Question 1

Liquidator Lounges' showroom was flooded and its inventory was totally destroyed.Its accounting records were damaged but the following information was salvaged.
Sales revenue (to date this period)$380 000
Beginning inventory (at retail) $90 000
Purchases (to date this period at retail)$400 000
Historical gross profit percentage 60%
Assuming the historical gross profit ratio is maintained the estimated cost of inventory lost in the flood is:

Accepted Answer

The beginning inventory was $90,000 and the purchases were $400,000, making a total of $490,000 (at retail) of inventory available. Using the historical gross profit percentage of 60%, we can estimate that the cost of goods sold would be $196,000. Subtracting this from the total value of inventory available gives us an estimated cost of lost inventory of $294,000.

Question 2

If Carmel knows that the ending inventory at retail for her corner store is $16 000 and her cost to retail percentage is 65%,her ending inventory at cost can be estimated as:

Accepted Answer

To find the ending inventory at cost, we need to multiply the ending inventory at retail by the cost-to-retail percentage, which is 65%. So the calculation would be:
$16,000 x 0.65 = $10,400
Therefore, the answer is B.

Question 3

Kingswood Electrical has just completed its annual physical inventory count.The ending inventory was obtained by adding up all the retail price tags for the goods on hand.Determine ending inventory at cost.
Cost Retail
Beginning inventory $ 20 000 $ 60 000
Purchases 133 000 390 000
Goods available for sale $153 000 $450 000
Sales 390 000

Accepted Answer

The cost-to-retail ratio can be calculated as Beginning inventory cost ÷ Beginning inventory retail = $20,000 ÷ $60,000 = 0.33. This can also be calculated for the Purchases giving us $133,000 ÷ $390,000 = 0.34. The weighted average cost-to-retail ratio can then be calculated as (0.33 x $60,000 + 0.34 x $390,000) ÷ ($60,000 + $390,000) = 0.34. Multiplying the ending inventory at retail of $100,000 by the cost-to-retail ratio of 0.34 gives us an ending inventory at cost of $34,000. However, since the options provide the cost in thousands, the answer is $20,400.

Question 4

Riverbottom Liquidators was wiped out by a recent flood when all its inventory was observed floating down the river.On the day after the flood,management filed an insurance claim on the inventory that was totally destroyed.From records maintained elsewhere it was established:
Sales revenue (to date this period)$700 000
Beginning inventory $ 90 000
Purchases (so far this period)$600 000
Historical gross profit percentage 60%
Assuming the historical gross profit was maintained during the current period what was the cost of inventory lost in the flood?

Accepted Answer

Cost of goods sold = Sales revenue x (1 - Gross profit percentage)= $700,000 x (1 - 60%)= $700,000 x 0.40= $280,000Cost of inventory lost = Beginning inventory + Purchases - Cost of goods sold= $90,000 + $600,000 - $280,000= $410,000

Question 5

The lower of cost or net realisable value procedure is used with which of the following?
i.FIFO
ii.Weighted average
iii.The perpetual method

Accepted Answer

The lower of cost or net realisable value procedure is applicable to all inventory valuation methods, including FIFO (First-In, First-Out), Weighted Average, and the Perpetual method. This procedure ensures that inventory is reported at the lower of its cost or the net realisable value on the balance sheet, reflecting a conservative valuation of assets.

Question 6

All the statements concerning the retail inventory method of estimating closing stock are correct except which of the following?

Accepted Answer

Differences in the mix of inventory compared to the mix used to determine the cost ratio can affect the accuracy of the retail inventory method, so statement C is incorrect. The other statements are correct.

Question 7

Mikey uses a periodic inventory system and committed an error that understated inventory at the end of Year One.If no further errors occur,at the end of Year Two:

Accepted Answer

The answer of Mikey uses a periodic inventory system and...

Question 8

The ratio that indicates an entity's overall mark-up on goods sold is the:

Accepted Answer

The gross profit ratio measures a company's profitability by expressing its gross profit as a percentage of its net sales. It is calculated by dividing the gross profit by the net sales revenue. The ratio indicates the entity's overall mark-up on goods sold.

Question 9

All of these statements about the presentation of inventory in financial reports are correct except which of the following?

Accepted Answer

Inventory shown on the balance sheet does not always have to be in a saleable condition; it can include items that are not immediately saleable, such as raw materials or work-in-progress.

