Question Details

The gross profit method of inventory valuation is invalid 



	1.	At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon for delivery during the coming summer. The company prices its inventory at the LCNRV. 
If the market price for jet fuel at the end of the year is $4.50, how would this situation be reflected in the annual financial statements?
a.	Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.
b.	No impact.
c.	Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.
d.	Disclose the existence of the purchase commitment.

	2.	At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.60 per gallon for delivery during the coming summer. The company prices its inventory at the LCNRV. If the market price for jet fuel at the end of the year is $4.25, how would this situation be reflected in the annual financial statements?
a.	Record unrealized gains of $350,000 and disclose the existence of the purchase commitment.
b.	No impact.
c.	Record unrealized losses of $350,000 and disclose the existence of the purchase commitment.
d.	Disclose the existence of the purchase commitment.

	3.	How is the gross profit method used as it relates to inventory valuation?
a.	Verify the accuracy of the perpetual inventory records.
b.	Verity the accuracy of the physical inventory.
c.	To estimate cost of goods sold.
d.	To provide an inventory value of LIFO inventories.

	4.	Which of the following is not a basic assumption of the gross profit method?
a.	The beginning inventory plus the purchases equal total goods to be accounted for.
b.	Goods not sold must be on hand.
c.	If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand.
d.	The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

	5.	The gross profit method of inventory valuation is invalid when
a.	a portion of the inventory is destroyed.
b.	there is a substantial increase in inventory during the year.
c.	there is no beginning inventory because it is the first year of operation.
d.	none of these.


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