Deck 9: Inventories: Additional Issues

Question 1

For a purchase commitment extending beyond the current fiscal year, if the market price on the purchase date declines from the previous year-end price, the purchase is recorded at the market price.

Answer 1

True

Question 2

An argument against the use of LCM is its lack of:

A)Relevance.
B)Reliability.
C)Consistency.
D)Objectivity.

Answer 2

C

Question 3

The purpose of ceilings and floors in LCM is to prevent profit distortion.

Answer 3

True

Question 4

In applying the LCM rule, the inventory of surgical supplies would be valued at:

A)$115.
B)$90.
C)$80.
D)$69.$80 designated market value is less than $90 cost.

Question 5

Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000. Information pertaining to that inventory is as follows: What should be the carrying value of Montana's inventory?

A)$600,000.
B)$520,000.
C)$590,000.
D)$510,000.

Question 6

In applying LCM, market cannot be:

A)Less than net realizable value.
B)Greater than the normal profit.
C)Less than the normal profit margin.
D)Greater than net realizable value.

Question 7

Net realizable value is selling price less costs of completion and disposal.

Question 8

Inventory written down due to LCM may be written back up if market values go back up.

Question 9

In determining lower-of-cost-or-market, market is the expected selling price under normal operations.

Question 10

For a purchase commitment contained within a single fiscal year, if the market price is less than the contract price, the purchase is recorded at the contract price.

Question 11

The primary motivation behind LCM is consistency.

Question 12

Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.

Question 13

In applying the LCM rule, the inventory of surgical equipment would be valued at:

A)$230.
B)$240.
C)$170.
D)$152.$170 designated cost is less than $230 designated market value.

Question 14

In using the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns and net markups.

Question 15

For a change from the average cost method to FIFO, the current year's income includes the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.

Question 16

In applying LCM, market cannot be:

A)Less than net realizable value minus a normal profit margin.
B)Net realizable value less reasonable completion and disposal costs.
C)Greater than net realizable value reduced by an allowance for normal profit margin.
D)Less than cost.

Question 17

The cost-to-retail percentage used in the retail method to approximate average costs considers both markdowns and markups.

Question 18

Losses on reduction to LCM may be charged to either cost of goods sold or to a current loss account without distorting financial statement ratios.

Question 19

A change from LIFO to any other inventory method is accounted for retrospectively.

Question 20

If the quantity of goods held in inventory decreased during the period, the dollar amount of ending inventory cannot exceed the dollar amount of beginning inventory.

Question 21

Howard's Supply Co. suffered a fire loss on April 20, 2009. The company's last physical inventory was taken on January 30, 2009, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howard's consistently reports a 30% gross profit. The estimated inventory loss is:

A)$490,000.
B)$238,000.
C)$250,000.
D)None of these is correct.

Question 22

The numerator for the current period's cost-to-retail percentage is:

A)$64,800.
B)$48,100.
C)$47,700.
D)$49,800.$49,800

Question 23

In applying the LCM rule, the inventory of skis would be valued at:

A)$162,000.
B)$128,000.
C)$120,000.
D)$126,000.$126,000 designated market value is less than $128,000 cost.

Question 24

So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2009. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2009, $300,000; sales and purchases from January 1, 2009, to May 1, 2009, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2009, is:

A)$302,500.
B)$360,000.
C)$395,000.
D)$455,000.

Question 25

In applying the LCM rule, the inventory of apparel would be valued at:

A)$108,000.
B)$ 90,000.
C)$110,000.
D)$115,000.$90,000 designated market value is less than $108,000 cost.

Question 26

In applying the LCM rule, the inventory of rehab equipment would be valued at:

A)$315.
B)$247.
C)$150.
D)$235.$235 designated market value is less than $250 cost.

Question 27

In applying the LCM rule, the inventory of boots would be valued at:

A)$135,000.
B)$133,000.
C)$130,000.
D)$105,000.$130,000 designated market value is less than $133,000 cost.

Question 28

In calculating the cost-to-retail percentage for the retail method, the retail column will not include:

A)Purchases.
B)Purchase returns.
C)Abnormal shortages.
D)Freight-in.

Question 29

Fad City sells novel clothes which are subject to a great deal of price volatility. A recent item which cost $20 was marked up $12, marked down for a sale by $6 and then had a markdown cancellation of $3. The latest selling price is:

A)$14.
B)$26.
C)$29.
D)$35.

Question 30

Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2009. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2009, to August 5, 2009, totaled $480,000 and purchases totaled $195,000 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:

A)$131,175.
B)$ 65,000.
C)$ 17,143.
D)None of these is correct.

Question 31

Under the retail inventory method:

A)A company measures inventory on its balance sheet by converting retail prices to cost.
B)A company measures inventory on its balance sheet at current selling prices.
C)A company measures inventory on its balance sheet on a LIFO basis.
D)None of these is correct.

