Deck 8: Inventories: Special Valuation Issues

Question 1

The purpose of dollar-value LIFO retail method is to eliminate the effects of price changes during a period.

Answer 1

True

Question 2

The Net Realizable Value is considered the ceiling or the upper bound that prevents inventory from being valued at amount higher than what the company could reasonably sell it.

Answer 2

True

Question 3

Under the dollar-value LIFO the cost-to-retail ratio includes net markups and net markdowns but includes the beginning inventory.

Answer 3

False

Question 4

Ending inventory is overstated due to a costing error but purchases are correct. The balance sheet would be correct in the succeeding year because the previous years error would have been counterbalanced.

Question 5

A company using the periodic inventory system to record the reduction of inventory to market would record the following journal entry to close beginning inventory using the direct method:

Question 6

Exhibit 8-1 Rival Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of $45.50. The following is other information concerning this unit:
$\begin{array}{ll}\$ 3.80 & \text { Estimated transportation costs for delivery } \\7.50 & \text { Normal profit margin } \\3.60 & \text { Packaging costs prior to delivery }\end{array}$

- Refer to Exhibit 8-1. The floor constraint of this unit must be

A) $41.90
B) $38.00
C) $41.70
D) $38.10

Question 7

The gross profit method is an excellent method to determine the cost of inventory for interim financial statements. The method of estimation must be disclosed.

Question 8

One of the main advantages to the retail inventory method over the gross profit is the retail method uses current-period estimates whereas the gross profit used past periods.

Question 9

A purchase on credit is omitted from the purchase account in error, ending inventory is correct. The effect on the current year financial statements would be net income is understated because purchases are understated also causing cost of goods sold to be understated.

Question 10

The gross profit method is more sensitive to price changes and produces a more accurate estimate of current period ending inventory.

Question 11

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 12

GAAP allows a company to report its inventory above cost with justifiable exceptions which include the inability to determine a cost.

Question 13

Precious metals can be valued above costs because they are immediately marketable at a quoted market price.

Question 14

An auditor would most likely not use the gross profit method to verify the accuracy of the reported cost of inventory.

Question 15

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 16

A company using the periodic inventory system to record the reduction of inventory to market would record the following journal entry to record inventory at market using the allowance method:

Question 17

Reporting inventory at the lower of cost or market provides a representationally faithful value of inventory therefore the application of the lower of cost or market rule is consistent with the materiality principle.

Question 18

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 19

Exhibit 8-1 Rival Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of $45.50. The following is other information concerning this unit:
$\begin{array}{ll}\$ 3.80 & \text { Estimated transportation costs for delivery } \\7.50 & \text { Normal profit margin } \\3.60 & \text { Packaging costs prior to delivery }\end{array}$

- Refer to Exhibit 8-1. The selling price of this unit must be

A) $49.30
B) $53.00
C) $52.90
D) $49.10

Question 20

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 21

For the period from 2014 through 2015, the Charlie Company had net sales of $500,000 and a gross profit of $200,000. During the first quarter of 2016, the company made purchases of $19,500 and recorded sales of $47,500. The inventory value at the beginning of the year was 15,500. What is the estimated cost of Charlie's inventory on March 31, 2016, using the gross profit method?

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

Question 22

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.

Question 23

Major 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: $\begin{array} { l l } \$5.00 & \text { Transportation costs } \\12.70 & \text { Narmal profit margain } \\5.20 & \text { Packanging coste }\end{array}$

The market value for this item is

A) $58.20
B) $70.90
C) $78.90
D) $81.10

Question 24

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 25

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 26

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 27

Morris Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one item in the inventory is $68.20. The following is other information concerning this unit: $\begin{array}{ll}\$ 4.00 & \text { Transportation costs } \\12.70 & \text { Normal profit margin } \\4.20 & \text { Packaging costs }\end{array}$
The net realizable value for this item is

A) $72.40
B) $55.50
C) $80.90
D) $76.40

Question 28

Although IFRS require the use of the lower of cost or market method to value inventory, some differences from GAAP still exist. Which of the following is not one of the differences?

