Deck 9: Inventories: Special Valuation Issues

Question 1

Given the following information for the Rachel Company: $\begin{array}{lll}\text { Date } & \text { Cost } & \text { Market } \\\hline \text { December 31, 2010 } & \$ 500 & \$ 500 \\\text { December 31, 2011 } & 700 & 650 \\\text { December 31, 2012 } & 800 & 730\end{array}$ If the direct method of recording lower of cost or market is in use, which December 31, 2012 entry is correct?

A)
Loss Due to Market Valuation $\quad$$\quad$ 20
Allowance to Reduce Inventory to Market $\quad$ 20
B)
Inventory $\quad$$\quad$ 730
Income Summary $\quad$$\quad$ 730
C)
Loss Due to Market Valuation $\quad 70$
Allowance to Reduce Inventory to Market $\quad 70$
D)
$\begin{array}{ll}\text { Inventory } & 800 \\\text { Income Summary } &800\end{array}$

Answer 1

Inventory $\quad$$\quad$ 730
Income Summary $\quad$$\quad$ 730

Question 2

Concerning application of the lower of cost or market method, which one of the following statements is true regarding the constraints on market value?

A)The upper constraint is estimated selling price less costs of completion and disposal.
B)The lower constraint is net realizable value less costs of completion and disposal.
C)The upper constraint is estimated selling price less a normal profit margin.
D)The upper constraint is estimated selling price less costs of completion and disposal and a normal profit margin.

Answer 2

A

Question 3

The Martha Company normally sells its inventory at a 20% profit margin on sales.In 2010, the net realizable value of inventory purchased for $50, 000 declined to $44, 000.There are no costs to complete and dispose of this inventory.What is the floor constraint on the valuation of this inventory using the lower of cost or market rule?

A)$35, 200
B)$40, 000
C)$44, 000
D)$50, 000

Answer 3

A

Question 4

The major criticism of the lower of cost or market rule for valuation of inventory is that

A)holding losses are recognized, but holding gains are not
B)holding gains are recognized, but holding losses are not
C)the total difference between selling price and cost is usually recognized in the period of the sale
D)the conservatism principle is violated because of the use of the floor constraint

Question 5

The most common approach to implementing the lower of cost or market rule for inventory valuation is to apply it

A)separately to each item of inventory
B)to each major category of inventory
C)to the total inventory
D)in a combination of these methods

Question 6

When applying lower of cost or market, market value

A)is defined as the selling price
B)should not exceed the net realizable value
C)should not exceed the net realizable value less an allowance for a normal profit margin
D)should not exceed the net realizable value plus an allowance for a normal profit margin

Question 7

Which application of the lower of cost or market rule will generally result in the lowest valuation for the ending inventory?

A)to each item of the inventory
B)to each major category of inventory
C)to the total inventory
D)all of these applications result in the same valuation for inventory

Question 8

Given the following information for the Teresa Company: $\begin{array}{lll}\text { Date } & \text { Cost } & \text { Market } \\\hline \text { December 31, 2010 } & \$ 800 & \$ 800 \\\text { December 31, 2011 } & 1,000 & 940 \\\text { December 31, 2012 } & 1,100 & 1,060\end{array}$ If the allowance method of recording lower of cost or market is in use, which December 31, 2012 entry is not correct?

A)
Loss Due to Market Valuation $\quad$$\quad$ 40
Allowance to Reduce Inventory to Market $\quad$ 40
B)
Allowance to Reduce Inventory to Market $\quad$ 20
Loss Recovery Due to Market Valuation $\quad$$\quad$ 20
C)
$\begin{array}{ll}\text { Inventory } & 1,100 \\\text { Income Summary } & 1,100\end{array}$
D)
$\begin{array}{cc}\text { Income Summary } & 1,000 \\\text { Inventory } & 1,000\end{array}$

Question 9

Exhibit 9-2 The Jenny Company uses a periodic inventory accounting system and values its inventory by using the lower of cost or market rule.The allowance method is used in applying the lower of cost or market rule.The company adjusts and closes its books annually on December 31.Below are the cost and market values of the company's year-end inventories for a three-year period:
$\begin{array}{lll}\text { Date } &\text { Cost }& \text { Market } \\\hline \text { December 31, 2010 } &\$ 70,000 & \$ 70,000 \\\text { December 31, 2011 } & 56,000 & 46,000 \\\text { December 31, 2012 } & 64,000 & 58,000\end{array}$

-Refer to Exhibit 9-2.Which of the following journal entries would be correct as of December 31, 2011, to apply the lower of cost or market rule to the valuation of inventory?