Question 32

Included in the computation of the cost-to-retail percentage for the LIFO retail method are:

A)Net markups and net markdowns.
B)Neither net markups nor net markdowns.
C)Net markups, but not net markdowns.
D)Net markdowns, but not net markups.

Question 33

On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available: What is the estimated inventory on July 8 immediately prior to the fire?

A)$192,000
B)$490,000
C)$510,000
D)$280,000

Question 34

When using the gross profit method to estimate ending inventory, it is not necessary to know:

A)Beginning inventory.
B)Net purchases.
C)Cost of goods sold.
D)Net sales.

Question 35

In applying the LCM rule, the inventory of rehab supplies would be valued at:

A)$122.
B)$158.
C)$162.
D)$155.$155 designated market value is less than $162 cost.

Question 36

Under the LIFO retail method, which of the following are not included in the denominator of the cost-to-retail conversion percentage?

A)Freight-in
B)Purchase returns
C)Purchases
D)Net markdowns

Question 37

Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?

A)Purchase returns
B)Net markups
C)Purchases
D)Net markdowns

Question 38

When computing the cost-to-retail percentage for the conventional retail method, included in the denominator are:

A)Net markups and net markdowns.
B)Neither net markups nor net markdowns.
C)Net markups, but not net markdowns.
D)Net markdowns, but not net markups.

Question 39

In determining the cost-to-retail percentage for the current year,:

A)Net markups are included.
B)Net markdowns are excluded.
C)Net sales are included.
D)All of these are correct.

Question 40

In applying the LCM rule, the inventory of supplies would be valued at:

A)$45,000.
B)$54,000.
C)$41,000.
D)$42,000.$45,000 cost is equal to the designated market value.

Question 41

To the nearest thousand, estimated ending inventory is:

A)$41,000.
B)$37,000.
C)$51,000.
D)None of these is correct.The correct answer is $39,000 (rounded)

Question 42

To the nearest thousand, estimated ending inventory is:

A)$55,000.
B)$52,000.
C)$57,000.
D)None of these is correct.

Question 43

To the nearest thousand, the estimated ending inventory at cost is:

A)$16,000.
B)$15,000.
C)$13,000.
D)$19,000.$16,000

Question 44

Current period cost-to-retail percentage is:

A)70.0%.
B)68.7%.
C)63.6%.
D)63.5%.

Question 45

The estimated ending inventory at retail is:

A)$27,300.
B)$25,000.
C)$26,600.
D)$26,400.$25,000

Question 46

The average cost-to-retail percentage is:

A)74.5%.
B)55.6%.
C)57.4%.
D)58.7%.55.6%
Cost-to-retail percentage = $155,000 $279,000 = 55.6%

Question 47

The average cost-to-retail percentage is:

A)52.2%.
B)61.5%.
C)56.8%.
D)55%.Cost-to-retail percentage = $341,000 $620,000 = 55%

Question 48

The conventional cost-to-retail percentage is:

A)54.9%.
B)58.9%.
C)53.6%.
D)70.6%.54.9%

Question 49

Using the dollar-value LIFO retail method for inventory,:

A)Is the same as dollar-value LIFO, except that the inventory is measured at retail, rather than at cost.
B)Combines retail LIFO accounting with dollar-value LIFO accounting
C)Allows companies to report inventory on the balance sheet at retail prices.
D)All of these are correct.

Question 50

To the nearest thousand, estimated ending inventory using the conventional retail method is:

A)$36,000.
B)$32,000.
C)$33,000.
D)$29,000.29,000

Question 51

The denominator for the current period's cost-to-retail percentage is:

A)$ 96,300.
B)$ 73,300.
C)$101,000.
D)$ 81,500.$73,300

Question 52

Hawkeye Auto Parts uses the retail method to estimate inventories. Data for the first six months of 2009 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2009, would be:

A)$330,000.
B)$360,000.
C)$362,300.
D)None of these is correct.

Question 53

Cloverdale, Inc. uses the conventional retail inventory method to account for inventory. The following information relates to current year's operations: What amount should be reported as cost of goods sold for the year?

A)$273,600.
B)$272,861.
C)$275,000.
D)None of these.

Question 54

Lacy's Linen Mart uses the retail method to estimate inventories. Data for the first six months of 2009 include: beginning inventory at cost and retail were $60,000 and $120,000, net purchases at cost and retail were $312,000 and $480,000, and sales during the first six months totaled $490,000. The estimated inventory at June 30, 2009, would be:

A)$ 68,200.
B)$ 55,000.
C)$ 71,500.
D)$ 63,250.

Question 55

Estimated ending inventory at retail is:

A)$ 65,000.
B)$169,600.
C)$ 25,000.
D)$129,600.

Question 56

The conventional cost-to-retail percentage is:

A)82.6%.
B)66.7%.
C)71.9%.
D)75.8%.66.7%

Question 57

To the nearest thousand, estimated ending inventory using the conventional retail method is:

A)$163,000.
B)$124,000.
C)$127,000.
D)$136,000.127,000

Question 58

Estimated ending inventory at cost is:

A)$90,720.
B)$83,920.
C)$91,600.
D)None of these is correct.