A) Market is defined only as net realizable value in IFRS.
B) When write-downs occur, IFRS do not specify how the loss must be categorized in the income statement.
C) IFRS allow the reversal of a previous write-down.
D) IFRS define market only as replacement cost.

Question 29

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 30

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 31

Given the following information for the Raquel Company: $\begin{array}{ll}\underline{\text { Market }} & \underline{\text { Cost }} &\underline{\text {Date}}\\\$500&\$500&\text {December 31,2014}\\650 & 700& \text {December 31, 2015}\\730 & 800&\text {December 31,2016}\end{array}$
Under the periodic system, if the direct method of recording lower of cost or market is in use, which December 31, 2016 entry is correct?

A) Loss Due to Market Valuation 20
Allowance to Reduce Inventory to Market 20

B) Inventory 730
Income Summary 730

C) Loss Due to Market Valuation 70
Allowance to Reduce Inventory to Market 70

D) Inventory 800
Income Summary 800

Question 32

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 33

Given the following information for the Tea Company:
$\begin{array} { l l l } \underline{\text { Merket }} & \underline{\text { Cost} } & \underline{\text { Dete} } \\\$800 & \$ 800& \text { December 31, 2014 } \\940 & 1,000 & \text { December 31, 2015 } \\1,060 & 1,100 & \text { December 31, 2016 }\end{array}$

Under the periodic system, if the allowance method of recording lower of cost or market is in use, which December 31, 2016 entry is not correct?

A) Loss Due to Market Valuation 40
Allowance to Reduce Inventory to Market 40

B) Allowance to Reduce Inventory to Market 20
Loss Recovery Due to Market Valuation 20

C) Inventory 1,100 Income
Summary 1,100

D) Income Summary 1,000
Inventory 1,000

Question 34

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 35

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 36

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 37

Zoe Company has provided the following values for its 400 units of inventory at the end of 2014:
$\begin{array}{ll}\underline{\text { Per Unit} } &\underline{ \text { Item }} \\\$ 65.00 & \text { Historical cost } \\\$ 54.20 & \text { Replacement cost } \\\$ 54.50 & \text { Net realizable value } \\\$ 35.80 & \text { Normal profit margir }\end{array}$
Under IFRS requirements, the per-unit reported value for Zoe's inventory will be

A) $55.00
B) $54.50
C) $54.20
D) $53.70

Question 38

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 39

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 40

The Maxa Company normally sells its inventory at a 20% profit margin on sales. In 2014, the net realizable value of inventory purchased for $75,000 declined to $66,000. 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) $60,000
B) $66,000
C) $79,200
D) $52,800

Question 41

As a result of taking a physical inventory count on December 31, 2014, the Mona Lisa Company inventory was determined to be $61,500. The auditors for Mona 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: $\begin{array}{ll}\$ 130,000 & \text { Inventory }(1 / 1 / 14) \\760,000 & \text { Purchases (2014) } \\1,020,000 & \text { Sales (2014) } \\60,000 & \text { Sales returns (2014) } \\25 \% \text { of sales } & \text { Gross profit ratio }\end{array}$
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, 2014?

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

Question 42

The Alpha 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 $68, 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 $8
D) net markdown of $5 and a net markup of $18

Question 43

Exhibit 8-2 The Dormer 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: $\begin{array}{ll}\$ 12,500 & \text { January 1, 2014, inventory balance } \\25,000 & \text { Purchases } \\24,000 & \text { Sales during January }\end{array}$

-Refer to Exhibit 8-2. The estimated cost of goods sold at January 31, 2014, is

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

Question 44

Exhibit 8-2 The Dormer 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: $\begin{array}{ll}\$ 12,500 & \text { January 1, 2014, inventory balance } \\25,000 & \text { Purchases } \\24,000 & \text { Sales During January }\end{array}$