A)
$\begin{array}{ll}\text { Inventory } & 46,000 \\\quad \text { Income Summary } & 46,000\end{array}$
B)
Loss Due to Market Valuation $\quad 10,000$
Allowance to Reduce Inventory to Market $\quad 10,000$
C)
$\begin{array}{lc}\text { Cost of Goods Sold } & 10,000 \\\text { Inventory } & 10,000\end{array}$
D)
Cost of Goods Sold $\quad 10,000$
Allowance to Reduce Inventory to Market $\quad 10,000$

Question 10

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.

Question 11

Exhibit 9-2 The Jenny Company uses a periodic inventory accounting system and values its inventory by using the lower of cost or market rule.The allowance method is used in applying the lower of cost or market rule.The company adjusts and closes its books annually on December 31.Below are the cost and market values of the company's year-end inventories for a three-year period:
$\begin{array}{lll}\text { Date } &\text { Cost }& \text { Market } \\\hline \text { December 31, 2010 } &\$ 70,000 & \$ 70,000 \\\text { December 31, 2011 } & 56,000 & 46,000 \\\text { December 31, 2012 } & 64,000 & 58,000\end{array}$

- Refer to Exhibit 9-2.Which of the following journal entries would be correct as of December 31, 2012, to apply the lower of cost or market rule?

A)
Inventory $\quad$$\quad$ 58,000
Income Summary $\quad$ 58,000
B)
Loss Due to Market Valuation $\quad 6,000$
Allowance to Reduce Inventory to Market $\quad 6,000$
C)
Allowance to Reduce Inventory to Market $\quad 4,000$
Loss Recovery Due to Market Valuation $\quad 4,000$
D)
Cost of Goods Sold $\quad 6,000$
Allowance to Reduce Inventory to Market $\quad 6,000$

Question 12

Which one of the following statements is true with regard to the lower of cost or market rule?

A)If the direct method is used in applying the lower of cost or market rule, the loss or loss recovery due to market valuation changes is included in cost of goods sold.
B)The lower of cost or market rule must be applied on an individual item basis for financial accounting purposes.
C)With the application of the lower of cost or market rule using the direct method, the account, Allowance to Reduce Inventory to Market, is reported on the balance sheet as a contra asset.
D)The lower of cost or market rule is primarily an application of the going concern assumption.

Question 13

When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because

A)the allowance method reports smaller losses than the direct method
B)the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct method
C)the allowance method reports the inventory loss or loss recovery in a separate income statement account
D)the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of the balance sheet

Question 14

Exhibit 9-1 Waring Inc.uses the lower of cost or market rule in valuing its inventory.One unit has a ceiling constraint of $42.50.The following is other information concerning this unit:
$\begin{array}{ll}\text { Estimated transportation costs for delivery } & \$ 3.20 \\\text { Normal profit margin } & 5.50 \\\text { Packaging costs prior to delivery } & 2.20\end{array}$

- Refer to Exhibit 9-1.The selling price of this unit must be

A)$44.70
B)$45.70
C)$47.90
D)$53.40

Question 15

Marcus Company uses the lower of cost or market rule in valuing its inventory.The floor constraint for one item in the inventory is $58.20.The following is other information concerning this unit: $\begin{array}{ll}\text { Transpoutation costs } & \$ 4.00 \\\text { Normal profit margin } & 11.70 \\\text { Packaging costs } & 4.20\end{array}$ The market value for this item is

A)$62.20
B)$66.40
C)$69.90
D)$78.10

Question 16

When comparing the lower of cost to market

A)the appropriate market value is determined before comparing it to the cost
B)the purpose of the ceiling is to ensure that the write-down is sufficient to cover all expected gains
C)the purpose of the floor is to prevent an excessive gain from being recognized in the future
D)the process is consistent with the principle of conservatism because the goal is to limit excessive swings in gross margin

Question 17

Marcus Company uses the lower of cost or market rule in valuing its inventory.The floor constraint for one item in the inventory is $58.20.The following is other information concerning this unit: $\begin{array}{ll}\text { Transpoutation costs } & \$ 4.00 \\\text { Normal profit margin } & 11.70 \\\text { Packaging costs } & 4.20\end{array}$ The net realizable value for this item is

A)$62.20
B)$66.40
C)$69.90
D)$78.10

Question 18

Given the following information for the Rachel Company: $\begin{array}{lll}\text { Date } & \text { Cost } & \text { Market } \\\hline \text { December 31, 2010 } & \$ 500 & \$ 500 \\\text { December 31, 2011 } & 700 & 650 \\\text { December 31, 2012 } & 800 & 730\end{array}$ If the allowance method of recording lower of cost or market is in use, which December 31, 2012, entry is correct?

