Which of the following is a deficiency of using the lower of cost or market rule

Question

Which of the following is a deficiency of using the lower of cost or market rule? Inventory valued at cost in one year and at normal profit" in determining inventory values, which Is a subjective measure. Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize. D ) All of the above are deficiencies of using the lower of cost or market rule. Which of the following is not true with respect to the gross profit method of valuing inventories? A blanket gross profit rate may not be representative. Normally acceptable for financial reporting purposes. GAAP requires a physical inventory as additional verification. Provides an estimate of ending inventory. Uses past percentages in calculation. With respect to the presentation of inventories, which of the following is not required by generally accepted accounting principles? The amount of inventory lost due to shrinkage during the year. Consistent application of costing methods from one period to another or disclosure of the change in methods, reasons therefore and financial statement impact. Inventory composition either In the balance sheet or in a separate schedule in the notes. Composition of the inventory, inventory financing arrangements, and the inventory costing methods employed Inventory turnover: Is required to be disclosed In the notes to the financial statements. Equals average inventory divided by cost of goods sold. Only applies to merchandising companies Equals cost of goods sold divided by average inventory. Which of the following Is generally not considered in determining the "cost" of land? Special assessments for local improvements. Costs of clearing, grading and filling land to get it ready for a building. Salvage receipts from the demolition of an old building or the sale of timber. Costs of paving and striping a parking lot. Which of the following is generally not considered to be part of the "cost" of a building? Materials and labor directly related to the construction of the building Architectural fees related to the building design. Costs of foundation alterations required for special new equipment Building fees

Explanation / Answer

3)

All of the above are deficiency of using Lower of cost or market rule

Note :

Inventory valued at cost in one year and at market in the next year. as it is inconsitency in valuing at cost in one year and at market in next year

Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize.

LCM uses a "normal profit" in determining inventory values, which is a subjective measure..

4)

B) Normally acceptable for financial reporting purposes.GAAP requires a physical inventory as addional verification

Note : Gross Profit Method only acceptable for interim (generally quarterly) reporting purposes and not for financial reporting purposes

5)

A) Amount of Inventory Lost due to shrinkage during the year

Note : Presentaion of Inventory reuired for :

Consistent application of costing methods from one period to another.

Inventory composition either in the balance sheet or in a separate schedule in the notes.

Composition of the inventory, inventory financing arrangements, and the inventory costing methods employed.

Normal loss are not being seperately shown or presented

6) Inventory Turnover :

D) Equal cost of Good Sold divided by average inventory

Note :

Inventory Turnover = Cost of Good Sold/Average Inventory

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