,000. The net realizable value is $540,000. Since NRV ($540,000) is lower than cost ($600,000), the inventory must be written down and reported at $540,000 on the balance sheet.
A company experiences a material inventory write-down due to obsolescence. According to U.S. GAAP, which of the following is a required disclosure related to this event?
The original purchase invoices for the inventory that was written down.
The amount of the write-down, either separately disclosed or included in cost of goods sold, and the circumstances that led to it.
The names of the major customers who refused to purchase the obsolete inventory.
A projection of future inventory levels for the next three fiscal years.
Explanation
U.S. GAAP requires that if a material amount of inventory is written down, the financial statement notes should disclose the amount of the loss and the circumstances that caused it. The loss can be reported as a separate line item in the income statement or included as part of the cost of goods sold, but its nature should be explained.
Which of the following statements correctly differentiates the application of the lower of cost or net realizable value (LCNRV) rule from the lower of cost or market (LCM) rule under U.S. GAAP?
LCNRV allows for the reversal of previous write-downs, whereas LCM does not.
LCNRV is used for inventories accounted for under the LIFO method, while LCM is used for the FIFO method.
LCM must be applied to individual inventory items, while LCNRV can only be applied to the inventory as a whole.
LCM defines 'market' as replacement cost subject to a ceiling and a floor, while LCNRV directly uses net realizable value.
Explanation
The primary difference lies in how the 'market' or 'net realizable value' side of the comparison is determined. The LCNRV rule, used for FIFO and weighted-average methods, is a direct comparison of cost to net realizable value. The LCM rule, used for LIFO and retail inventory methods, is more complex; it compares cost to a 'market' value, which is replacement cost constrained by a ceiling (NRV) and a floor (NRV less normal profit).
What is the effect of this omission on the company's year-end financial statements, assuming the error is not corrected?
Assets are understated and net income is overstated.
Assets are understated and cost of goods sold is overstated.
Liabilities are overstated and gross profit is understated.
Cost of goods sold is understated and retained earnings are overstated.
Explanation
Failing to record a write-down means that the ending inventory (an asset) is overstated. According to the COGS formula (Beginning Inventory + Purchases - Ending Inventory), an overstated ending inventory leads to an understated Cost of Goods Sold. An understated COGS results in overstated gross profit and net income. Overstated net income leads to overstated retained earnings. Therefore, COGS is understated and retained earnings are overstated.