A)
Loss Due to Market Valuation $\quad$$\quad$ 20
Allowance to Reduce Inventory to Market $\quad$ 20
B)
Inventory $\quad$$\quad$ 730
Income Summary $\quad$ 730
C)
Loss Due to Market Valuation $\quad$$\quad$ 70
Allowance to Reduce Inventory to Market $\quad$ 70
D)
Allowance to Reduce Inventory to Market $\quad$ 800
Income Summary $\quad$$\quad$ 800

Question 19

Which application of the lower of cost or market rule will generally result in the highest valuation for the ending inventory?

A)to each item of the inventory
B)to each major category of inventory
C)to the total inventory
D)all of these applications result in the same valuation for inventory

Question 20

Exhibit 9-1 Waring Inc.uses the lower of cost or market rule in valuing its inventory.One unit has a ceiling constraint of $42.50.The following is other information concerning this unit:
$\begin{array}{ll}\text { Estimated transportation costs for delivery } & \$ 3.20 \\\text { Normal profit margin } & 5.50 \\\text { Packaging costs prior to delivery } & 2.20\end{array}$

- Refer to Exhibit 9-1.The floor constraint of this unit must be

A)$39.30
B)$37.00
C)$34.80
D)$31.60

Question 21

If the gross profit to cost of goods sold ratio is 0.30, the gross profit to sales ratio is

A)0.231
B)0.300
C)0.429
D)0.700

Question 22

In general, it is argued that the lower of cost or market rule is supported most closely by which of the following theoretical assumptions?

A)revenue recognition
B)conservatism
C)historical cost
D)going concern

Question 23

Exhibit 9-3 The Donna Company uses the gross profit method to estimate its inventory in interim financial statements.The markup on cost is 50%.The following information is available:
$\begin{array}{ll}\text { January } 1,2010, \text { inventory balance } & \$ 12,500 \\\text { Purchases } & 25,000 \\\text { Sales churing J anuary } & 24,000\end{array}$

- Refer to Exhibit 9-3.The estimated cost of goods sold at January 31, 2010, is

A)$25, 500
B)$21, 500
C)$16, 000
D)$12, 000

Question 24

Which one of the following statements is not true with regard to the gross profit method of estimating inventories?

A)The gross profit method may be used to determine inventory for interim financial reporting purposes without taking a physical count.
B)The percentage used for the gross profit method is determined by using previous years' historical data.
C)The gross profit method is not as accurate as the retail inventory method.
D)The gross profit method may only be used with a perpetual inventory accounting system.

Question 25

The journal entry to record the existence of a loss on a non-cancellable fixed purchase contract is

A)
$\begin{array}{cc}\text { Accrued Loss on Purchase Commitments } & \mathrm{XXX} \\\text { Loss on Purchase Commitments } & \mathrm{XXX}\end{array}$
B)
Loss on Purchase Commitments $\quad \mathrm{XXX}$
Accrued Loss on Purchase Commitments $\quad \mathrm{XXX}$
C)
$\begin{array}{lr}\text { Loss on Purchase Commitments } & \text { XXX } \\\text { Accounts Payable } & \mathrm{XXX}\end{array}$
D)
Loss on Purchase Commitments $\quad$$\quad$ $\quad \mathrm{XXX}$
Allowance to Reduce Inventory to Lower of Cost or Market $\quad$ XXX

Question 26

For valuation of inventory, the lower of cost or market rule may be applied to

A)the total inventory
B)each item or the total of inventory
C)each item, the total of inventory, or major categories of inventory
D)each item

Question 27

Consider the following: Code: $\quad A=$ Gross profit to net sales ratio
$\quad\quad\quad\mathrm{B}=$ Gross profit to cost of goods sold ratic Which equation is correct?

A)A = B / (1 - B)
B)A = (1 + B)/ B
C)A = (1 - B)/ B
D)A = B / (1 + B)

Question 28

The account, Loss on Purchase Commitments, used when the year-end market price is less than the fixed purchase price for non-cancellable purchase obligations is reported as a(n)

A)liability on the balance sheet
B)contra asset to inventory on the balance sheet
C)extraordinary item on the income statement
D)component of income from continuing operations

Question 29

Generally, valuing inventory above cost

A)violates conservatism and is never allowed
B)violates the lower of cost or market rule and is never allowed
C)is acceptable when revenue recognition is not applicable
D)is acceptable only in selected industries and in certain circumstances

Question 30

The Sara Company's inventory was partially destroyed on July 4, 2010, when its warehouse caught on fire early in the morning.Inventory that had a cost of $8, 000 was saved.The accounting records, which were located in a fireproof vault, contained the following information: $\begin{array}{ll}\text { Sales }(1 / 1 / 10 \text { through } 7 / 3 / 10) & \$ 260,000 \\\text { Purchases }(1 / 1 / 10 \text { through } 7 / 3 / 10) & 190,000 \\\text { Inventory }(1 / 1 / 10) & 40,000\\\text { Grossprofit ratio }&30 \% \text { of cost}\end{array}$ Using the gross profit method, what is the estimated cost of the inventory destroyed by the fire?

