In Comparison to the Allowance Method of Applying the Lower

question 49

Multiple Choice

In comparison to the allowance method of applying the lower of cost or market rule to the valuation of inventory, the direct method has which of the following deficiencies?

• A)The direct method reports a more conservative amount for net income.
• B)For the direct method, the loss or loss recovery due to market valuation changes is included in the cost of goods sold amount.
• C)With the direct method, the inventory amount reported on the balance sheet is the historical cost.
• D)The direct method can only be used with a perpetual inventory system.

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Definitions:

Utility Cost

The expense incurred for using utilities such as electricity, water, and natural gas in a business operation.

Total Cost

The sum of all costs associated with the production and delivery of a company's products or services, including both fixed and variable costs.

Manufacture Units

The process of converting raw materials into finished goods on a large scale, measured by units produced.

Least-squares Regression

A statistical method used to determine the line of best fit by minimizing the square of the differences between observed values and values predicted by a linear function.