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3. The purpose of the ―floor‖ in lower-of-cost-or-market
considerations is to avoid overstating inventory.
4. Application of the lower-of-cost-or-market rule results in
inconsistency because a company may value inventory at cost in one
year and at market in the next year.
5. GAAP requires reporting inventory at net realizable value,
even if above cost, whenever there is a controlled market with a
quoted price applicable to all quantities.
6. A reason for valuing inventory at net realizable value is that
sometimes it is too difficult to obtain the cost figures.
7. In a basket purchase, the cost of the individual assets acquired
is determined on the basis of their relative sales value.
8. A basket purchase occurs when a company agrees to buy
inventory weeks or months in advance.
9.
Most purchase commitments must be recorded as a liability.
10. If the contract price on a noncancelable purchase commitment
exceeds the market price, the buyer should record any expected losses
on the commitment in the period in which the market decline takes
place.
11. When a buyer enters into a formal, noncancelable purchase
contract, an asset and a liability are recorded at the inception of the
contract.
12. The gross profit method can be used to approximate the dollar
amount of inventory on hand.
13. In most situations, the gross profit percentage is stated as a
percentage of cost.