A)$40, 000
B)$30, 000
C)$25, 000
D)$22, 000

Question 31

The Wendy Company entered into a non-cancellable fixed price purchase obligation on July 20, 2010, to purchase 3, 000 assemblies at $6.50 per assembly to be delivered on March 2, 2012.On December 31, 2011, the replacement cost of the assembly was determined to be $5.90 per assembly.Which of the following adjusting journal entries would be correct as of December 31, 2011, to account for the price change?

A)
$\begin{array}{cr}\text { Inventory (or Purchases) } & 17,700 \\\text { Loss on Purchase Commitments } & 1,800 \\\text { Accounts Payable } & 19,500\end{array}$
B)
$\begin{array}{cc}\text { Loss on Purchase Commitments } & 1,800 \\\text { Inventory (or Purchases) } & 1,800\end{array}$
C)
Loss on Purchase Commitments $\quad 1,800$
Accrued Loss on Purchase Commitments $\quad 1,800$
D)
$\begin{array}{lrl}\text { Accounts Payable } & 1,800 & \\\text { Inventory (or Purchases) } & & 1,800\end{array}$

Question 32

Which journal entry is required to record the existence of a contingent loss on a cancelable fixed purchase contract?

A)
$\begin{array}{cc}\text { Accrued Loss on Purchase Commitments } & \mathrm{XXX} \\\text { Loss on Purchase Commitments } & \mathrm{XXX}\end{array}$
B)
Loss on Purchase Commitments $\quad$$\quad$ XXX
Accrued Loss on Purchase Commitments $\quad$ XXX
C)
$\begin{array}{lr}\text { Loss on Purchase Commitments } & \text { XXX } \\\text { Accounts Payable } & \text { XXX }\end{array}$
D)No required entry

Question 33

The application of the lower of cost or market rule to inventory valuation is an example of

A)the revenue realization principle
B)the going concern assumption
C)special industry practices
D)conservatism

Question 34

Which one of the following inventories may not be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory?

A)grain for an agricultural company
B)crude oil for an oil company
C)gold for a mining corporation
D)laptops for a computer manufacturer

Question 35

The account, Accrued Loss on Purchase Commitments, used when the year-end market price is less than the fixed purchase price for non-cancellable purchase obligations is reported as a(n)

A)liability on the balance sheet
B)contra asset to inventory on the balance sheet
C)extraordinary item on the income statement
D)component of income from continuing operations

Question 36

Exhibit 9-3 The Donna Company uses the gross profit method to estimate its inventory in interim financial statements.The markup on cost is 50%.The following information is available:
$\begin{array}{ll}\text { January } 1,2010, \text { inventory balance } & \$ 12,500 \\\text { Purchases } & 25,000 \\\text { Sales churing J anuary } & 24,000\end{array}$

- Refer to Exhibit 9-3.The estimated inventory at January 31, 2010, is

A)$25, 500
B)$21, 500
C)$16, 000
D)$12, 000

Question 37

For the period from 2010 through 2012, the Cheryl Company had net sales of $500, 000 and a gross profit of $200, 000.During the first quarter of 2013, the company made purchases of $17, 500 and recorded sales of $37, 500.The inventory value at the beginning of the year was 11, 500.What is the estimated cost of Cheryl's inventory on March 31, 2013, using the gross profit method?

A)$22, 500
B)$15, 000
C)$ 6, 500
D)$ 6, 000

Question 38

The Marjorie Company entered into a non-cancellable fixed price purchase obligation on August 19, 2010.The agreement was to purchase 2, 500 units of material at $16.00 per unit to be delivered on April 1, 2011.On December 31, 2010, and on April 1, 2011, the replacement cost is determined to be $14.50 per unit.Which journal entry would be correct to record the delivery on April 1, 2011?

A)
Inventory (or Purchases) $\quad 36,250$
Accrued Loss on Purchase Commitments $\quad$ 3,750
Accounts Payable $\quad$$\quad$ 40,000
B)
$\begin{array}{cr}\text { Inventory (or Purchases) } & 40,000 \\\text { Accounts Payable } & 40,000\end{array}$
C)
$\begin{array}{l}\text { Accrued Loss on Purchase Commitments } &3,750\\\text { Inventory }&3,750\end{array}$
D)No required entry

Question 39

Relevance of the gross profit margin depends upon

A)the accuracy of the gross profit percentage
B)the net sales
C)applying the overall profit margin to each individual department
D)averaging prior periods' net sales and total sales to verify which is best to use

Question 40

Which one of the following inventories may be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory?

