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Chapter 9: Q1ISTQ (page 499)

All of the following are key similarities between GAAP and IFRS with respect to accounting for inventories except: (a) costs to include in inventories are similar. (b) LIFO cost flow assumption where appropriate is used by both sets of standards. (c) fair value valuation of inventories is prohibited by both sets of standards. (d) guidelines on ownership of goods are similar

Short Answer

Expert verified

The correct option is “b.”

Step by step solution

01

LIFO cost flow assumption

(b) LIFO cost assumption is permitted by the GAAP but is prohibited under IFRS.

02

Explanation of wrong options

(a) Under GAAP and IFRS, the costs included in the inventories are the same.

(c) Both GAAP and IFRS prohibit the fair value valuation method.

(d) Guidelines of ownership are similar under both.

Thus, the correct option is the second one.

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Most popular questions from this chapter

Reed Pentak, a finance major, has been following globalization and made the following observation concerning accounting convergence: “I do not see many obstacles concerning development of a single accounting standard for inventories.” Prepare a response to Reed to explain the main obstacle to achieving convergence in the area of inventory accounting

Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 \( 400 \) 80,000 Purchases: March 10 500 \( 450 \)225,000 March 20 400 \( 475 \)190,000 March 30 300 \( 500 \)150,000 Sales: March 15 500 \( 540 \)270,000 March 25 400 \( 570 \)228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 \( 800 \)480,000 Purchases: March 3 600 \( 900 \)540,000 March 12 300 \( 950 \)285,000 March 21 500 \(1,000 \)500,000 Sales: March 18 900 \(1,080 \)972,000 March 29 600 \(1,140 \)684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart’s commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Net realizable value (per unit) \(900 \)580 The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method. Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level. Englehart places both commercial and residential pumps into the same (and only) category. Analysis Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information? Principles Assume that during April, the net realizable value of commercial pumps rebounds to $1,050. (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).

The financial statements of M&S are presented in Appendix E. The company’s complete annual report, including the notes to the financial statements, is available online. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) How does M&S value its inventories? Which inventory costing method does M&S use as a basis for reporting its inventories? (b) How does M&S report its inventories in the statement of financial position? (c) What costs does M&S include in Inventory and Cost of Sales? (d) What was M&S’s inventory turnover in 2015? What is its gross profit percentage? Evaluate M&S’s inventory turnover and its gross profit percentage.

Olson Corporation, a retailer and wholesaler of national brand-name household lighting fixtures, purchases its inventories from various suppliers. Instructions (a) (1) What criteria should be used to determine which of Olson’s costs are inventoriable ? (2) Are Olson’s administrative costs inventoriable ? Defend your answer. (b) (1) Olson uses the lower-of-cost-or-market rule for its wholesale inventories. What are the theoretical arguments for that rule? (2) The replacement cost of the inventories is below the net realizable value less a normal profit margin, which, in turn, is below the original cost. What amount should be used to value the inventories? Why? (c) Olson calculates the estimated cost of its ending inventories held for sale at retail using the conventional retail inventory method. How would Olson treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories? Why.

Presented below is information related to Rembrandt Inc.’s inventory, assuming Rembrandt uses lower-of-LIFO cost-or-market. (per unit) Skis Boots Parkas Historical cost \(190.00 \)106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profit margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of cost-or-market computation for skis, (b) the cost amount that should be used in the lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to value parkas on the basis of the lower-of-cost-or-market.
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