Question 59

The conventional retail inventory method is based on:

A)Average cost
B)LIFO cost
C)Average, lower of cost or market
D)LIFO, lower of cost or market

Question 60

When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:

A)Net markups and net markdowns.
B)Neither net markups nor net markdowns.
C)Net markups, but not net markdowns.
D)Net markdowns, but not net markups.

Question 61

To use the dollar-value LIFO retail method for inventory, the first step is to:

A)Determine the estimated ending inventory at current year retail prices.
B)Determine the estimated cost of goods sold for the current year.
C)Determine the cost-to-retail percentage for the current year transactions.
D)Price index adjust the LIFO inventory layers.

Question 62

Henderson Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of July was $122,500. The following information for the month of August was available from company records:
In addition, the controller is aware of $10,000 of inventory that was stolen during August from one of the company's warehouses.
Required:
1. Calculate the estimated inventory at the end of August, assuming a gross profit ratio of 30%
2. Calculate the estimated inventory at the end of August, assuming a markup on cost of 25%.

Question 63

To determine if an increase in the dollar value of inventory is due to increased quantities, using dollar-value LIFO retail:

A)Compare beginning and ending inventory amounts at current year prices.
B)Compare beginning and ending inventory amounts after adjusting both amounts to the average price level for the year.
C)Inflate beginning inventory amount to end of year prices and compare to ending inventory amount.
D)Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount.

Question 64

On July 5, 2009, a fire destroyed the entire inventory of Kinard Music Mart. The following information is available from its accounting records:
Required:
Compute the estimated cost of inventory lost in the fire.

Question 65

Portman Inc. uses the conventional retail inventory method. Expressed in millions of dollars, information about Portman's 2009 inventory account is expressed in the table below: At what amount would Portman record its inventory on its 12/31/09 balance sheet?

A)$150 million
B)$252 million
C)$300 million
D)None of these is correct.

Question 66

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual types of feeds.

Question 67

On March 17, 2009, a flood destroyed the entire inventory of Beatty Co. The following information is available from its accounting records:
Required: Compute the estimated cost of inventory lost in the flood.

Question 68

To use the dollar-value LIFO retail method for inventory, the second step is to determine the estimated:

A)Ending inventory at current year retail prices.
B)Cost of goods sold for the current year.
C)Ending inventory at cost.
D)Ending inventory at base year retail prices.

Question 69

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual trees.

Question 70

Retrospective treatment of prior years' financial statements is required when there is a change from:

A)Average cost to FIFO.
B)FIFO to average cost.
C)LIFO to average cost.
D)All of these.

Question 71

How much loss on purchase commitment will Johnson recognize in 2009?

A)$10,000.
B)$20,000.
C)$30,000.
D)None.$200,000 - 180,000 = $20,000 loss

Question 72

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the following year. As a result, Prunedale's cost of goods sold for this year was:

A)Overstated by $31,000.
B)Overstated by $5,000.
C)Understated by $31,000.
D)Understated by $48,000.Understatement of beginning inventory understates ( ) cost of goods sold and the understatement of ending inventory overstates (+) cost of goods sold.Also, the understatement of purchases understates ( ) cost of goods sold: $30,000 + 17,000 18,000 ($20,000 2,000) = $31,000 understatement of cost of goods sold

Question 73

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of trees.

Question 74

Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2008 (its base year). Its beginning inventory for 2009 was $36,000 at cost and $72,000 at retail prices. At the end of 2009, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2009 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/09 balance sheet?

A)$64,800
B)$72,000
C)$120,000
D)It can't be determined with the given informations You would need to know the retail price index for 2009 transactions relative to the base year to make this computation.

Question 75

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to the total inventory.

Question 76

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of feeds.

Question 77

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the following year. As a result, Prunedale's cost of goods sold for this year was:

A)Overstated by $94,000.
B)Overstated by $30,000.
C)Understated by $94,000.
D)Understated by $30,000.Overstatement of beginning inventory overstates cost of goods sold and the understatement of ending inventory overstates cost of goods sold: $32,000 + 62,000 = $94,000 overstatement of cost of goods sold

Question 78

At what amount will Johnson record the inventory purchased on February 1, 2010?

A)$210,000
B)$200,000
C)$180,000
D)$190,000 In 2009, loss of $20,000 recognized ($200,000 - 180,000) and liability established for the estimated loss on purchase commitment.When the inventory is purchased for $200,000, the following journal entry records the transaction:

Question 79

To determine the value of a LIFO layer, using dollar-value LIFO retail:

A)Divide the LIFO layer by the layer year price index and multiply by the layer year cost-to-retail percentage.
B)Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage.
C)Multiply the LIFO layer by the layer year price index and by the layer year cost-to-retail percentage.
D)Divide the LIFO layer by the layer year cost-to-retail percentage and multiply by the layer year price index.

Question 80

Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to the total inventory.