A)automobiles for an automobile manufacturer
B)gold for a mining corporation
C)steel for a steel manufacturer
D)athletic shoes for a retail store

Question 41

The Patti Company's inventory was destroyed on July 4, 2010, when its warehouse caught on fire early in the morning.Inventory was totally destroyed.The accounting records, which were located in a fireproof vault, contained the following information: $\begin{array}{ll}\text { Sales }(1 / 1 / 10 \text { through } 7 / 3 / 10) & \$ 220,000 \\\text { Purchases }(1 / 1 / 10 \text { through } 7 / 3 / 10) & 180,000 \\\text { Inventory }(1 / 1 / 10) & 45,000\\\text { Grossprofit ratio }&25 \% \text { of cost}\end{array}$ Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?

A)$17, 500
B)$25, 000
C)$30, 000
D)$37, 500

Question 42

Barbara Co.presents the following information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\\\text { Net markups } & & \$ 200 \\\text { Sales } & & 2,100 \\\text { Purchases } & \$ 1,870 & 2,050 \\\text { Net markdowns } & & 50 \\\text { Beginning inventory } & 240 & 300\end{array}$ The company uses the average cost retail inventory method.What is the cost of ending inventory?

A)$340.00
B)$330.98
C)$379.80
D)$337.60

Question 43

As a result of taking a physical inventory count on December 31, 2010, the Samantha Company inventory was determined to be $50, 000.The auditors for Samantha suspected an inventory shortage and used the gross profit method to estimate the ending inventory.The accounting records for the company contained the following information: $\begin{array}{ll}\text { Inventory }(1 / 1 / 10) & \$ 130,000 \\\text { Purchases }(2010) & 770,000 \\\text { Sales }(2010) & 1,100,000 \\\text { Sales returns }(2010) & 100,000 \\\text { Grossprofit ratio } & 25 \% \text { of sales }\end{array}$ Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31, 2010?

A)$ 75, 000
B)$100, 000
C)$150, 000
D)$250, 000

Question 44

Daphne Company used the gross profit method to estimate its ending inventory of $800, which was an increase of $200 from the beginning inventory for the month.Gross purchases for the month amounted to $6, 000 and sales were $7, 250, made at a gross profit of 25% on cost.Calculate the amount of purchase returns made by Daphne for the month.

A)$ 0
B)$ 400.00
C)$ 600.00
D)$1, 562.50

Question 45

Which one of the following statements regarding the gross profit method is not true?

A)The gross profit method is a complicated method to use in practice.
B)The gross profit method is often used to estimate the year-end inventory for comparison to actual on-hand inventory.
C)The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
D)The gross profit method results in a less accurate inventory valuation than the retail inventory method.

Question 46

The Alice Company uses the retail inventory method and the average cost flow assumption for preparation of its interim reports.Information about Alice's inventory in the second quarter of 2010 is shown below: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Beginting inventory } & \$ 255 & \$ 800 \\\text { Purchases } & 600 & 1,400 \\\text { Net markips } & & 200 \\\text { Net markdowns } & & (500) \\\text { Sales } & & 1,300\end{array}$ What is the estimated cost of Alice's inventory on June 30, 2010?

A)$270
B)$300
C)$585
D)$600

Question 47

The lower of cost or market rule for inventory valuation can be used in conjunction with the retail inventory method if which of the following adjustments is made?

A)Include the cost and retail value of the beginning inventory when using the FIFO method.
B)Include the cost and retail value of the beginning inventory and the net markups and markdowns when using the average cost method.
C)Exclude the separate ratios for each layer in the beginning inventory when using the LIFO method.
D)Exclude the cost and retail value of the beginning inventory and net markups when applying the lower of average cost or market method.

Question 48

The gross profit method is most commonly used to

A)replace the year-end physical inventory
B)check the cost generated by a perpetual inventory system
C)determine the cost of inventory destroyed by fire
D)develop a sales budget

Question 49

Which one of the following statements is not true concerning the retail inventory method?

A)Net markups and markdowns are always added and subtracted in order to compute the retail value of ending inventory.
B)Markups and markdowns are recorded only at retail.
C)In the lower of average cost or market method, net markups are excluded from the computation of the cost-to-retail ratio.
D)In computing the cost-to-retail ratio, purchase discounts affect only the cost of purchases and not the retail amount of purchases.

Question 50

At the beginning of 2010, the Nancy Company had an inventory valued at $34, 375 at cost ($50, 000 at retail).During the year, Nancy purchased inventory for $50, 000 ($70, 000 at retail), and made markdowns of $7, 500.Nancy's sales in 2010 were $62, 500.What is Nancy's estimated ending inventory at FIFO cost using the retail inventory method?

