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Lower of Cost or Market (Quiz)

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If you have difficulty answering the following questions, learn more about this topic by reading our Lower of Cost or Market (Explanation).


  1. 1.

    The accounting guideline usually associated with the lower of cost or market (LCM) rule for valuing inventory.

    Conservatism
    Right!
    Economic Entity
    Wrong.
    Reliability
    Wrong.
  2. 2.

    The upper limit or ceiling for the replacement cost in the LCM rule.

    Net Realizable Value
    Right!
    Net Realizable Value Minus Normal Profit
    Wrong.
    Expected Selling Price In The Ordinary Course Of Business
    Wrong.
  3. 3.

    The lower limit or floor for the replacement cost in the LCM rule.

    Net Realizable Value
    Wrong.
    Net Realizable Value Minus Normal Profit
    Right!
    Expected Selling Price In The Ordinary Course Of Business
    Wrong.
  4. 4. Define net realizable value:
    __________
    The expected selling price in the ordinary course of business minus the costs of completion and disposal.
    .
  5. 5.

    At December 31, a retailer's Inventory account correctly reported its cost of $48,000. On December 31, the market value of the inventory was $49,000. The retailer also uses a balance sheet valuation account Allowance to Reduce Inventory to LCM. On December 31, the balance in the valuation account should be

    $0
    Right!
    Credit Balance Of $1,000
    Wrong.
    Debit Balance Of $1,000
    Wrong.
    This would cause the inventory to be reported at an amount greater than cost and thereby violate the cost principle.
  6. 6.

    On December 31, the retailer's cost of its inventory is correctly reported in its Inventory account as $51,000. The market value of the inventory on December 31, was $50,300. What amount should be reported as the balance in Allowance to Reduce Inventory to LCM at December 31?

    $0
    Wrong.
    Credit Balance Of $700
    Right!
    Debit Balance Of $700
    Wrong.
    This would cause the inventory to be reported at an amount greater than cost and thereby violate the cost principle.
  7. Use the following information on Product J for answering Questions 7 - 11:

  8. 7. The net realizable value of Product J is: $
    __________
    $11.10
    Expected selling price of $12.50 minus $1.40 of costs to complete and dispose.
    .
  9. 8. The ceiling or upper limit on the replacement cost is: $
    __________
    $11.10
    The net realizable value determined in #7.
    .
  10. 9. The floor or lower limit on the replacement cost is: $
    __________
    $8.60
    The net realizable value of $11.10 minus the normal profit of $2.50 (20% of $12.50).
    .
  11. 10. The market amount that will be compared to cost is: $
    __________
    $9.50
    The replacement cost. Replacement cost is used because it is between the ceiling of $11.10 and the floor of $8.60.
    .
  12. 11. The lower of cost or market that should be reported on the balance sheet for Product J under the item-by-item method is: $
    __________
    $9.00
    $9.00 is the answer because it is the lower of $9.00 (cost) vs. the constrained replacement cost of $9.50. (The replacement cost of $9.50 was used as the market because it was between the ceiling of $11.10 and the floor of $8.60.)
    The answer can also be found by arranging the four relevant amounts in descending order and then selecting the third highest amount, unless cost is lower. If cost is lower than the third number, select cost:

    $11.10 NRV (ceiling for replacement cost)
    $ 9.50 Replacement cost
    $ 9.00 Cost
    $ 8.60 NRV - profit (floor for replacement cost)
    .
  13. Use the following information on Product W for answering Questions 12 - 16:

  14. 12. The net realizable value of Product W is: $
    __________
    $10.60
    Expected selling price of $12.00 minus $1.40 of costs to complete and dispose.
    .
  15. 13. The ceiling or upper limit on the replacement cost is: $
    __________
    $10.60
    The net realizable value determined in #12.
    .
  16. 14. The floor or lower limit on the replacement cost is: $
    __________
    $8.20
    The net realizable value of $10.60 minus the normal profit of $2.40 (20% of $12.00).
    .
  17. 15. The market amount that will be compared to cost is: $
    __________
    $8.20
    Replacement cost of $8.00 cannot be the market because it is lower than the floor amount of $8.20.
    .
  18. 16. The lower of cost or market that should be reported on the balance sheet for Product W under the item-by-item method is: $
    __________
    $8.20
    $8.20 is the answer because it is the lower of $9.00 (cost) vs. the constrained replacement cost of $8.20. (The replacement cost of $8.00 could not be used as the market because of the floor of $8.20.)
    The answer can also be found by arranging the four relevant amounts in descending order and then selecting the third highest amount, unless cost is lower. If cost is lower than the third number, select cost:

    $10.60 NRV (ceiling for replacement cost)
    $ 9.00 Cost
    $ 8.20 NRV - profit (floor for replacement cost)
    $ 8.00 Replacement cost
    .
  19. Use the following information on Product Z for answering Questions 17 - 21:

  20. 17. The net realizable value of Product Z is: $
    __________
    $8.60
    Expected selling price of $10.00 minus $1.40 of costs to complete and dispose.
    .
  21. 18. The ceiling or upper limit on the replacement cost is: $
    __________
    $8.60
    The net realizable value determined in #17.
    .
  22. 19. The floor or lower limit on the replacement cost is: $
    __________
    $6.60
    The net realizable value of $8.60 minus the normal profit of $2.00 (20% of $10.00).
    .
  23. 20. The market amount that will be compared to cost is: $
    __________
    $8.60
    Replacement cost of $8.75 cannot be the market because it is higher than the ceiling of $8.60.
    .
  24. 21. The lower of cost or market that should be reported on the balance sheet for Product Z under the item-by-item method is: $
    __________
    $8.60
    $8.60 is the answer because it is the lower of $9.00 (cost) vs. the constrained replacement cost of $8.60. (The replacement cost of $8.75 could not be used as the market because of the ceiling of $8.60.)
    The answer can also be found by arranging the four relevant amounts in descending order and then selecting the third highest amount, unless cost is lower. If cost is lower than the third number, select cost:

    $ 9.00 Cost
    $ 8.75 Replacement cost
    $ 8.60 NRV (ceiling for replacement cost)
    $ 6.60 NRV - profit (floor for replacement cost)
    .
  25. Use the following information on Product D for answering Questions 22 - 26:

  26. 22. The net realizable value of Product D is: $
    __________
    $9.60
    Expected selling price of $11.00 minus $1.40 of costs to complete and dispose.
    .
  27. 23. The ceiling or upper limit on the replacement cost is: $
    __________
    $9.60
    The net realizable value determined in #22.
    .
  28. 24. The floor or lower limit on the replacement cost is: $
    __________
    $7.40
    The net realizable value of $9.60 minus the normal profit of $2.20 (20% of $11.00).
    .
  29. 25. The market amount that will be compared to cost is: $
    __________
    $8.00
    The replacement cost. Replacement cost is used as the market because it is between the ceiling of $9.60 and the floor of $7.40.
    .
  30. 26. The lower of cost or market that should be reported on the balance sheet for Product D under the item-by-item method is: $
    __________
    $8.00
    $8.00 is the answer because it is the lower of $9.00 (cost) vs. the constrained replacement cost of $8.00. (The replacement cost of $8.00 was used as the market because it is between the ceiling of $9.60 and the floor of $7.40.)
    The answer can also be found by arranging the four relevant amounts in descending order and then selecting the third highest amount, unless cost is lower. If cost is lower than the third number, select cost:

    $ 9.60 NRV (ceiling for replacement cost)
    $ 9.00 Cost
    $ 8.00 Replacement cost
    $ 7.40 NRV - profit (floor for replacement cost)
    .
  31. Use the following information on Product R for answering Questions 27 - 31:

  32. 27. The net realizable value of Product R is: $
    __________
    $10.60
    Expected selling price of $12.00 minus $1.40 of costs to complete and dispose.
    .
  33. 28. The ceiling or upper limit on the replacement cost is: $
    __________
    $10.60
    The net realizable value determined in #27.
    .
  34. 29. The floor or lower limit on the replacement cost is: $
    __________
    $8.20
    The net realizable value of $10.60 minus the normal profit of $2.40 (20% of $12.00).
    .
  35. 30. The market amount that will be compared to cost is: $
    __________
    $8.20
    Replacement cost of $8.10 cannot be used as the market because it is lower than the floor of $8.20.
    .
  36. 31. The lower of cost or market that should be reported on the balance sheet for Product R under the item-by-item method is: $
    __________
    $8.00
    $8.00 is the answer because it is the lower of $8.00 (cost) vs. the constrained replacement cost of $8.20. (The replacement cost of $8.10 could not be used as the market because it is below the floor of $8.20.)
    The answer can also be found by arranging the four relevant amounts in descending order and then selecting the third highest amount, unless cost is lower. If cost is lower than the third number, select cost:

    $10.60 NRV
    $ 8.20 NRV - profit (floor for replacement cost)
    $ 8.10 Replacement cost
    $8.00 Cost. The answer is $8.00 because it is the cost and it is lower than the third amount.
    .
  37. 32.

    The most conservative application of the lower of cost or market (LCM) rule is

    Inventory Totals
    Wrong.
    Item-by-item
    Right!
    Major Categories Of Inventory
    Wrong.
  38. 33.

    The least conservative application of the lower of cost or market (LCM) rule is

    Inventory Totals
    Right!
    Item-by-item
    Wrong.
    Major Categories Of Inventory
    Wrong.

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