Question 10

Which of these is not a possible source of error in calculating closing inventory?

Accepted Answer

Mistakes in the price at which goods are sold to customers may impact revenue calculations, but they do not directly affect the calculation of closing inventory. The other options all relate directly to the accuracy of the closing inventory calculation.

Question 11

Which statement is untrue?

Accepted Answer

Inventory is generally valued at cost, however, there are certain circumstances where it can be valued at a lower amount, which is referred to as net realizable value (NRV). This occurs when the market price of the inventory falls below the cost of the inventory. It is not common to value inventory above cost. Net realizable value is related to estimated market value, which is the price at which inventory can be sold in the normal course of business.

Question 12

Nugyen Co purchased goods for $3500.While on display,the goods were damaged and it is estimated that they can now only be sold for $2000.Additional marketing and distribution costs are $100.The net realisable value of the goods is:

Accepted Answer

The net realisable value of the goods is the estimated selling price ($2000) minus any costs necessary to make the sale (in this case, $100 for marketing and distribution). Therefore, the net realisable value is $1900 ($2000 - $100).

Question 13

Won Inc has an historical gross profit percentage of 35%.Net purchases for six months were $1400 and sales were $2000.Inventory at the end of the previous period was $200.If Won Inc prepares an interim balance sheet the amount that can be estimated for closing inventory is:

Accepted Answer

First, we need to calculate the cost of goods sold (COGS) for the six-month period. We can do this using the formula COGS = Net Purchases + Beginning Inventory - Ending Inventory.
Beginning Inventory = $200 (given)
Net Purchases = $1400 (given)
Ending Inventory = ?
COGS = $1400 + $200 - Ending Inventory
Gross Profit Percentage = 35% (given)

We can use the formula Gross Profit Percentage = (Revenue - COGS)/Revenue to find the revenue for the six-month period.
Revenue = ($2000 - 0.35 x Revenue)/0.65
Revenue = $3076.92

Now we can use the formula for COGS to solve for Ending Inventory:
COGS = $1400 + $200 - Ending Inventory
COGS = 0.65 x $3076.92
COGS = $2000

$2000 = $1400 + $200 - Ending Inventory
Ending Inventory = $300

Therefore, the amount that can be estimated for the closing inventory is $300, which is answer choice B.

Question 14

How many of these are reasons for the selling value of some inventory items falling below their cost price?
-Obsolescence
-Damage
-Past use-by date
-A rise in the market price

Accepted Answer

Obsolescence, damage, and being past the use-by date can all cause the selling value of inventory items to fall below their cost price. A rise in the market price would typically increase the value, not decrease it.

Question 15

Net realisable value in relation to inventory is:

Accepted Answer

Net realisable value in relation to inventory is the estimated selling price less anticipated further costs to complete the sale. It is the amount at which inventory can be sold, less any costs of selling it. This value is used to determine the value of the inventory in the balance sheet and is an important factor in the calculation of the cost of goods sold.

Question 16

Which of the following information concerning inventory is not required to be disclosed in the external financial reports?

Accepted Answer

Inventory turnover ratio is not required to be disclosed in the external financial reports, although it may be included as supplementary information. However, information about the types of inventory (finished goods and work in process) as well as the method of valuation (such as FIFO or weighted average) is required to be disclosed in the financial reports.

Question 17

The formula,cost of sales/average inventory,measures the:

Accepted Answer

The formula cost of sales/average inventory measures the number of times, on average, that inventory is turned over per year, also known as inventory turnover ratio. This ratio indicates how effectively a company is managing its inventory and how quickly it is selling its products.

Question 18

At 31 December 2014,the end of their accounting year,the Zanzibar trading company understated ending inventory by $4,250.The profit for 2014 will be:

Accepted Answer

When ending inventory is understated, it means that the cost of goods sold (COGS) is overstated, which in turn understates the profit for the year.

Question 19

Under the FIFO method sales returns are costed back into inventory at:

Accepted Answer

The answer of Under the FIFO method sales returns are...

Question 20

The statement relating to the lower of cost and net realisable value rule that is untrue is which of the following?

Accepted Answer

The gross profit reported in the period when the rule is applied is lower than it otherwise would be because it requires the recognition of probable losses. The lower of cost and net realisable value rule is a conservative approach to inventory valuation and ensures that inventory is not overstated on the balance sheet.

Quiz 13: Inventories