-Refer to Exhibit 8-2. The estimated inventory at January 31, 2014, is

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

Question 45

The Rebecca Company provided the following data for its December 31, 2014, inventory maintained on the retail basis. $\begin{array}{c}\begin{array}{lll}\text { At Retall } \\\$ 225,000 \\446,000 \\45,750 \\(32,000) \\575,000 \end{array}\begin{array}{lll}\text {At Cost}\\\$ 165,000 \\275,000\\\\\\\\\end{array}\begin{array}{lll}\\\text {Beginning inventory}\\\text {Purchases}\\\text {Markps (net)}\\\text {Mark downs(net)}\\\text {Sales}\end{array}\end{array}$
What is the estimated inventory at December 31, 2014, valued at lower of average cost or market?

A) $67,333
B) $75,000
C) $67,374
D) $50,000

Question 46

The Alexandra Company uses the retail inventory method and the average cost flow assumption for preparation of its interim reports. Information about Alexandra's inventory in the second quarter of 2014 is shown below: $\begin{array}{c}\begin{array}{lll}\underline{\text {Retail}}\\\$ 800 \\1,400 \\200 \\(500) \\1,300\end{array}\begin{array}{lll}\underline{\text { Cost }} \\\$ 255 \\600 \\\\\\\\\end{array}\begin{array}{lll}\\\text {Begining inventoty}\\\text {Purchases}\\\text {Net markups}\\\text {Net matkdowns}\\\text {Sales}\end{array}\end{array}$
What is the estimated cost of Alexandra's inventory on June 30, 2014?

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

Question 47

Consider the following: 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 48

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 49

At the beginning of 2014, the Joan Company had an inventory valued at $34,375 at cost ($50,000 at retail). During the year, Joan purchased inventory for $50,000 ($70,000 at retail), and made markdowns of $7,500. Joan's sales in 2014 were $62,500. What is Joan'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 50

The gross profit method is not 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 51

As a result of taking a physical inventory count on December 31, 20104 the Cookie Company inventory was determined to be $425,000. The auditors for Cookie 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: $\begin{array}{ll}\$ 330,000 & \text { Inventory }(1 / 1 / 14) \\1,770,000 & \text { Purchases (2014) } \\2,200,000 & \text { Sales (2014) } \\100,000 & \text { Sales returns (2014) } \\25 \% \text { of sales } & \text { Gross profit ratio }\end{array}$
Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31, 2014?

A) $100,000
B) $75,000
C) $15,000
D) $25,000

Question 52

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 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

Given the following information for Bonnie Bunny Company:
$\begin{array}{ll}\$ 650 & \text { Freight-in } \\12,550 & \text { Purchases } \\300 & \text { Sales returns } \\1,950 & \text { Beginning inventory } \\23,450 & \text { Sales } \\45 \% & \text { Gross profit on sales }\end{array}$
Calculate ending inventory of Bonnie Bunny using the gross profit method.

A) $1,360
B) $1,075
C) $4,597
D) $2,253

Question 55

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? $\begin{array}{llll}&\underline{\text { LIFO }} &\underline{ \text { Average Cost }} &\underline{ \text { FIFO} } & \\\text { I. } &\text { Exclude } & \text { Include } & \text { Include } \\\text { II. }&\text { Exclude } & \text { Exclude } & \text { Include } \\ \text { III. } &\text { Exclude } & \text { Exclude } & \text { Exclude } \\\text { IV. } &\text { Exclude } & \text { Include } & \text { Exclude } \end{array}$

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

Question 56

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 57

When using 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 58

The Sahara Company's inventory was partially destroyed on June 4, 2014, 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: $\begin{array}{ll}\$ 260,000 & \text { Sales }(1 / 1 / 14 \text { through } 6 / 3 / 14) \\190,000 & \text { Purchases }(1 / 1 / 14 \text { through } 7 / 3 / 14) \\40,000 & \text { Inventory }(1 / 1 / 14) \\30 \% \text { of cost } & \text { Gross profit ratio }\end{array}$
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 59