A)$37, 500
B)$40, 000
C)$39, 000
D)$34, 375

Question 51

Which one of the following statements regarding the gross profit method is true?

A)The gross profit method is a complicated method to use in practice.
B)The gross profit method results in a more accurate inventory valuation than the retail inventory method.
C)The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
D)The gross profit method is often used to calculate the year-end inventory for financial accounting purposes.

Question 52

The Mary Company provided the following data for its December 31, 2010, inventory maintained on the retail basis. $\begin{array}{lll}&\text { At Cost }&\text { At Retail }\\\text { Beginning inventory } & \$ 120,000 & \$ 224,000 \\\text { Purchases } & 280,000 & 396,000 \\\text { Markups (net) } & & 20,000 \\\text { Markdowns (net) } & & (40,000) \\\text { Sales } & & 520,000\end{array}$ What is the estimated inventory at December 31, 2010, valued at lower of average cost or market?

A)$53, 333
B)$75, 000
C)$56, 000
D)$50, 000

Question 53

If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory method, the ending inventory's valuation is lower because of which of the following effects on the cost-to-retail ratio?

A)The denominator of the ratio will be lower, which results in a higher cost-to-retail ratio.
B)The denominator of the ratio will be higher, which results in a lower cost-to-retail ratio.
C)The numerator of the ratio will be higher, which results in a higher cost-to-retail ratio.
D)The numerator of the ratio will be lower, which results in a lower cost-to-retail ratio.

Question 54

With the retail inventory method, how is the total beginning inventory value used in the calculation of the cost-to-retail ratio for the current period under the following cost flow assumptions? $\begin{array}{lll}&\text { FIFO }&\text { Average Cost }&\text { LIFO }\\I.&\text { Include } & \text { Include } & \text { Exclude } \\II.&\text { Include } & \text { Exclude } & \text { Exclude } \\III.&\text { Exclude } & \text { Exclude } & \text { Exclude } \\IV.&\text { Exclude } & \text { Include } & \text { Excluide }\end{array}$

A)I
B)II
C)III
D)IV

Question 55

Which one of the following statements is not true concerning the retail inventory method?

A)In arriving at a cost-to-retail ratio, sales discounts are deducted from goods available for sale to determine ending inventory at retail.
B)Employee discounts are subtracted from goods available for sale to compute ending inventory at retail.
C)Abnormal inventory spoilage would be subtracted at both cost and retail in the determination of goods available for sale.
D)Purchase returns and allowances must be subtracted from both the cost and retail value of the purchases.

Question 56

When calculating the cost-to-retail ratio, net markups and markdowns are

A)always included in the computation of the ending inventory at retail
B)always included in the computation of the ending inventory at cost
C)never computed at retail
D)computed differently in each industry

Question 57

Edna Corp.uses the FIFO retail inventory method and reports the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Purchases } & \$ 21,450 & \$ 28,000 \\\text { Sales } & & 24,800 \\\text { Net markips } & & 1,000 \\\text { Beginning inventory } & 2,100 & 3,000 \\\text { Net\_markdowns } & & 400\end{array}$ What is the cost of ending inventory for Edna Corp.?

A)$4, 760
B)$5, 100
C)$5, 209
D)$5, 552

Question 58

The Beta Company uses the retail inventory method for valuation of its inventory.If an item had a cost of $45, was originally marked to sell at $60, was later priced at $55, and finally was priced at $63, the final price change is a

A)net markup of $18
B)markdown of $5 and a markup of $8
C)net markdown of zero and an additional markup of $3
D)net markdown of $5 and a net markup of $18

Question 59

As a result of taking a physical inventory count on December 31, 2010, the Lisa Company inventory was determined to be $61, 500.The auditors for Lisa suspected an inventory shortage and used the gross profit method to estimate the ending inventory.The accounting records for the company contained the following information: $\begin{array}{ll}\text { Inventory }(1 / 1 / 10) & \$ 130,000 \\\text { Purchases }(2010) & 760,000 \\\text { Sales }(2010) & 1,020,000 \\\text { Sales returns }(2010) & 60,000 \\\text { Grossprofit ratio } & 25 \% \text { of sales }\end{array}$ Using the gross profit method, what did the auditors estimate as the amount of the inventory that should have been on hand at December 31, 2010?

A)$240, 000
B)$ 61, 500
C)$125, 000
D)$170, 000

Question 60

Given the following information for Bonnie Company: $\begin{array}{ll}\text { Freight-in } & \$ 400 \\\text { Purchases } & 10,050 \\\text { Sales returns } & 100 \\\text { Beginning inventory } & 1,750 \\\text { Sales } & 13,450 \\\text { Grossprofit on sales } & 20 \%\end{array}$ Calculate ending inventory of Bonnie using the gross profit method.

