Question 1

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:

Accepted Answer

First, we need to calculate the cost of goods sold (COGS) during the period from January 30 to April 20:
COGS = Beginning Inventory + Purchases - Ending Inventory
Since we don't know ending inventory, we need to estimate it using the gross profit method:
Ending Inventory = COGS / (1 - Gross Profit Rate)
Gross Profit Rate = Gross Profit / Net Sales = 30% / ($600,000 - $450,000) = 50%
COGS = ($220,000 + $450,000) - Ending Inventory = $670,000 - Ending Inventory
Ending Inventory = $670,000 / (1 + 50%) = $446,667

Now we can estimate the inventory loss due to the fire:
Estimated Loss = Beginning Inventory + Purchases - Estimated Ending Inventory
Estimated Loss = $220,000 + $450,000 - $446,667 = $223,333
However, this is the cost of the inventory, not the retail value. To convert to the retail value, we need to use the gross profit rate:
Retail Value of Loss = Estimated Loss / (1 - Gross Profit Rate)
Retail Value of Loss = $223,333 / (1 - 30%) = $318,904

Therefore, the closest answer is C) $250,000.

Question 2

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

Accepted Answer

The numerator for the cost-to-retail percentage is the cost of goods sold, which is given as $49,800 for the current period. Therefore, the correct answer is D.

Question 3

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

Accepted Answer

When applying the LCM rule, we compare the cost and the designated market value of the inventory and take the lower of the two. In this case, the cost is $128,000 and the designated market value is $126,000, so we take the lower value. Therefore, the inventory of skis would be valued at $126,000.

Question 4

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:

Accepted Answer

The estimated inventory is calculated by determining the cost of goods sold (COGS) and subtracting it from the cost of goods available for sale. The gross profit is 40%, so the cost percentage is 60%. Sales from January 1 to May 1 are $1,300,000, so COGS is 60% of that, which is $780,000. The cost of goods available for sale is the beginning inventory ($300,000) plus purchases ($875,000), totaling $1,175,000. Subtracting COGS ($780,000) from this gives an estimated inventory of $395,000.

Question 5

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

Accepted Answer

The LCM rule requires inventory to be valued at either cost or market value, whichever is lower. In this case, the market value is $90,000, which is lower than the cost of $108,000. Therefore, the inventory should be valued at $90,000.

Question 6

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

Accepted Answer

The LCM (Lower of Cost or Market) rule requires inventory to be valued at the lower of its cost or market value. Here, the market value of $235 is lower than the cost of $250.

Question 7

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

Accepted Answer

According to the LCM rule, inventory should be valued at the lower of its cost or market value. The market value for the boots is $130,000 which is lower than the cost of $133,000. Therefore, the boots inventory should be valued at $130,000.

Question 8

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

Accepted Answer

Freight-in is included in the cost column, not the retail column, when calculating the cost-to-retail percentage.

Question 9

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:

Accepted Answer

The item was marked up by $12, so the price became $20 + $12 = $32. 
Then it was marked down for a sale by $6, so the price became $32 - $6 = $26. 
Next, there was a markdown cancellation of $3, so the price increased by $3 to become $26 + $3 = $29. 
Therefore, the latest selling price is $29.

Question 10

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:

Accepted Answer

To find the cost of goods sold, we need to subtract the beginning inventory from the sum of purchases and ending inventory. Since we do not have information about the ending inventory, we can estimate it using the gross profit percentage (markup as a percentage of cost).

Markup as a percentage of cost = (selling price - cost) / cost = 60% 
Markup as a percentage of selling price = 60% / (100% + 60%) = 37.5%

Therefore, the estimated cost of goods sold is: 
Sales / (1 + markup %) = $480,000 / (1 + 37.5%) = $348,837.21

The estimated cost of the lost inventory is: 
Beginning inventory + purchases - cost of goods sold = $170,000 + $195,000 - $348,837.21 = $16,162.79

However, we also need to consider the markup when estimating the value of the lost inventory: 
Estimated value of lost inventory = cost of lost inventory / (1 - markup %) = $16,162.79 / (1 - 60%) = $40,406.98

Therefore, the answer is B) $65,000 (rounded to the nearest thousand).

Question 11

Under the retail inventory method:

Accepted Answer

The retail inventory method involves converting the retail prices of inventory to their cost using a cost-to-retail percentage. This allows a company to measure inventory at cost on their balance sheet. Option B is incorrect because inventory is not measured at current selling prices. Option C is incorrect because LIFO is a specific inventory costing method and is not related to the retail inventory method.

Question 12

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

Accepted Answer

The LIFO retail method considers both net markups and net markdowns in its computation of the cost-to-retail percentage. Net markups increase the cost of goods sold, while net markdowns decrease it. Therefore, both elements are included in the overall calculation to arrive at an accurate cost-to-retail percentage.

Question 13

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?

Accepted Answer

The answer of On July 8, a fire destroyed the...

Question 14

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

Accepted Answer

The gross profit method to estimate ending inventory typically requires knowledge of beginning inventory, net purchases, and net sales to calculate the cost of goods sold and ultimately the ending inventory. It does not directly require knowing the cost of goods sold since that is what is being estimated.

Question 15

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

Accepted Answer

According to the LCM rule, inventory should be valued at the lower of cost or market value. The cost of the rehab supplies is $162 and the market value is $155. Therefore, the inventory should be valued at $155, which is less than the cost. Therefore, the best choice is D.

Question 16

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

Accepted Answer

The answer of Under the LIFO retail method, which of...

Question 17

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

Accepted Answer

The answer of Under the conventional retail method, which of...

Question 18

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

Accepted Answer

In the conventional retail method, net markups are included in the denominator to reflect the increased retail value, but net markdowns are excluded to maintain a conservative estimate of inventory cost.

Question 19

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

Accepted Answer

The answer of In determining the cost-to-retail percentage for the...

Question 20

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

Accepted Answer

The LCM rule states that inventory must be valued at the lower of its historical cost or market value. In this case, the historical cost is $45,000 and the market value is also $45,000, so the inventory would be valued at $45,000.

Quiz 9: Inventories: Additional Issues