Posted: July 24th, 2016

Which one of the following statements is true with regard to the lower of cost or market rule?

1. Which application of the lower of cost or market rule will generally result in the lowest valuation for the ending inventory?
to each item of the inventory
to each major category of inventory
to the total inventory
all of these applications result in the same valuation for inventory

2. Waring, Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of $42.50. The following is other information concerning this unit:

The selling price of this unit must be
$44.70
$45.70
$47.90
$53.40

3. Which one of the following statements is true with regard to the lower of cost or market rule?
If the direct method is used in applying the lower of cost or market rule, the loss or loss recovery due to market valuation changes is included in cost of goods sold.
The lower of cost or market rule must be applied on an individual item basis for financial accounting purposes.
With the application of the lower of cost or market rule using the direct method, the account, allowance to reduce inventory to market, is reported on the balance sheet as a contra asset.
The lower of cost or market rule is primarily an application of the going concern assumption.

4. Which one of the following statements regarding the gross profit method is true?
The gross profit method is a complicated method to use in practice.
The gross profit method results in a more accurate inventory valuation than the retail inventory method.
The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
The gross profit method is often used to calculate the year end inventory for financial accounting purposes.

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