A)$1, 360
B)$1, 075
C)$1, 440
D)$1, 520

Question 61

Sherrie's Shoes uses the FIFO retail inventory method to determine its ending inventory.The accounting records for Sherrie's Shoes contained the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Purchases } & \$ 242,000 & \$ 348,830 \\\text { Sales } & & 394,000 \\\text { Sales returns } & & 5,076 \\\text { Beginning inventory } & 60,500 & 107,294 \\\text { Net markups } & & 32,800 \\\text { Net markdowns } & & 12,000\end{array}$ The freight-in charges for the merchandise were $7, 500.What is the cost of ending inventory for Sherrie's Shoes?

A)$49, 280
B)$55, 792
C)$57, 200
D)$59, 400

Question 62

Brenda Corp.reported 2012 net income of $30, 000.However, the ending inventory in 2011 had been understated by $3, 000, and 2012's ending inventory had been overstated by $6, 000.Brenda's correct net income for 2012 was

A)$21, 000
B)$27, 000
C)$33, 000
D)$36, 000

Question 63

Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail ratio in a period of declining prices?

A)FIFO
B)LIFO
C)average cost
D)lower of average cost or market

Question 64

Carol Music Store uses the average cost retail inventory method to determine its ending inventory.The accounting records for the current year for Carol contained the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Purchases } & \$ 108,000 & \$ 137,750 \\\text { Beginning inventory } & 24,000 & 32,000 \\\text { Sales } & & 146,250 \\\text { Net markups } & & 18,819 \\\text { Net markdowns } & & 6,500 \\\text { Employee discounts } & & 12,500\end{array}$ What is the cost-to-retail percentage to be used for ending inventory calculations?

A)70.0%
B)72.5%
C)74.9%
D)77.8%

Question 65

The accountant for the Shelley Company made the following errors related to purchases of merchandise and ending inventory in 2010: 1. $\$ 2,100$ purchase of merchandise on credit early in 2011 was recorded and included in encling inventory at December 31,2010
2. purchase of merchandise on credit in 2010 was recorded, but it was not inclucled in the end-of-year plysical inventony count Assuming a periodic inventory system, Shelley Company's 2010 net income will be

A)understated by $550
B)understated by $3, 650
C)overstated by $3, 650
D)overstated by $550

Question 66

Darla's Dazzle Shop uses the lower of average cost or market retail inventory method to determine its ending inventory.The accounting records for the current year for Darla's contained the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Beginning inventory } & \$ 19,000 & \$ 27,500 \\\text { Purchases } & 71,500 & 94,000 \\\text { Sales } & & 105,000 \\\text { Net markups } & & 5,167 \\\text { Net markclowns } & & 3,067\end{array}$ In addition, the accounting records for Darla's disclosed that freight-in charges were $4, 500 and sales returns were $2, 833.What is the cost-to-retail percentage to be used for ending inventory calculations?

A)71.4%
B)73.2%
C)75.0%
D)76.9%

Question 67

Debra's Card Shop uses the average cost retail inventory method to determine the ending inventory.Debra's accounting records for 2010 contained the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Purchases } & \$ 216,000 & \$ 317,500 \\\text { Sales } & & 350,000 \\\text { Beginning inventory } & 64,000 & 78,500 \\\text { Net markups } & & 12,000 \\\text { Net markclowns } & & 8,000\end{array}$ In addition, sales returns for 2010 were $28, 000, and employee discounts taken were $6, 000.What is the cost of the ending inventory at December 31, 2010?

A)$21, 000
B)$35, 000
C)$50, 400
D)$54, 600

Question 68

The Susan Retail Shop uses the FIFO retail inventory method to determine its ending inventory.The accounting records for the current year for Susan contained the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\\\text { Purchases } & \$ 225,000 & \$ 362,250 \\\text { Beginning inventory } & 55,000 & 73,000 \\\text { Sales } & & 385,750 \\\text { Net markups } & & 32,500 \\\text { Net markdowns } & & 19,750 \\\text { Employee discounts } & & 12,500\end{array}$ What is the cost-to-retail percentage to be used for ending inventory calculations?

A)57.0%
B)60.0%
C)62.1%
D)62.5%

Question 69

The accountant for Shelley Company made the following errors related to purchases of merchandise and ending inventory in 2010: A $\$ 1,200$ purchase of merchandise on credit was not recorded or included in ending inventory.
A $\$ 1,180$ purchase of merchandise on credit was recorded, but it was inadvertently omitted from the ench-of-year physical inventory count. Assuming a periodic inventory system, Shelley Company's 2010 net income will be

A)understated by $1, 180
B)understated by $2, 380
C)overstated by $1, 200
D)overstated by $1, 180

Question 70

A purchase on credit is recorded twice and not corrected during the physical inventory.Which of the following statements correctly describes the impact of this error?