The Jamison Company's inventory was destroyed on July 4, 2013, 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: $\begin{array}{ll}\$ 250,000 & \text { Sales }(1 / 1 / 13 \text { through } 7 / 3 / 13) \\180,000 & \text { Purchases }(1 / 1 / 13 \text { through } 7 / 3 / 13) \\45,000 & \text { Inventory }(1 / 1 / 13) \\25 \% \text { of cost } & \text { Gross profit ratio }\end{array}$
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 60

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 61

Darla's Card Shop uses the average cost retail inventory method to determine the ending inventory. Darla's accounting records for 2014 contained the following information: $\begin{array}{c}\begin{array}{l}\underline{\text { Retail }} \\\$317,000 \\350,000\\78,500 \\12,000 \\8,000\end{array}\begin{array}{lll}\underline{\text {Cost}}\\ \$ 216,000 \\\\\\64,000\\\\\end{array}\begin{array}{lll}\\\text {Purchases}\\\text {Sales}\\\text {Begining inventory}\\\text {Net markups}\\\text {Net markdowns} \end{array} \end{array}$


In addition, sales returns for 2014 were $28,000, and employee discounts taken were $6,000. What is the cost of the ending inventory at December 31, 2014?

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

Question 62

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 63

Ann 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 64

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 65

Debbie's Bling 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 Debbie's contained the following information: $\begin{array}{lll}\underline{\text { Retail }}&\underline{\text {Cost}} \\ \$ 27,500 & \$ 19,000 & \text { Beginning inventory } \\94,000 & 71,500 & \text { Purchases } \\105,000 & & \text { Sales } \\5,167 & & \text { Net markups } \\3,067 & & \text { Net markdowns }\end{array}$
In addition, the accounting records for Debbie's disclosed that freight-in charges were $6,700 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) 76.7%
D) 76.9%

Question 66

Eloise Corp. uses the FIFO retail inventory method and reports the following information:
$\begin{array}{c}\begin{array}{l}\underline{\text { Retail }} \\\$ 28,000 \\24,800\\1,000 \\3,000 \\400\end{array}\begin{array}{lll}\underline{\text {Cost}}\\ \$ 21,450 \\\\\\2,100\\\\\end{array}\begin{array}{lll}\\\text {Purchases}\\\text {Sales}\\\text {Net markups}\\\text {Beginning inventory}\\\text {Net markdowns} \end{array} \end{array}$


What is the cost of ending inventory for Eloise Corp.?

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

Question 67

Laura's Department Store uses the average cost retail inventory method to determine its ending inventory. The accounting records for the current year for Laura's contained the following information: $\begin{array}{lll}\underline{\text { Retail }}&\underline{\text {Cost}} \\ \$ 87,750 & \$ 71,200 & \text { Purchases } \\23,500 & 17,000 & \text { Begining inventory } \\98,000 & & \text { Sales } \\6,500 & & \text { Net markups } \\3,000 & & \text { Net markdowns }\end{array}$
In addition, the accounting records for Laura's disclosed that purchases returns at cost and retail were $1,950 and $4,250, respectively. What is the cost-to-retail percentage to be used for ending inventory calculations?

