Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Financial Statement Effects of Inventory Costing Methods

Financial Accounting

5. Inventory

Financial Statement Effects of Inventory Costing Methods

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Multiple Choice

In the context of inventory costing and asset impairment, the recoverability test compares:

The asset's book value to its net realizable value.

The asset's carrying amount to the sum of the expected future undiscounted cash flows from the asset.

The asset's carrying amount to its fair market value.

The asset's historical cost to its replacement cost.

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Verified step by step guidance

Understand the concept of recoverability test: The recoverability test is used to determine whether an asset is impaired. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount.

Identify the key comparison in the recoverability test: The test compares the asset's carrying amount (book value) to the sum of the expected future undiscounted cash flows generated by the asset.

Clarify the terms: The carrying amount refers to the value of the asset recorded on the balance sheet, while the expected future undiscounted cash flows represent the total cash inflows expected from the asset without applying a discount rate.

Eliminate incorrect options: The recoverability test does not compare the asset's book value to its net realizable value, fair market value, historical cost, or replacement cost. These comparisons are used in other contexts, such as inventory valuation or fair value assessments.

Conclude the correct comparison: The recoverability test specifically compares the asset's carrying amount to the sum of the expected future undiscounted cash flows to determine if impairment exists.