A)The current year income on the income statement is correct because purchases are overstated and ending inventory is overstated.
B)The current year balance sheet ending inventory and accounts payable are understated.
C)The succeeding year income on the income statement is incorrect because beginning inventory is understated.
D)The succeeding year purchases are understated when the prior year purchases are corrected.

Question 71

Laura, Ltd.used the LIFO retail inventory method to determine its ending inventory.The accounting records for the company contained the following relevant information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\\\text { Net purchases } & \$ 48,000 & \$ 79,000 \\\text { Sales } & & 91,000 \\\text { Beginning inventory } & 12,000 & 25,000 \\\text { Net markups } & & 5,000 \\\text { Net markdowns } & & 4,000\end{array}$ What is the cost of the ending inventory?

A)$6, 720
B)$7, 700
C)$7, 980
D)$8, 400

Question 72

Adell Co.uses the dollar-value LIFO retail method.The beginning inventory, purchased when the price index was 100, had a retail value of $4, 000 and a cost of $3, 600.During the period, purchases amounted to $60, 000 at retail ($52, 800 at cost).Sales amounted to $56, 300.The year-end price index was 110.What is the cost of ending inventory?

A)$6, 169
B)$6, 504
C)$6, 570
D)$6, 900

Question 73

The Latisha Department Store uses the average cost retail inventory method to determine its ending inventory.The accounting records for the current year for Latisha contained the following information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\\\text { Purchases } & \$ 61,200 & \$ 85,000 \\\text { Beginning inventory } & 17,000 & 25,000 \\\text { Sales } & & 75,700 \\\text { Net markups } & & 7,500 \\\text { Net markdowns } & & 2,500\end{array}$ In addition, the accounting records for Latisha disclosed that purchases returns at cost and retail were $1, 800 and $4, 300, respectively.What is the cost-to-retail percentage to be used for ending inventory calculations?

A)66.6%
B)67.5%
C)68.0%
D)69.0%

Question 74

Which of the following general assumptions underlie the retail inventory method?

A)The inventory is sufficiently homogeneous to have the same markup and the cost-to-retail ratio changes inversely to the costs of purchases.
B)The inventory is sufficiently homogeneous to have the same markup and the cost-to-retail ratio changes relative to the costs of purchases.
C)The inventory is sufficiently homogeneous to have a different markup and the cost-to-retail ratio changes inversely to the costs of purchases.
D)The inventory is sufficiently homogeneous to have a different markup and the cost-to-retail ratio changes relative to the costs of purchases.

Question 75

If purchases are recorded correctly but ending physical inventory is understated, which one of the following situations occurs for the current year?

A)Working capital is understated and net income is overstated.
B)Working capital and net income are understated.
C)Working capital is overstated and net income is understated.
D)Working capital and net income are overstated.

Question 76

Which of the following items would not be used in the calculation of the cost-to-retail ratio if the FIFO retail inventory method were used to determine the ending inventory?

A)net markdowns
B)purchases
C)beginning inventory
D)freight-in charges

Question 77

Amber Company uses the LIFO retail inventory method and reports the following information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\\\text { Beginning inventory } & \$ 540 & \$ 900 \\\text { Net markups } & & 1,000 \\\text { Sales } & & 4,500 \\\text { Net markdowns } & & 500 \\\text { Purchasess } & 3,150 & 4,000\end{array}$ What is the cost of ending inventory for Amber Company?

A)$540
B)$580
C)$630
D)$900

Question 78

What is the effect on net income if a company fails to record a purchase in transit (FOB shipping point)and also fails to include the purchase in physical inventory?

A)Income is overstated.
B)Income is understated.
C)Income is correct.
D)Not enough information is provided to determine the answer.

Question 79

Madeline Sports uses the dollar-value LIFO retail method.The price index on January 1, 2010, was 100, and on that date the inventory was $20, 000 (retail)and $14, 000 (cost).Additional information follows: $\begin{array}{lll}&2010&2011\\\text { Purchases, retail } & \$ 160,000 & \$ 204,000 \\\text { Purchases, cost } & 115,200 & 150,960 \\\text { Sales } & 160,416 & 202,160 \\\text { Price index Dec. 31. } & 102 & 103\end{array}$ What is the cost of the December 31, 2011, inventory (to the nearest dollar)?

A)$14, 610
B)$14, 638
C)$14, 660
D)$15, 854

Question 80

Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail ratio in a period of rising prices?

A)FIFO
B)LIFO
C)average cost
D)lower of average cost or market