A) 75.1%
B) 79.8%
C) 76.8%
D) 78.1%

Question 68

The Sherri's Retail Shop uses the FIFO retail inventory method to determine its ending inventory. The accounting records for the current year for Sherri's contained the following information: $\begin{array}{lll}\underline{\text { Retail }}&\underline{\text {Cost}} \\ \$ 362,250 & \$ 225,000 & \text { Purchases } \\73,000 & 55,000 & \text { Beginning inventory } \\385,750 & & \text { Sales } \\32,500 & & \text { Net markups } \\19,750 & & \text { Net markdowns } \\12,500 & & \text { Emplovee discounts }\end{array}$
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

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 70

Barbara Co. presents the following information: $\begin{array}{c}\begin{array}{l}\text { Retail } \\\$ 785 \\2,850 \\2,150 \\50 \\350 \end{array}\begin{array}{lll}\text {Cost}\\\\\\ \$ 1,570 \\\\300\end{array}\begin{array}{lll}\\\text {Net markups}\\\text {Sales}\\\text {Purchases}\\\text {Net markdowns}\\\text {Beginning inventory} \end{array}\end{array}$


The company uses the average cost retail inventory method. What is the cost of ending inventory?

A) $233.55
B) $255.98
C) $275.80
D) $222.55

Question 71

The dollar-value LIFO cost-to-cost retail ratio does not include

A) beginning inventory
B) net markups and markdowns
C) ending inventory
D) purchases

Question 72

Kelcie Sports uses the dollar-value LIFO retail method. The price index on January 1, 2014, was 100, and on that date the inventory was $20,000 (retail) and $14,000 (cost). Additional information follows: $\begin{array}{lll}\underline{2015}&\underline{2014}&\\\$ 204,000 & \$ 160,000 & \text { Purchases, retail } \\150,960 & 115,200 & \text { Purchases, cost } \\202,160 & 160,416 & \text { Sales } \\103 & 102 & \text { Price index, Dec. 31 }\end{array}$
What is the cost of the December 31, 2015, inventory (to the nearest dollar)?

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

Question 73

Leslie, Ltd. used the LIFO retail inventory method to determine its ending inventory. The accounting records for the company contained the following relevant information:
$\begin{array}{c}\begin{array}{l}\underline{\text { Retail }} \\\$ 79,000 \\91,000 \\2500\\5,000\\4,000\end{array}\begin{array}{lll}\underline{\text {Cost}}\\\$48,000\\\\12,000\\\\\\\end{array}\begin{array}{lll}\\\text {Net purchases}\\\text {Sales }\\\text {Begining inventory}\\\text {Net markups}\\\text {Net markdowns} \end{array} \end{array}$


What is the cost of the ending inventory?

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

Question 74

Caroline's Music Store uses the average cost retail inventory method to determine its ending inventory. The accounting records for the current year for Caroline's contained the following information: $\begin{array}{lll}\underline{\text { Retail }}&\underline{\text {Cost}} \\ \$ 137,750 & \$ 108,000 & \text { Purchases } \\34,000 & 28,000 & \text { Beginning inventory } \\156,900 & & \text { Sales } \\21,500 & & \text { Net markups } \\7,500 & & \text { Net markdowns } \\14,500 & & \text { Employee discounts }\end{array}$
What is the cost-to-retail percentage to be used for ending inventory calculations?

A) 70.0%
B) 73.2%
C) 79.4%
D) 77.8%

Question 75

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

Question 76

Which one of the following statements is false 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 77

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 78

Which of the following statements is true?

A) Application of LIFO for financial reporting purposes must follow the tax laws applicable to LIFO.
B) A company must use FIFO for both tax reporting and financial statement reporting.
C) A company may use FIFO to valuate inventory and LIFO for financial statement reporting purposes.
D) LIFO must be used for financial reporting if it is used for tax purposes.

Question 79

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

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

Question 80

Audrey Company uses the LIFO retail inventory method and reports the following information:
$\begin{array}{c}\begin{array}{l}\underline{\text { Retail }} \\\$ 900 \\1,000 \\4,500\\500 \\4,000\end{array}\begin{array}{lll}\underline{\text {Cost}}\\\$540\\ \\\\\\3,150\end{array}\begin{array}{lll}\\\text {Beginning inventory}\\\text { Net markups }\\\text {Sales}\\\text {Net markdowns}\\\text {Purchases} \end{array} \end{array}$


What is the cost of ending inventory for Audrey Company?

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